-        UK’s unemployment rate may have edged closer to 7% threshold (09.30 GMT)

-        Euro-zone industrial production probably fell again in September (10.00 GMT)

-        Russia’s economy grew by less than expected in Q3

 

Key Market Themes

The recent strength of the UK labour market may prompt the Bank of England to announce in its Inflation Report today that it expects the unemployment rate to fall more quickly to 7% – the threshold at which it has said it would consider raising Bank Rate. We think there is some scope for such an announcement to raise interest rate expectations and put some upward pressure on the yields of UK Gilts, at least temporarily.

 

After all, 2-year and 3-year UK overnight indexed swap rates have remained relatively stable since September. (See Chart 1.) This suggests that investors have not substantially altered their expectations for the path of monetary policy over the next few years despite the improvement in the economic data.

 

Admittedly, the market may be partially discounting a change by the Bank of England to its forecast given that OIS rates are higher than they were at the start of the summer. Unlike in the US, those OIS rates have not fallen back much since the Fed decided to refrain from tapering its asset purchases a couple of months ago.

 

But even if the Inflation Report does trigger an adverse reaction in the markets, we would not expect there to be a substantial and sustained rise in the yields of UK Gilts given our view that unemployment will take longer to fall back to 7% than the consensus expects. That being said, we do anticipate a gradual drift higher in yields over the next couple of years as we get closer to an eventual turning point in the monetary policy cycle. (Jessica Hinds)

 

What to watch for today: US

No major data or events scheduled for today.

 

Canada

Reflecting the recent increase in the MLS sales-to-listings ratio, we expect that the Teranet-National Bank composite house price index (14.00 GMT) will show house price inflation rose slightly to around 3.0% in October, from 2.7% in the month before. (David Madani)

 

Continental Europe

Euro-zone industrial production may have fallen in September (10.00 GMT) by around 0.5%. In August, industrial production rose by 1.0%, reversing the 0.9% decline in July. However, there are good reasons to believe that production may have declined again in September. We already know that industrial production in Germany and France fell by 0.8% and 0.5% respectively, while production rose by just 0.2% in Spain and Italy. (Paul Hollingsworth)

 

UK

Labour market figures (09.30 GMT) may show that the unemployment rate fell a notch in September. This could bolster the markets’ belief that interest rates will rise sooner than the MPC thinks and therefore may create an awkward backdrop to the Inflation Report later in the day (10.30 GMT). Most of the private sector employment surveys have continued to strengthen over the last few months and the timelier claimant count has fallen sharply over the three months to September. Accordingly, we expect a 50,000 or so drop in unemployment, enough to bring the rate down to 7.6%. (Samuel Tombs)

 

October’s inflation data (released on Tuesday) suggests that the UK economy is hitting a sweet spot of accelerating growth and falling inflation. Annual CPI inflation fell from 2.7% to 2.2% in October, the lowest rate since September 2012 and well below the consensus forecast of 2.5%. Meanwhile, underlying pressures are likely to remain subdued in response to weak cost pressures and spare capacity. So there seems little risk of the inflation ‘knockout’ to forward guidance being triggered anytime soon. (Martin Beck)

 

Japan

Machinery orders for September (23.50 GMT, Tuesday) should shed further light on investment trends at the end of last quarter. Core orders jumped 5.4% m/m in August and the usual seesaw pattern suggests that we should see a partial correction in September. We have therefore pencilled in a 1.5% m/m decline, but this should leave the upward trend intact.

 

In contrast to the improving outlook for corporate spending, the slump in consumer confidence in October in the wake of the decision to hike the consumption tax marks the end of PM Abe’s extended honeymoon period with ordinary households. (Data released on Tuesday.) The headline index plummeted from 45.4 to 41.2, taking it almost back to levels that prevailed when Abe was elected last December and the second largest decline in the history of the survey (only surpassed in the wake of the Great East Japan Earthquake in 2011). (Marcel Thieliant)

 

China

The Third Plenum of China’s Communist Party concluded on Tuesday. It would be foolish to rush to a snap judgement on whether the Plenum was a success given how little was revealed of leadership deliberations in the concluding communiqué and the long period over which reforms will have an effect. Relative to expectations though, our sense is that it fell some way short. It was no great surprise that the communiqué gave very little detail on specific policy proposals. But we had hoped for something approaching a high-level vision for the direction of reform, something worthy of President Xi’s talk of a “master plan”. Reference is made in the communiqué to various moves in different areas, with top billing going to granting markets a “decisive” role in resource allocation. But there is little sense of how the various proposals should sit together. Without this, we suspect that reformers will struggle to push piecemeal efforts against the opposition of vested interests. (See Tuesday’s China Economics Update for more.) (Mark Williams)

 

Other Asia-Pacific

Bank Indonesia unexpectedly raised both its main policy rate and the Fasbi (the rate it pays lenders on overnight deposits) by 25bp each on Tuesday. BI has now raised its policy rate by a cumulative 175bp since June. But the lagged impact of substantial rate increases in the last few months will weigh heavily on growth in the coming quarters. Barring another bout of financial market turbulence, we think Tuesday’s move is likely to be the last in the current tightening cycle. (Krystal Tan)

 

The latest output data released on Tuesday underlined the continuing struggles of India’s industry. Output was up 2.0% y/y in September, lower than both the Bloomberg median (+3.5%) and our forecast (+2.5%). Hopes had been raised by a sharp acceleration in the more-timely core industry output data for September. However, with the manufacturing PMI unchanged at 49.6 in October, the bulk of the evidence points to continued weakness in industry. We think an imminent turnaround is unlikely, particularly given the recent tightening of monetary policy which has sent credit costs higher. (Miguel Chanco)

 

Latin America

No major data or events scheduled for today.

 

Emerging Europe

No major data or events scheduled for today.

 

The weaker-than-expected 1.2% y/y increase in Russia’s GDP in Q3 is likely to reinforce concerns that the slump in Emerging Europe’s largest economy over the past year will be longer-lasting than many had initially assumed. (Data published on Tuesday.) But although the headline growth figure was weak, the bigger concern is arguably that there remains little evidence of a much-needed rebalancing in the drivers of the economy away from consumer spending and towards greater investment. We now expect GDP to grow by 1.5% this year (previous forecast 1.8%). Our forecast for growth in 2014 remains unchanged at 2.8%. (Neil Shearing)

 

Key Data and Events

Tue 12th                23.00    Kor    Unemployment (Oct)   

                             23.50    Jpn    Core Machinery Orders (Sep)  

                             23.50    Jpn    Domestic CGPI (Oct) 

Wed 13th               08.00    Spa    CPI (Oct, Final)          

                             09.30    UK     Claimant Count Rate (Oct)      

                             09.30    UK     Claimant Count Change (Oct)  

                             09.30    UK     ILO Unemployment Rate (Sep)

                             09.30    UK     Average Weekly Earnings (Sep)          

                             10.00    EZ     Industrial Production (Sep)     

                             10.30    UK     BoE Inflation Report  

                             11.00    Brz     Retail Sales (Sep)      

                             14.00    CA     Teranet-National Bank House Prices (Oct)       

                             19.00    US     Monthly Budget Statement (Oct)         

Thu 14th                 00.00    US     Fed’s Bernanke on History of Federal Reserve

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