The Week Ahead – Foggy and Frothy

>> This is a really important time. You're seeing an exponential growth in the amount of compute demand necessary for AI. You're seeing an exponential growth of adoption and use of AI, and the number of applications that are going to be using these AI is also growing. [MUSIC] >> Hello and welcome to the week ahead on Nomura Podcasts. My name is Yuben Paracuelas, Chief Southeast Asia Economist at Nomura based in Singapore, and today is Friday the 21st of November. [MUSIC] It's been a bit of a roller coaster ride in equity markets this week, initially getting a boost from individuals better than expected results, as you heard from its CEO, Jensen Huang, in that interview with Bloomberg, only for the sell-off to return the next session, and that also coincided with the release of the long-awaited US jobs report, which likely contributed to market seemingly pricing out a cut by the Fed in December. Jeremy Schwartz from our US Economics team in New York explains why he sees the September job report as mixed, but supportive of our call, the Fed will pause in December. Over in the UK, George Buckley, our Chief Economist for the Euro area in the UK, discusses his thoughts on the upcoming budget, and why the fiscal tightening will be modestly back-loaded, but this is not going to affect our expectation of the Bank of England cutting in December. In Asia, Auradip Nandi from our Economics team in Mumbai talks about the Q3 GDP growth in India, staying healthy, and where we are in the trade deal with the US. Finally, we do a deep dive on South Korea with our economist, Jong Woo Park, discussing not just the hawkish hold we expect from BOK next week, but also Korea's two super cycles, which is the subject of the recent special report, Jong Woo's Spear Headed. So let's dive in. [MUSIC] >> All right, let's kick off with the US and I'm joined by Jeremy. Welcome back to the podcast and thanks for being here. >> Hey, you've been great to be back. >> Yeah. So we just got the long-awaited jobs report for September. What's your read on the data overall, Jeremy? >> Yeah. So we think this was a good, not great result for the labor data with a really mixed report. We saw a solid job gains from the establishment survey. So that's surprised on the upside, accelerating to 119K. That was above consensus forecast, and the strongest monthly print since April. You also had much better breadth of job gains than we've gotten used to in the past few months. Recently, the growth in employment has been really narrowly concentrated in just one sector, education and health. But that was joined by a number of additional sectors showing some positive momentum. This month. So again, that was the positive side. On the negative side, the unemployment rate showed a surprising increase to 4.4 percent, and was actually quite close to rounding up to 4.5 percent. So that's the highest reading since late 2021. That said, when we look through the details of the household survey, it does seem like that rise in unemployment was a little bit unusual and a little bit out of step with some of the broader details. So household survey employment was positive, participation rate and E-pop ratios both ticked up, and really importantly, measures of layoffs in the household survey. There's a couple of ways to look at that, but we see a consistent message. Those remained within their recent range, and that's very consistent with stable initial jobless claims. We also saw a downtick in the underemployment rate of U6, including part-time workers who would prefer to work full-time. So again, overall, there's certainly some cause for concern without unemployment rate rising to a new cycle high, but we don't see that as evidence of really broad deterioration, and we think overall the details are more positive than negative. Okay, got it. And I guess in terms of the implications of the Fed, this is still supportive of your forecast of a December pause, I suppose. And in terms of FedSpeak, I guess we've seen relatively hawkish commentaries of late. So anything that's sort of striking to you from these Fed speakers as well? Yeah, so on the Fed read-through from the employment report, we've gotten used to Fed officials really stressing the unemployment rate as the most important single indicator to watch. We'd actually downplay that a little bit for this report, and there's really two factors there. One is because this was a delayed report, the unemployment rate is a little less timely than usual, while that's usually one of the best signals of early labor market stress. Now we have almost two months of initial jobless claims data suggesting that labor market remains resilient. In contrast, because the report was so delayed, you actually had a longer collection period than normal for the household survey, which makes the first estimate there a lot more reliable and less prone to revisions. So on the margin, we do think that this report is supportive for the Fed remaining on holds. I'd say FedSpeak has been clearly very divided. We saw sharp divisions in the committee in the October meeting minutes, but overall, it does appear that hawks on the committee are sort of dug in, and I think a larger contingent that we had expected even after the hawkish October press conference. There remain a number of officials who clearly would prefer to use and are certainly gonna use this rise in the unemployment rate as a justification for their diverse stance. But we do think that the bulk of FedSpeak is suggesting that officials are at least comfortable with a patient approach and maybe communicating this as a temporary skip with cuts resuming next year. - Okay, yeah, interesting. And then finally, what else are you watching for next week? - Yeah, so the data calendar is starting to unfold here. And I think the highlight next week is retail sales, which got rescheduled following the government shutdown. That's gonna be out on Tuesday. And we expect a modest slowdown here. We think it's gonna increase 0.4% for the headline, 0.2% from the control group. Those are both lower than the August readings. But that said, high-frequency data on the consumer is relatively positive. Anecdotes from retailers have been constructive this earnings season. And we do think that the slowdown is mostly about giving up some outside strength over the summer, so more on normalization than the deterioration. In terms of the calendar, next week, it is holiday shortened in the US. There's a Thanksgiving holiday on Thursday and Friday is Black Friday. So while there's not too much scheduled, I would also flag that this is right up to the Fed's blackout period, which is beginning on the 29th. So with the market priced for more of a pause than a cut in December, we think that Fed officials will be generally comfortable with that. But I think even though there's nothing scheduled yet, you do have to keep an eye out for any Fed speakers making unscheduled appearances to try to manage those market cut expectations going into the blackout. OK, brilliant. Thanks again, Jeremy. Yeah, thank you. All right, now let's swing over to London. And hey, George, welcome back to the podcast. Hey, thanks for having me, Urban. Yeah, it's a big week with the UK budget on Wednesday, 26th of November. So first of all, could you just walk us through what you're expecting in terms of the main elements of the budget and maybe relate that against consensus expectations? Yeah, it is a big weekend. And for that reason, the budget is very important because there's a lot happened since the last fiscal event in the UK, and it means that there's probably a fiscal hole opened up relative to the chancellor's fiscal rules. And so she's going to have to fill that, and she'll have to do it most likely by raising taxes. We think that the hole is probably worth about 2/3 of a percent of GDP. But on top of that, there is an expectation in the market that she will build in a bit more headroom against those rules, which might just stop the need for keep intervening every time there's a weaker economic forecast. So a combination of those two, the fiscal hole and the building up of the headroom, I bet it's not very far away from 1% of GDP, this total tax requirement. We're probably going to see higher guilt issuance as well, maybe not that much, because they're going to have to stick with the fiscal rules, so they won't be allowing fiscal slippage. So it won't be as big a slippage on guilt, but certainly more taxes to fill those fiscal gaps. OK, wow, raising taxes is something that we don't often hear in this part of the world. So that would be pretty impressive if that gets done. And yeah, it sounds like there's going to be some kind of fiscal tightening. So what do you expect is the impact on both the economy, but also inflation? And then what does it do to your forecast for the Bank of England? So yeah, I mean, your point about tax hikes, it's interesting, because if you look at what the budget watchdog said many years ago now, actually associated with the austerity during 2010 to 2015, they thought that the multipliers associated with tax hikes are actually a lot less than those associated with spending cuts. And this is a left of center government, so it seems quite reasonable that they want to focus on these tax hikes rather than spending cuts. In terms of the impact, a lot's going to depend upon whether this is front or back loaded, because they have to meet these rules not today or tomorrow. They've got to meet them in five years time. So they do have a bit of time to-- while they have to announce tax hikes, they don't have to have them implemented straight away. And I suspect some of it might be back loaded. They're talking about freezing income tax thresholds. Well, by definition, because they're already frozen until 2028. So to freeze them further, by definition means it's something further out. And that has implications for the Bank of England's forecast. It has implications for policy. I don't think this is going to change monetary policy that much at all. We're still looking for two interest rate cuts from the Bank of England. One, next month in December, we think the data will be good enough or bad enough, should I say, to encourage them to cut rates. So weaker economic growth and potentially lower inflation momentum. So we've got them cutting again. We don't think the budget really is going to change that too much. But at the margin, the fact that they're having to tighten fiscal policy at all is probably a negative on growth and negative on inflation and therefore encourages, supports the case for rate cuts. OK, yeah, interesting. And I guess anything else that you're watching for the week ahead elsewhere? Yeah, I mean, there's a few bits of data out. In Europe, I think the most interesting one there is going to be inflation. It's been hanging around just above the target. We think it's probably going to stay around there, 2.1, 2.2-ish. That sort of rate for the headline, maybe a little bit higher on services, inflation, but not much. I think the point here is that inflation in Europe is very close to its target. We've got GDP, which is very close to trend, or we think is going to be close to trend over the next year. And we've got interest rates, which are very close to neutral. So a combination of all of that means that the ECB doesn't need to do much. They do have a lot of survey evidence out next week as well, things like the IFO survey. We get some unemployment numbers from Germany. We get some retail sales numbers from the UK. So there's quite a few survey and unemployment data out next week to watch. So it's not just the CPI, but I think the CPI in the euro area will be the biggest data to watch, as well as, of course, the budget, which we've talked extensively about. OK, great. Excellent, George. Thanks very much. Thanks again, Euban. Now, let's go to Asia. And I'm joined by Auradip from our team in Mumbai. Hey, Auradip, thanks very much for coming on, and great to have you here. Thanks a lot, Euban. So first up, the all-important GDP data in India will be out for Q3 on Friday, I believe, on the 28th of November. What's your expectations? And what do you think is consensus? So we expect GDP growth to moderate, but to a still healthy 7.6% on a year-on-year basis in Q3 from 7.8% in Q2. So we are above consensus, where we expect consumption, government spending, fixed investment growth to pick up. The contribution from net exports is also likely to be positive this time. On the supply side, we expect the gross value-added growth to moderate to 7.4% from 7.6%. So healthy, agri-growth, incrementally better industrial production growth, and services sector supported by construction and financial, real estate, and professional services. So on the back of this, we recently raised our FY26 GDP growth forecast to 7% from 6.6%. Right, got it. And yeah, that's also despite the tariffs from the US. And on that note, we haven't heard much in terms of the trade deal with the US. Could you just give us an update on where we are in that? And do you have any thoughts on when we might actually get a deal? I really wish I had more information on this, right? Because we keep hearing positive comments from Indian officials and US officials. But it seems that everyone is waiting for the pen to hit the paper, so to speak, on the trade agreement. So look, the reports that we are getting is that there's going to be two broad tranches in which the first tranche is more or less sort of near closure. It seems that the ball is in the US court at this point. There have been comments from the Indian side to the tune of that, look, there's no need to negotiate any further. We've done all what we've had to do. So now it's a question of them agreeing to it. I think it's curious because for so long, India hadn't introduced any exporter support package. And the natural expectation in the market was that maybe that's because a trade deal is about to happen. And so there's no need to support exporters. But curiously enough, over the past week or so, there's been actually an array of measures announced by the government and by the RBI in terms of credit guarantee scheme for exporters, in terms of a moratorium on term loans, delayed repatriation of earnings by exporters, and a bunch of other such stuff, which does beg the question that is it the case that a trade deal is about to happen, or is it the case that the establishment is now readying itself for a situation where it needs to give support to exporters regardless. So again, I mean, the timing of these measures are curious. But I think our baseline case still remains that the trade deal gets announced soon. Just one last point, which is that the key thing to watch out for there is where do tariffs eventually settle for India, right? So if it settles at, I don't know, around 20% or so, then it actually brings India close to the rest of Asia. And that's going to be a really important relief for exporters currently who are battling 50% tariffs. So where the final tariffs settle down, I think is also going to be an important aspect of the trade deal to watch out for. OK, great. Thanks. Just providing some highlights for the rest of Asia. In the week ahead, I'd say it's important to watch the two center banks, BOK and RB and Z. We expect both to keep the policy rates and change for RB and Z. That's an out-of-consensus forecast, although we believe it's a very close call. In Singapore, core inflation has already bottomed out. And indeed, we expect a pickup in October. But in contrast, the monthly CPI inflation print in Australia should show some moderation. In the Philippines, the fiscal data for October will be closely watched, and we expect the monthly deficit to narrow sharply due to another significant drop in non-interest spending of the government due to the ongoing corruption controversy. And finally, in China, we expect the official PMI-- manufacturing PMI-- to remain subdued way down by soft investment in both infrastructure and the property sectors. So that's your roundup for Asia. Again, pretty important numbers coming out from India as well and the potential trade deal that we're watching out for. Hey, Ordi, thanks very much for joining. Thanks a lot. [MUSIC PLAYING] This moment, given the negative output gap still, our official position is that we will maintain the easing monetary cycle. But the magnitude and timing of the cut, or even the change of direction, will depends on the new data that we'll see. Yeah, finally, let's do a bit of a deep dive on South Korea, which has been a focus for markets in Asia of late. And as you just heard from BOK Governor Ri there in that clip in an interview in Bloomberg in Singapore recently, talking about BOK's data-dependent approach with respect to the timing and magnitude of further easing, or even he mentioned a change in direction, which I think got markets excited. So I'm very delighted to be joined by Jong-Woo Park in Singapore, who is our South Korea expert. And he just published a special report called "When Chips Meet Housing, Two Super Cycles Reshaping the Economy." So that sounds very interesting. Hey, Jong-Woo, thanks very much for joining today. Nicely done on that very interesting report. Yeah, thanks for inviting me. OK, so before we get into the report, let's just talk about the BOK decision first, which is out next week. That's on Thursday, the 27th. What do you expect there? This BOK meeting, I think, is going to be closely watched by the market, because recently, the BOK's tone has shifted towards more hockey side. Particularly nowadays, we are seeing strong chip-led exports and the domestic demand is picking up. So on this improving gross outlook, Governor Lee and he mentioned that he indicated that the BOK may change, even change, the policy direction. So basically, we expect the BOK to stay on hold at this meeting. And more importantly, it's the Ford guidance, and over the next three months, we think that the BOK, Ford guidance, is likely to become more hockey. And we also expect the BOK to raise its 2026 GDP gross forecast to 1.8% from 1.6% now, which means that the Korea's economy is now coming back to its potential. So with this gross recovery, I think the BOK is likely to become less hockey. Probably, they wouldn't say that we are done, but I think the BOK has already ended its aging cycle. So terminal rate would remain at 2.5% through end of next year. OK, got it. So a relatively hawkish hold for next week and BOK done with the aging cycle. Now, on the report, you discussed really this powerful forces, which you think could drive Korea's economic outlook, the two super cycles in the tech and housing sectors. So let's start with the tech sector. That's obviously of great focus globally, with all of the concerns about a tech-driven bubble in equity markets. So why do you say this is a super cycle? Yeah, I think it's very interesting, because this cycle is a little bit different from what we saw previously. So first of all, basically, the supply and demand imbalance is driving this chip cycle. So first of all, we already know that AI demand is strong. So last year and early this year, people just talking about that it's only AI driving that demand. But now, demand is broadening to non-AI parts. So for example, hyperscalers, they are starting to replace their existing traditional server, which also increase demand for chips. At the same time, we need a lot of the data storage. So that's also pushing up demand for land flashes. So now we are seeing demand is broadening out to non-AI product. But at the same time, the chip companies, they remain very cautious on their capex, because they had very bad experience during the COVID boom. So at that time, the capex, the chip companies, they aggressively increased capex, which led to oversupply. And they had the large sufferings from over investment. So now, chip companies, they just maintain capex discipline, despite the strong demand. So basically, the supply shortage is worsening the tightening market conditions. So two weeks ago last week, if you look at the chip price, the spot market chip prices, then it's crazy. It's going up like 30%, just one day. So chip price will likely remain elevated. So basically, we think that demand and supply imbalance is the key driver for this cycle. And at the same time, our analysis also shows that the demand-led cycle tend to last for more than two years. So basically, demand-led cycle is longer than supply-led cycle. But this cycle is like demand-strong supply shortage. So we think that this is kind of the super cycle. OK, well, that's fascinating. And what about the housing market? Yeah, so housing market is also very similar. The demand picking up and the household income growth is very steady. At the same time, the housing supply shortage now is worsening because in key metropolitan areas, a lot of despite strong demand, the government is constrained to increase housing supply. So easing financial conditions, strong demand, and the supply shortage. That's a very similar condition with the chip markets. So housing market is also seeing very strong demand. And at the same time, supply shortage. So this demand and supply imbalance is also driving the housing super cycle. So basically, the same narrative, same logic in both chip and housing markets. OK, yeah. And yeah, that sounds very positive for the overall economic outlook in South Korea. So what's the implication in terms of your growth forecasts? In terms of the domestic demand, these two super cycles will likely create massive tailwinds for domestic demand. So we have raised our 2026 GDP growth forecast to above consensus 2.3% from 1.9%. So basically, we expect the economy to remain above the potential growth as well next year. OK, excellent. Yeah, let's leave it here. And I would highly recommend people to read the report for more details. And yeah, thanks again, Jong-woo. Thank you. Well, that's it for now. And thank you again for listening to our podcast, edited and produced by John Dalton. Please like and subscribe to Nomura's podcast on Apple, Spotify, and SoundCloud, or your usual podcast provider. We'd love to hear your feedback. So please feel free to write a review and share this podcast to anyone you think might be interested. 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