Everything But The Kitchen Sink: Full Week Ahead Preview

Well, there’s not a lot going on in the week ahead and by that I mean there’s so much going on that you couldn’t plan for it even if you wanted to.

Let’s start with the obvious: Robert Mueller is going to indict someone tomorrow and the President is displaying his usual penchant for restraint in the face of adversity:

A couple of things there. First, Trump still doesn’t understand what it means to put something in scare quotes. Second, “tax” is not a proper noun. Neither is “cuts”. And neither is “reform”. Finally, he’s right: it’s not coincidental. Because this is what happens sometimes after criminal investigations: people get indicted. Oh, and when was the last time you heard anyone over the age of about 9 use the word “not” in all caps at the end of a sentence?

 

So there’s that. We’ll also get Trump’s pick for the Fed and in case you weren’t already excited enough about that, he’s released an actual commercial for it. And I mean that literally:

 

In all likelihood, it will be Powell. That’s the safe choice and I’m sure by now someone has told him that anyone other than Powell or Yellen would throw markets for a loop and he’s unlikely to risk that, as record high stock prices are all he’s got left when it comes to things he can point to as being “great.” Plus, Mnuchin has been lobbying for Powell so that helps. If for some reason he changes his mind at the last minute and picks Taylor, expect a sharp rally in the dollar and higher yields. If he loses his mind completely and pulls a Warsh out of his hat, just go ahead and sell everything and barricade yourself in the basement for the next six months.

Speaking of the Fed, we’ll the get the November meeting this week and barring someone having a senior moment, there won’t be anything new there. If they sent any kind of meaningful signal to markets in the statement, it would be a surprise. Here’s Goldman:

We expect a slightly more upbeat tone on growth that acknowledges the disruptions from the hurricanes but characterizes them as temporary or in the past tense, as we think Fed officials will view the data released over the inter-meeting period as broadly encouraging. Despite the disappointing September CPI report, we do not expect a downgrade of the inflation assessment or outlook, reflecting broadly stable year-over-year inflation and the further decline in the unemployment rate. We also expect the committee will continue to describe the risks to the outlook as “roughly balanced,” but there is a possibility that the statement upgrades the assessment of growth risks to “balanced” and leaves the inflation language unchanged (“closely monitoring”).

Basically, they’ll confirm that December is still a go, and that will be that.

The BoE is a different story. They’ll probably hike. If you need a recap of how we got to where we are now for the BoE, see here, here and here. Meanwhile, here’s Goldman:

As we have emphasised in the past, the MPC has wanted financial markets to price policy rates higher 2 years forward. In our view, the Committee has wanted markets to price 2-3 rate rises by mid-2020. Markets were largely unmoved by such communication. Part of the reason for next week’s rate increase — and the MPC’s hawkish guidance in September — was to assert some greater control over the money market curve. With the forward curve now pricing three rate rises by 2020, the BoE has succeeded in gaining greater control over the forward curve (Exhibit 1). We do not believe that implies a pressing case to deliver a second hike soon after next week. We expect GDP growth at the pace of 0.3%qoq each quarter for the next year, with CPI inflation peaking next month.

For their part, BofAML thinks this is probably a mistake. To wit:

This week’s 0.4% qoq first estimate of Q3 GDP left the door open for the BoE to hike at next week’s meeting in our view. This does not mean we think the Bank of England (BoE) ‘should’ hike rates on 2 November, when they also publish their latest Inflation Report forecasts. We only reluctantly changed our call from them staying on hold after several rate setters reiterated their September guidance that a hike was coming. In our view the case for hiking now is weaker than before any of the previous hiking cycles since BoE independence.

Maybe we are over-interpreting. It is not the BoE’s job to tell the market it is right or wrong of course. But that is precisely what the BoE did in the September policy meeting minutes: seemingly in response to the market ignoring the BoE saying the market was wrong in August. As a result of that an over 80% chance of a November hike is now priced, which the BoE has not attempted to correct despite having ample time. The BoE faces a meaningful credibility risk, we think, if it does not follow through this time.

With GDP out of the way, there is little to stop the BoE hiking given their communication so far. They have some technical wiggle room (‘coming months’ ‘if the economy continues on the track’) and we would advise never say never with the BoE. But no hike looks like a slim possibility now.

Recall this chart we showed you a couple of days ago after the GDP print referenced in that BofAML bit came down:

“We expect the BoE to deliver a 25bp rate hike and dispel expectations of a one-and-done hike,” Barclays muses, adding the obvious: “we expect GBP to appreciate as a result.”

For laughs, we’ll also get the BoJ. Obviously, they’re not going to change anything and in fact, the only drama will probably revolve around whether Kataoka dissents again in favor of something even more dovish than the existing policies although it’s not exactly clear what “more dovish” would mean in the context of the BoJ short of maybe Kuroda just strapping every board member to a sleigh, loading up a sack full of yen, and flying over Japan like a North Korean missile and dumping actual paper money on everyone.

“We expect the BOJ to maintain the status quo in all areas of monetary policy at next week’s MPM, likely maintaining targets for short (-0.1%) and 10-year interest rates (around 0%), and not changing its purchasing program for ETF and other risk assets,” Goldman writes, adding that “in [the bank’s] quarterly Outlook Report to be released at the same time, we expect the BOJ to slightly revise down its inflation outlook for FY2017.”

This of course comes as the Nikkei just crossed 22,000 and also just days after reports suggested that Abe recently told  his ministers the following about Kuroda:

At the moment, there’s no particular reason to replace him.

And you know that’s the thing about Kuroda: we all think he’s the stupid one, but at the end of the day, you can’t help but wonder if maybe we’re all actually the joke and he’s laughing at us….

lol… Kuroda = zero fucks given… pic.twitter.com/hVJU5DEyIf

— Heisenberg Report (@heisenbergrpt) August 28, 2017

Something (creepy) to think about.

Also, we’ll get jobs this week. This print should be all kinds of amusing because it will represent another month where parsing hurricane distortions will be well nigh impossible. “We estimate nonfarm payrolls rebounded 325k in October, following a 33k decline in September and compared to three- and six-month moving averages of 185k and 160k, respectively,” Goldman projects. “Our forecast reflects a 150k boost from workers returning to their jobs after Hurricanes Harvey and Irma, which weighed heavily on September payrolls based on the state-level breakdown.” BofA is at 350k, Barclays at 325k. It’ll be interesting to watch the extent to which traders are willing to discount this the same way they did the dismal September print in favor of a focus on AHE – that will be especially fun to watch if earnings disappoint.

Oh, and as far as tax reform goes, they’ll be the usual back-and-forth on that. Here’s Barclays with a bit of possibly useful color:

Congress budget approval fueled expectations for tax reform but difficult negotiations lie ahead. Ways and Means Committee Chairman Rep Brady said that the House will introduce a bill on Wednesday and begin committee deliberations on 6 November with hopes to send the bill to Senate before Thanksgiving. The effect of tax policy on the USD could vary: 1) the failure to deliver would result in the USD returning to its medium-term weakening trend, particularly versus high carry EM and parts of G10; 2) tax cuts would likely entail only modest USD strength, and 3) tax reform would give the dollar a significant boost, likely to retest the January high. However, contentions remain among Republicans on components of tax policy, such as elimination of SALT, clouding the outlook for the likelihood of passage and the eventual structure of such a tax reform.

Finally, here’s the full calendar from BofAML

Bonus: “things that go bing”…