MONDAY, OCT 31, 2022 – 07:35 AM

As DB’s Jim Reid writes this morning, “the most unoriginal intro I can use this morning given today’s date is to speculate as to whether the Fed will offers tricks or treats this week.”

Indeed a week with the latest FOMC and payrolls is unlikely to be dull and could “spook” the market, especially after a 10-day period that was mostly made of up dovish pivot talks. However this momentum stalled a bit after runaway European inflation on Friday tempered some of the enthusiasm for the trade. So all to play for. We also have a BoE meeting (Thursday) that although less pivotal than it could have been a few weeks back is still something that can influence global markets. The biggest events are on deck next week: remember that the following week sees US mid-terms (Tuesday) and CPI (Thursday). So quite a run of big events coming up as we hit the last day of the month.

Other key data releases include the ISM indices in the US (tomorrow and Thursday). Industrial activity and labor market indicators will be also released in Europe. Corporate earnings will feature Saudi Aramco, BP, Pfizer, Starbucks, Toyota and Qualcomm after last week’s disappointing results from Big Tech firms.

Among the main events over the weekend, Russia announced that it is exiting from the internationally brokered arrangement that allowed grain ships to leave Ukrainian Black Sea ports, in response to what it called a major Ukrainian drone attack near the port of Sevastopol in Crimea. The abrupt move by Russia has caused international outcry as the decision undermines efforts to ease a global food crisis. Moscow has requested a meeting with the UN’s security council today to discuss the issue. Grain markets have reacted to this development with Chicago wheat futures rising +5.47% to $8.75 a bushel after hitting a high of $8.93 a bushel in early trade. Additionally, Corn (+2.2%) and soybeans (+0.75%) have also moved higher. So one to watch. Moving on to political news, Brazilian left wing leader Lula narrowly defeated the far-right incumbent Bolsonaro in an extremely tight election to become the next president with 50.9% of votes against 49.1% for Bolsonaro. Lula will be sworn in on 1 January 2023.

Back to this coming week and with regards to the Fed, Reid confirms what most know, namely that a fourth successive 75bps has long been pretty much nailed on but the subsequent path of hikes is now up for grabs and will be the key focus from this week’s meeting. That said, it feels “inconceivable” to the DB strategist, given how spectacularly forward guidance has broken down across the global markets over the last 12 months, that Powell will try to guide too aggressively for December, especially with two payrolls (one this week) and two CPIs to come before they meet again. DB economists still believe that 75bps is likely in December (unlike Goldman which on Sunday said it expects 50bps in December), but that January could mark a downshift whilst still seeing upside risks to DB’s terminal rate expectation of 5% given the recent inflation data and evidence that r-star has risen. Even WSJ Timiraos tweeted at the weekend “Consumers have a big cushion of savings. Corporations have lowered their debt-service costs. For the Fed, a more resilient private sector means that when it comes to rate rises, the peak or “terminal” policy rate may be higher than expected.”

To be fair in his WSJ article that went viral 10 days ago he did mention that 2023 Fed forecasts could be upgraded. However the market mostly focused on the near-term downshift possibilities.

The downshift debate will still carry on right up to the meeting though with a few bits of important data for the Fed to throw into the mix prior to their final statement and subsequent tone in the press conference. The Chicago PMI (47.6 forecast vs. 45.7 previously) today will tweak estimates for tomorrow’s manufacturing ISM (est 50.0 vs. 50.9 last). The latter could drop below 50 for the first time since May 2020. The employment series of both will be important, especially in payrolls week. Last month the employment component of the Chicago PMI plunged 14.4 points to 40.2 – the largest month-over-month decline on record, while the equivalent in the manufacturing ISM fell by 5.5 points to 48.7 last month. Staying with jobs, tomorrow’s JOLTS is always a key indicator of the tightness of the labor market, albeit a month behind other releases. After the FOMC, the services ISM (DB at 55.3 vs. 56.7 last) could also tweak payrolls estimates. The employment component bounced from 50.2 to 53 last month but the flash services PMI indicates that the risks to the employment outlook are to the downside.

In terms of payrolls, consensus expects another major slowdown, with the headline print expected to shrink to +190k (vs. +263k previously) with private at +195k (vs. +288k previously). Consensus expects the unemployment rate to tick up to 3.6%. Average hourly earnings is expected by the street to dip from 5% to 4.7% (DB at 4.6%)

Back here in Europe, the BoE’s decision on Thursday will be in the spotlight after a tumultuous month since its latest rate hike on September 22. Most economists expect the central bank to hike by +75bps, taking the Bank Rate to 3%. Beyond Thursday’s meeting, the DB team sees a terminal rate of 4.5% amidst growing fiscal consolidation. Their expected sequence of hikes beyond Thursday has +50bps in December and February and +25bps in March and May. For the ECB Lagarde speaks twice (Thursday and Friday) and she can firm up or row back on the slightly more dovish meeting last week than expected. Will she be influenced by Friday’s shocking European inflation numbers that saw German inflation at 11.6% YoY against 10.9% expectations, Italy at 12.8% vs. 9.9% expected and France 7.1% vs. 6.5% expected? Italy’s PPI was at 53.0% YoY vs. 50.5% expected. It wasn’t just energy related and core estimates for the full EA reading will likely have been upgraded given Friday’s numbers. Chief Economist Lane speaks today as well.

Turning to earnings now, with 255 of S&P 500 members now reported and after Big Tech’s disappointing releases, this week’s busy line-up of results include key numbers from key oil & gas, healthcare and consumer firms. It’s been an interesting season so far as our equity strategists reviewed over the weekend here. They comment that the breadth and size of Q3 earnings beats are near historical averages but these are off estimates that have continued to be cut. The blended estimate for Q3 earnings (combining actuals plus consensus for those yet to report) as a result has barely ticked higher and is significantly below the typical upward trajectory at this stage of the earnings season. In addition, consensus estimates for Q4 have fallen over -2% since the beginning of this earnings season, much larger than the typical -1%, and follow cuts of -6% in the prior three months. 2023 estimates have fallen by -2% this earnings season bringing the cuts since April to -7%. 2023 EPS consensus is now at $234, still significantly higher than our team’s forecast of $195 which incorporates a recession forecast next year. The consensus forecast on the other hand looks to embody a soft landing.

In terms of this week, for oil and gas, we will hear from Saudi Aramco and BP tomorrow, followed by ConocoPhillips, Cheniere, Enel and EOG on Thursday. In healthcare, results will be due from Eli Lilly, Pfizer (tomorrow), Novo Nordisk (Wednesday) and Moderna (Thursday), among others. After some strong performance from staples this week, earnings from Mondelez (tomorrow) and Starbucks (Thursday) will be in focus. Automakers outside the US will announce too, including Toyota (tomorrow), Ferrari (Wednesday) and BMW (Thursday). Tech firms reporting will include AMD, Sony and Uber tomorrow, Qualcomm and eBay on Wednesday and PayPal on Thursday. Other notable earnings releases will include Booking, Maersk (Wednesday) and Marriott (Thursday). See the full day by day week ahead at the end for all the key data and earnings releases.

Courtesy of DB, here is a day-by-day calendar of events

Monday October 31

  • Data: US October MNI Chicago PMI, Dallas Fed manufacturing activity, China October manufacturing PMI, UK October Lloyds business barometer, September net consumer credit, mortgage approvals, M4, Japan October consumer confidence index, September housing starts, Italy and Eurozone Q3 GDP, Germany September retail sales, Eurozone October CPI
  • Central banks: ECB’s Visco and Lane speak
  • Earnings: Stryker, NXP Semiconductors

Tuesday November 1

  • Data: US October ISM manufacturing index, total vehicle sales, September JOLTS report, construction spending, China Caixin October manufacturing PMI, Japan October vehicle sales, monetary base, UK October Nationwide house price index, GermanySeptember import price index, Italy October new car registrations, budget balance, Canada October manufacturing PMI
  • Central banks: BoJ minutes of September meeting
  • Earnings: Saudi Aramco, Eli Lilly, Pfizer, Toyota, BP, Advanced Micro Devices, Sony, Mondelez, Airbnb, Eaton, Uber, Marathon Petroleum, Devon Energy, KKR, Electronic Arts, Newmont

Wednesday November 2

  • Data: US October ADP report, China October services PMI, Italy October manufacturing PMI, Germany September trade balance, October unemployment change, France September budget balance
  • Central banks: Fed’s decision, ECB’s Villeroy, Nagel and Makhlouf speak
  • Earnings: Novo Nordisk, Qualcomm, CVS, Estee Lauder, Booking, GSK, Suncor, Maersk, Ferrari, Albemarle, Apollo, eBay, Vestas, MGM Resorts, Etsy, Robinhood, Roku, Zillow

Thursday November 3

  • Data: US October ISM services index, September trade balance, factory orders, Q3 unit labor costs, Q3 nonfarm productivity, initial jobless claims, UK October official reserves changes, Italy and Eurozone September unemployment rate, Canada September international merchandise trade, building permits
  • Central banks: BoE’s decision, ECB’s Lagarde, Panetta, Nagel, Visco, Makhlouf and Elderson speak, BoE’s Mann speaks
  • Earnings: ConocoPhillips, Amgen, Starbucks, PayPal, Petrobras, Cigna, Regeneron, EOG, BNP Paribas, ICE, BMW, Marriott, Moderna, Cheniere, Enel, Orsted, Block, Warner Bros Discovery, Barrick Gold, DoorDash, Expedia, BT, Peloton

Friday November 4

  • Data: US October change in nonfarm payrolls, unemployment rate, labor force participation rate, average hourly earnings, China Q3 BoP current account, UK October construction PMI, new car registrations, Italy October services PMI, Germany September factory orders, France September manufacturing production, industrial production, 3Q private sector payrolls, Eurozone September PPI, Canada October unemployment rate, participation rate
  • Central banks: Fed’s Collins speaks, ECB’s Lagarde and Guindos speak, BoE’s Pill speaks
  • Earnings: Duke Energy, Dominion Energy, Intesa Sanpaolo, Telefonica, Societe Generale, Vonovia, DraftKings

Finally, looking at just the US, Goldman notes that the key economic data releases this week are the JOLTS job openings and ISM manufacturing reports on Tuesday, and the employment situation report on Friday. The November FOMC meeting is on Wednesday. The post-meeting statement will be released at 2:00 PM ET, followed by Chair Powell’s press conference at 2:30 PM.

Monday, October 31

  • 09:45 AM Chicago PMI, October (GS 48.0, consensus 47.0, last 45.7): We estimate that the Chicago PMI rebounded 2.3pt to 48.0 in October, as the Chicago PMI has overshot to the downside relative to other business surveys (GS manufacturing survey tracker -1.5pt to 48.8 in October).
  • 10:30 AM Dallas Fed manufacturing index, October (consensus -18.5, last -17.2)

Tuesday, November 1

  • 09:45 AM S&P Global US manufacturing PMI, October final (consensus 49.9, last 49.9)
  • 10:00 AM JOLTS job openings, September (GS 10,000k, consensus 9,625k, last 10,053k): We estimate that JOLTS job openings declined to 10,000k in September.
  • 10:00 AM Construction spending, September (GS -0.3%, consensus -0.5%, last -0.7%): We estimate construction spending decreased 0.3% in September.
  • 10:00 AM ISM manufacturing index, October (GS 49.9, consensus 50.0, last 50.9): We estimate that the ISM manufacturing index declined by 1pt to 49.9 in October, reflecting weak industrial trends abroad and convergence towards other manufacturing surveys (GS manufacturing survey tracker -1.5pt to 48.8 in October).
  • 05:00 PM Lightweight motor vehicle sales, October (GS 14.6mn, consensus 14.3mn, last 13.49mn)

Wednesday, November 2

  • 08:15 AM ADP employment report, October (GS +200k, consensus +180k, last +208k): We estimate a 200k rise in ADP payroll employment in October.
  • 02:00 PM FOMC statement, November 1-2 meeting: We expect the FOMC to deliver a fourth 75bp hike at its November meeting this week, raising the target range for the fed funds rate to 3.75-4%. The focus will be on what comes next, and we expect Chair Powell to hint that the FOMC will likely slow the pace to 50bp in December. We expect the FOMC to eventually pair that slowdown with a somewhat higher projected peak funds rate in the December dot plot. Our forecast calls for hikes of 75bp in November, 50bp in December, 25bp in February, and 25bp in March with the funds rate range peaking at 4.75-5%.

Thursday, November 3

  • 08:30 AM Trade balance, September (GS -$72.4bn, consensus -$72.0bn, last -$67.4bn): We estimate the trade deficit widened by $5bn to $72.4bn in September, reflecting declining goods exports and rising goods imports in the advanced goods report.
  • 08:30 AM Nonfarm productivity, Q3 preliminary (GS +0.5%, consensus +0.5%, last -4.1%): Unit labor costs, Q3 preliminary (GS +4.7%, consensus +4.0%, last +10.2%): We estimate nonfarm productivity growth of +0.5% in Q3 (qoq saar) and unit labor cost—compensation per hour divided by output per hour—growth of +4.7%.
  • 08:30 AM Initial jobless claims, week ended October 29 (GS 215k, consensus 220k, last 217k); Continuing jobless claims, week ended October 22 (consensus 1,450k, last 1,438k): We estimate initial jobless claims edged down to 215k in the week ended October 29.
  • 09:45 AM S&P Global US services PMI, October final (consensus 46.6, last 46.6)
  • 10:00 AM Factory orders, September (GS flat, consensus +0.3%, last flat); Durable goods orders, September final (consensus +0.4%, last +0.4%); Durable goods orders ex-transportation, September final (last -0.5%); Core capital goods orders, September final (last -0.7%); Core capital goods shipments, September final (last -0.5%): We estimate that factory orders were unchanged in September. Durable goods orders rose 0.4% in the September advance report but core capital goods orders declined 0.7%.
  • 10:00 AM ISM services index, October (GS 55.7, consensus 55.1, last 56.7): We estimate that the ISM services index declined by 1pt to 55.7 in October, reflecting convergence towards other business surveys but a sentiment boost from rebounding stock markets. Our non-manufacturing survey tracker fell by 2.0pt to 51.2 in October.

Friday, November 4

  • 08:30 AM Nonfarm payroll employment, October (GS +225k, consensus +190k, last +263k); Private payroll employment, October (GS +225k, consensus +195k, last +288k); Average hourly earnings (mom), October (GS +0.35%, consensus +0.3%, last +0.3%); Average hourly earnings (yoy), October (GS +4.7%, consensus +4.7%, last +5.0%); Unemployment rate, October (GS 3.5%, consensus 3.6%, last 3.5%); Labor force participation rate, October (GS 62.3%, consensus 62.4%, last 62.3%): We estimate nonfarm payrolls rose by 225k in October (mom sa), a slowdown from the +263k pace in September reflecting sequentially lower—but still very elevated—labor demand. Big Data indicators were mixed in the month, but jobless claims remained very low. We also note that job growth tends to pick up in October when the labor market is tight, as firms frontload fall and pre-holiday hiring. We estimate the unemployment rate was unchanged at 3.5%, reflecting a rise in household employment and flat-to-up labor force participation. We estimate a 0.35% increase in average hourly earnings (mom sa), reflecting positive calendar effects and a possible boost from autumn recruitment efforts.
  • 10:00 AM Boston Fed President Collins (FOMC voter) speaks: Boston Fed President Susan Collins will discuss the economic and monetary policy outlook at an event hosted by the Brookings Institution. On October 12, Collins said, “We are focused and resolute and have the tools to bring inflation back down to the two-percent target…I am anticipating or expecting additional interest rate changes.”

Source: DB, Goldman, BofA