The Week Ahead – Our new Fed call

And Iran, militarily, is effectively over. We're just keeping it the status quo. Hello, and welcome to the week ahead on Nomura Podcast. My name is Yubin Patakrellas, chief Southeast H.A. economist, Nomura, in Singapore. And today is Friday, the 13th of November. So it's yet another roller coaster week for financial markets. Wall Street stage is sharp rebound after last week's tech route. Only for fresh turmoil at NVIDIA, reigniting questions about the AI trade. We also had a hotter than expected US inflation print and hawkish Fed speak, raising the prospect of more Fed hikes. And in fact, prompting a change in our own Fed forecast as we will discuss shortly. Treasure yields went up again and the dollar rose to fresh multi-month highs. In contrast, oil prices came down as hopes of easing tension with Iran offered summer leave, helped by President Trump's comments as you heard there earlier. However, later in the week he posted, "We don't need to deal with Iran, sending oil prices higher again with Brent now above $96 per barrel as we speak. Lifting US treasure yields with it, and the 10-year yield now back up to 5.1%. For this episode, it's a relatively light counter in the US, so we focus on the outlook for the Fed and the recent change in our Fed forecasts. So I'm very delighted that Aichi Memea, our senior US economist and Global Head of Theumatic Research, is joining me to discuss all of that. We'll also check in with George Buckley, chief economist for your era in the UK, who will preview UK CPI and labor market data, and he's thoughts on the near-term implications for the Bank of England. Jing Wang, from our China Economic Steam in Hong Kong, will outline expectations from Tier 1 data releases in China, the EPEC Summit in Shenzhen, as well as Jing highlighting his report, arguing the blue wave after the US midterms could be beneficial for China's AI economy. I'll close with a roundup of some key data coming up in the region and the decision by Bank Indonesia, which has been in the spotlight of late, as the Rupiah has hit record lows this week. Now, let's dive in. All right, that's kickoff for the US. Hi Aichi, and welcome back to the podcast. Hi, you've been Saxo Habemir today. Yeah, I'm really glad that you can join. You've had an important change in your Fed call, made this week. So can you just please walk us through the new forecast. And importantly, for me, what prompted the change? Sure. So you changed our Fed call. And now we expect a Fed to deliver two 25 basis point rate hikes in December this year, in a March next year. Previously, we had expected of December hike to be the final one. So we added much hike to our expectations. So the primary reason of the change is inflation. So October CPI report on Tuesday was very, very strong. Called CPI supplied to the upside again, and it shows some signs of inflation pressures broadening. Based on our calculation, the share of 194 CPI subcomponents increasing in October jumped sharply, suggesting a wide variety of CPI subcategories rose. In addition, the Fed speak became very hawkish, covering a wall or indicated a possibility of a 50, 50 basis point rate hike at the December meeting, that as Fed president Logan suggested back to the back, 25 basis point rate hikes in December and January. By share for supervision, Bowman who is a long time a dove said that there is still work to do on inflation, supporting for the tightening, so do Fed president show me this club's stance of monetary policy as a fairery accommodative. So overall, recent Fed speak was uniformly hawkish. So those, you know, the inflation data, as well as recent hawkish Fed speak are primary reason why do we change our Fed call? Okay, got it. That's quite clear. So that combination of hot CPI print and the hawkishness of Fed speak in the last few days. But in terms of the risks to the new forecast hson, is it still tilted to the upside, would you say? And I guess the question now is whether you don't have anything on January, but do you think that could still be live as well? Yeah, yeah, yeah, yeah, so you're right. So balance of risks to our monetary policy outlook is still skewed towards the hawkish side. So on our base case scenario, we assume the Fed will maintain a cautious approach. i.e. quarterly pace of rate hikes. Considering financial conditions, you know, recent tightening of financial conditions, due to recent AI trade in stock markets and the credit conditions continue to tighten. Also, we, so some softening in housing markets and increasing in consumer loan delinquency rate in recently, due to higher interest rates. So, you know, given those, you know, some signs of the impact from a tighter financial conditions on the sum parts of the economy, we, we think, you know, cautious approach or a quarterly pace of rate hikes is still reasonable. However, the most important driver of monetary policy is realized inflation. If we see another upside surprise in inflation data in coming month, that might increase a number of additional rate hikes. In other words, January rate hike is a still close call. - Okay. - Really interesting. And finally, H is on, in terms of the week ahead, I know there's the FOMC minutes as well. Anything that you're looking out for in that? Yeah, so our primary focus is on October from same minutes. The key thing to watch is whether a chair warship's dovish post-meeting press conference represented the consensus of the committee. The war said that a September rate hike had already been effective in reducing inflation without discussing the details of recent strong inflation data. He also mentioned that the financial conditions tighten. Moreover, he repeated his dovish rhetoric on the potential disinflationary forces stemming from AI. However, as I mentioned, the majority of infancy participants remain very, very cautious about inflation risks. And so financial conditions are not restrictive enough to bring inflation down. So given that stark contrast, it's important to watch whether or not the chair warship represented the consensus of views on the committee. In that regard, it's interesting to see a collective assessment in the minutes on the recent strong inflation data as well as the implication of risk of trade in financial markets for monetary policy. Okay, perfect. That's really fantastic and very clear. Thanks again, Echisan. Thank you very much for having me. Thank you. Okay, now let's swing over to London and I'm joined by George Buckley. Hey, George, good to see you and thanks again for your time. How are you even great to be on as always? So I guess we'll start with this theme of central banks. We've just had Echisan talking about our change in the Fed call. So we have now an additional hike there. And I understand there's been a few speakers, central bank speakers in your region, ECB, and even maybe Bank of England. So I'm curious whether there's been some changes in tone and whether they've sort of started to take into account the recent drop in oil prices, which I know is important for their decision-making. Yes, and you'd think we've all been comparing notes here, you've been with the fact that we now have the ECB, the Bank of Japan and the Fed all on December and March in terms of our forecast for next rate hikes and Bank of England, November and February. So they're all sort of very similar time frames in terms of what we have had and are expecting over the next few months. ECB speak has remained hawkish despite the fact that we've had oil prices settling in around $95 and you've still got very high gas prices in Europe. That is going to filter through to inflation. It already is doing European inflation is now standing at 4% for the euro area. So it has risen quite a bit. It's probably going to rise more as well in the next few months. I think the really interesting thing of what's going on in ECB speak at the moment. Not even ECB speak. It's more European Commission speak and European Council speak, which is who is going to be the next president of the ECB and there was a bit of news this week on that. We know that it's now down to two people. Decaus who is generally considered to be dovish and cannot from the Netherlands who is more hawkish Germany denied the idea that it could be Decaus but were you still wait to see who it's going to be? So that's going to be the next interesting thing coming up from from the ECB I imagine. Okay, that's right. Yeah, that's happening where all of these things are coming up as well. So that's worth a good reminder. And in terms of the data next week, George, I know it's a big week for the UK. So what are you expecting in terms of CPI and also the labor market report? Yeah, the job market report. in the UK. I think is very interesting. We've seen the unemployment rate fall down to 4.7. I think it could go down further. We've got a 4.6 number. We're also looking at a fairly chunky increase in employment. In terms of inflation, we think that's going to stay broadly where it was. It might tick up a little bit to 10th to 3.6 from 3.5, but all of the underlying indicators, services, core goods, core inflation, probably going to stay broadly the same. These are the sort of indicators that the bank of England is going to be watching very closely. We're already priced 20 basis points for a rate hike at the next meeting in December. We don't expect it as I mentioned till February, but this is the sort of data. We're getting into the sort of time frame now where you would expect to start to see second round effects if they were going to start coming through. It may not be the most optimal time that you're going to see them, but they are going to start filtering through if we're going to see them at all. Lots of focus on headline inflation, on what's going on in the labour market because, of course, the stronger the labour market is, the greater the risk for second round effects. Lots to watch out for as well as a number of surveys in Europe as well. I wonder whether some of those surveys might react positively to the fact that we've seen a slightly improved outlook when it comes to oil prices. They're no longer well above 100, they're slightly below. That might actually have some positive repercussions, particularly for things like consumer confidence. Okay, got it. You mentioned, there's been some increase in pricing of the bank of England in December and maybe also further out. Just wondering, the numbers that you mentioned, if there's some upsides or prices, does that feed into more market expectations, which is already higher than what you have in our baseline, right? Yeah, and what's fascinating at the moment is not just us who have a lower baseline for the central bank, but it's also consensus really across the board. If you look at the divergence between market pricing and what economists are expecting, this is true for all central banks, or many central banks, not just the bank of England, but it's more true for the bank of England because the divergence there is huge. Markets are expecting probably between three and four more hikes, so that will between four and five in total with the one we've already had earlier this month. Whereas economists are talking about maybe one or two hikes more from the bank of England, so very big divergence. I think one of the arguments there is that it's very difficult for economists to change their view as quickly as the market does based on energy, but you know, you would have thought of anything, energy prices might have tempered expectations for hikes. I think what's really generated this rise, and it looks like about half of the rise this week has been, or the about 10 basis points, has been generated of the expectation in December, has been generated by the rise and CPI in the US, and also comments by Governor Waller, which has raised the possibility of either back-to-back moves or a larger move in one particular meeting. Yeah, that's really interesting. Some external spillovers there, if you will. Okay, we'll leave it here, George. Thanks again. Super, thanks, Yubin. Okay, now let's talk about China and the rest of the region. Hey, Jing, welcome back to the podcast, and thanks for coming. Yeah, thank you, Yubin. Great to be back. Cool, so I guess we have some tier 1 numbers coming out of China next week. What are your forecasts, and what do you think is the picture that they will paint overall for the Chinese economy? Yeah, so, you know, we recently, you know, revised up our Q4 GDP growth to 4.8 percent year-on-year, from 4.5 percent before, which is also above the 4.5 percent growth in Q3. And this higher year-on-year, probably a GDP growth, many reflects a favorable base effect. You know, the base was lower last year, and the latest round of policy efforts should also support the growth in Q4. Yeah, so for next Monday, we will have the October activity data, and we see a similar pattern as we see for the Q4. So we expect a higher year-on-year growth for a wide range of data points, including industrial production, and fixating investment. But again, you know, it's a meaning because of low-base, rather than a real rebound of the economy. Okay, yeah, got it. And outside of the data, I guess we have the APEC leaders summit happening on the 18th and 19th in Shenzhen. Anything you're expecting from that in the potential second round of meetings between President Xi and Trump? Yeah, so the US Treasury Secretary Scott Besson just confirmed, you know, he will join President Trump in Shenzhen next week. So very likely, we will have the third round of a Trump Xi summit for this year next week. But this summit will be relatively short, I would say, you know, compared to the Paris two rounds, you know, when we had this mutual state visits. And for this round of summit, we don't expect a major breakthroughs. There might be some progress in terms of the new AI dialogue. But that is just more about notification mechanism for joint risk management. More about, you know, to ensure the AI remains under human control and to prevent serious AI incidents. Anyway, you know, definitely this dialogue is not about collaboration or any AI chips or technologies, you know, especially given the intense competition between the two countries. Yeah, so I think that's how we see the summit, this incoming summit next week. Okay, got it. So more of the same, but still worth watching in those discussions. And speaking of that, I know you guys published a very interesting report earlier arguing that the blue wave after the midterms in the U.S. could actually benefit China's AI economy. So could you elaborate on that point, please? Oh, sure. Our points are quite straightforward. You know, we had a landslide of victory for Democrats from the U.S. meter elections. And which could potentially, you know, delay the data center construction in the U.S. And we think China could potentially benefit from that for a few reasons. Number one, potential slowdown in the demand for chips in the U.S. My trigger, a welcome price normalization of chips and Chinese AI companies may find it easier and less costly to access those higher AI chips. And in that case, the AI gap between the U.S. and China could be narrowed. And number two, you know, if we have a slowdown in this U.S. data center build out, it could also trigger a slowdown in the global AI exports, you know, including China's AI exports. But we think the actual impact on China's real economic growth could be far milder than the headline export data suggest. In this year, we had a big boom in the AI exports globally and also in China, because China is also part of the AI global supply chain. But the export data for China is heavily inflated by the processing tree and the price effect and especially the cheap prices. You know, in other words, you know, the real value added from those exports is much smaller than the headline export data indicate. And in return, you know, if we do have a big slowdown in the AI exports next year, then the negative impact on China's real economy should be also much smaller. Yeah, so overall, you know, we think this potential slowdown in the U.S. data center construction might not be necessarily a bad thing for China, especially for China's AI economy. Okay, got it. So it improves a bit there, I guess, price effects. and maybe access to chips. Yeah, that's indeed very interesting, Jane. So before we close, let me just complete the picture in terms of what we expect for the rest of Asia. Just a few things to flag. So we'll have some Q3 GDP numbers. Final estimates for Singapore and Malaysia. We think that's gonna be revised up. So still very solid. Again, reflecting strong manufacturing and in turn driven by electronics exports and AI-related demand in Thailand as well, yeah, Q3 GDP should pick up, but not as strong. And they're not a big beneficiary of this AI boom. But there will be a temporary boost from the cash handouts provided by the government. And then in Japan, we have the preliminary Q3 GDP numbers as well. Looks, we expect it to be relatively flat. Again, some boost from AI demand in KAPEX and also goods exports, but offset by private consumption. So there's a clear theme out there that in a lot of these countries, they're still getting a lot of benefits from AI demand. In terms of central bank decision, we have bank Indonesia on Wednesday. We expect no change in the policy rate despite the weakness in the currency. We think BI prefers to use other instruments in its toolkit to support FX stability. And domestic demand is slowing and core inflation is also declining in Indonesia. So that would probably mean that BI will see this as not warranting a rate hike at this point. But I would say this is a close call because there's a lot of moving parts. And I would say we see about a 60% probability to our forecast versus a 40% that bank Indonesia delivers at 25 basis points hike. And then finally, Australia's unemployment rates in October on Thursday. We expect that to edge up a little bit to 4.8 from 4.7 and unemployment rising by a modest 20,000 after a 39,000 decline in September. So some improvements in Australian labor markets. Yeah, so that's the roundup for the region. Let's see, but here, Jing, thanks again very much. Thanks. Talk to you later. Well, that's it for now. Thank you again for listening to our podcast, edited and produced by John Dalton. Please like and subscribe to Numerous Podcasts from your usual 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. You can check out NumerousConnects.com for more of our research and updates. Have a great week ahead. 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