Week Ahead: Traders digest soft data and trim rate outlook

Markets may take a breather with a much quieter week ahead on the risk calendar. Halloween didn’t spook investors as we head into year end, a seasonally weaker time for the dollar and a possible Santa rally? Stocks have climbed significantly higher with the broader benchmark S&P 500 up over six per cent off its lows from late October. The dip below the widely followed 200-day simple moving average has again been brief whilst Wall Street’s “fear gauge”, the VIX, has declined back below its long-term average.

The market moves have been driven by weak US data, a dovish market view of the Fed and a better outlook for the US Treasury with a slower pace of bond issuance. This was crowned by Friday’s all-round weaker US jobs report. Downward revisions, a softening in wage growth plus a rise in unemployment makes it potentially more likely that the Fed won’t hike rates again. Coming on top of last week’s FOMC meeting where Chair Powell declined to deliver a more hawkish message means the dollar had its worst week since July. A decisive breakdown from its recent range could see this move extended.

This week sees numerous Fed speakers on the wires to interpret the market’s view of the FOMC, though there will not be much top tier US data. The last two months of the year are usually weak months for the greenback. But there are still two more inflation reports and another monthly US employment set of figures before the next FOMC meeting in mid-December. We note that payrolls have averaged over 200,000 over the past three months so still very solid, especially for this stage in the cycle.

As for risk events in the coming days, the RBA decision on Tuesday will be interesting as the market pricing is near a 50:50 split between a 25bps hike and no hike. Such an outcome will follow four consecutive on-hold decisions from July to October. The most recent inflation data showed that the pace of falling prices isn’t as fast as the RBA was hoping. The resilience of the housing market also supports a rate rise, though the labour market is looking weaker.

Elsewhere, the Aussie dollar will also pay attention to Chinese data with trade figures and inflation numbers likely to impact global risk sentiment. Markets often focus on producer prices and export prices as these are seen as proxies for global factory demand. The UK publishes Q3 GDP data on Friday which could be grim and fall into contraction. Gloomy business surveys have pointed the way while the labour market started losing jobs in June and this has continued.

Major data releases of the week:

7 November 2023, Tuesday

–RBA Meeting: Markets are near enough a coin toss on a 25bp rate hike taking the cash rate to 4.35%. Inflation for August and September has run close to 0.6% m/m. The RBA recently indicated their low tolerance for above target inflation. Labour markets also remain tight.  The AUD looks to have based around 0.63. It is now bumping up into the 100-day SMA at 0.6514. The highs from late August and September congregate here too.

08 November 2023, Wednesday

-China CPI: Economists forecast a one-tenth increase to 0.2% y/y in October. That comes after the economy climbed out of deflation in August with a rise of 0.1% previously. Weak demand will keep inflation subdued.

10 November 2023, Friday

–UK GDP: Expectations are for a contraction of 0.1% m/m, against a +0.2% expansion in August. The Q3 figure is forecast to be flat. Recent PMIs were all below the boom/bust 50 level. Higher rates are impacting the economy with stagnation evident and recession lurking. Cable burst through its 50-day SMA at 1.2305 for the first time decisively since June. The 38.2% Fib level of the July decline is 1.2459.

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