US elections, earnings, and CPI, week ahead in the markets

Watch out for comments from FED central bank speakers to see if they confirm the tone set last week by each of the central banks.

Traders will be watching this week for any type of fallout from the central bank meetings last week. Watch for comments from central bank speakers to see if they confirm the tone set last week by each of the central banks. In addition, one may want to watch the US election results for any surprises. Expectations are for Republican to win at least the House. If Democrats sweep (unlikely given recent polls), stocks may trade lower. The star of the week will be US CPI on Thursday. A higher than expected reading may have the Fed hiking 75bps in December!


Last week rounded out the last 3 major central bank meetings for the late October/early November period. All 3 hikes were as expected. The RBA hiked rates by 25bps and is expected to hike further. The FOMC hiked rates by 75bps, however cautioned that the terminal rate is now more important than the pace of rate increases. The BOE also hiked rates by 75bps, however put the markets on notice that the terminal rate will be lower than markets are anticipating. Watch for continued volatility as the outcomes linger into this week. In addition, the US mid-term elections are on Tuesday. A swing in the House or Senate will make it more difficult for Biden to get his agenda through. Also, don’t forget that it’s still earnings season and markets will get to see CPI data from the US on Thursday!


Central Banks


The RBA hiked rates by 25bps last week to bring its cash rate to 2.85%, as expected. In addition, the central bank now sees inflation peaking around 8% this year, as opposed to 7.75% previously. The Committee also raised the 2023 inflation outlook to 4.75% and the 2024 inflation outlook to 3%. The RBA said it expects to increase interest rates further over the period ahead , but the size and timing will be determined by incoming data and the board’s assessment of the outlook for inflation and the labor market. RBA Governor Lowe added that it could return to larger rate hikes if deemed necessary but will also remain on hold if the situation requires it.


The FOMC hiked rates by 75bps last week to bring the Fed Funds rate to the 3.75%-4.00% range, as expected. Interestingly, the Committee’s statement was seen as dovish as it said, “in determining the pace of rate hikes, we will consider cumulative tightening policy, policy lags, and economic and financial developments”. Many took this to believe that the Fed will be slowing the pace of rate hikes by 50bps at the December meeting. However, during the press conference, sentiment changed. There were a few phrases that turned the sentiment from dovish to hawkish, such as “Incoming data suggest that the ultimate level of rates will be higher than previously anticipated”, “How high to raise rates is more important than the pace of tightening”, and “Pausing is not something we are thinking about or even discussing”. Will the Fed be hiking rates at the next meeting? It appears so. However, markets will have to wait for more clarification from Fed speakers, as well as the CPI report due out this week.


"We think we are on the path for a rocky landing for the economy, and next week we will get two pretty big clues as to what it's going to look like," said Steve Chiavraone, head of multi-asset solutions at Federated Hermes, who is holding larger-than-normal allocations in cash and commodities.


Consumer price data has driven huge market moves this year, as surging inflation forced investors to ramp up expectations for Fed rate hikes. A stronger-than-expected reading on Nov. 10 would likely bolster the case for the Fed to continue.


The BOE voted to hike rates by 75bps last week by a majority of 7-2. The large increase brought interest rates to 3%. The main takeaway from the meeting was the Committee noted that the peak interest rate is likely lower than implied by the markets. In addition, it noted the possibility of a 2-year recession ahead. The Committee sees inflation peaking at 10.9%. However, Bailey said markets saw a terminal rate of 5.25%, implying that it will be lower than that. He also added that the economy may have contracted by -0.5% in Q3. The first look at the UK GDP for Q3 will be reported on Friday.


US Mid-term Elections


Democrats and Republicans will battle it out on Tuesday as each look to take control of the Senate and the House of Representatives. All seats are up for grabs (435) in the House of Representative as each seat is up for re-election every 2 years. The Democrats currently hold a slim margin in the House with 221 seats. The Republicans hold 212 seats. Therefore, Republicans need to maintain their current number of seats and pick up 5 additional to flip the House to their favor. Polls heading into the weekend have the Republicans winning the House. In the Senate, there are only 35 seats up for grabs. 21 of those seats are currently held by Republicans and 14 by Democrats. The Senate is currently split 50/50, with Vice-President Harris casting the deciding vote when needed. Therefore, Republicans need a net increase of only 1 seat to gain control of the House. If Republicans win either the House or Senate, it will make it harder for President Biden to get his agenda through Congress. Key issues voters are focused on include the economy, inflation, gun control, and abortion rights.

Analysts said a surprise win by Democrats in the Nov. 8 midterm election, which will determine control of Congress, could fuel concerns about more fiscal spending and inflation.


Republicans have been leading in polls and betting markets and many analysts believe the likely result will be a split government, with GOP control of the House of Representatives and possibly the Senate for the second half of Democratic President Joe Biden's term.


"If the Dems were to retain full control of Congress, you're more likely to see fiscal expenditures rise and that would be highly problematic in this inflationary environment," said Spenser Lerner, a portfolio manager at Harbor Capital.


Options hedges on the S&P 500 imply a move of nearly 3% in either direction on the day after the election, analysts at Goldman Sachs wrote this week, nearly twice the size of the average daily move the index has recorded this year.


Some investors are more hopeful regarding the period of stronger markets that past midterm elections have ushered in rather than on moves stemming from the vote itself: the S&P 500 has posted a positive return in the 12 months following all 19 midterm elections since World War Two, according to CFRA Research.


Similar gains could be in store this time around – as long as inflation numbers are not hotter than investors expect, said Kei Sasaki, senior portfolio advisor at Northern Trust, who believes energy and financial stocks will perform well in a divided government.


"The results of the midterm will give greater visibility and help draw investor confidence higher," he said.


Earnings


Two weeks into the second month of the quarter and we are over the hump for earnings season. However, don’t get too comfortable as there are still some big names to come! This week, markets will hear from DIS, OXY, AZN, RIVN, AMC, ADSG, NIO, RBLX, PMPEX, as well as an update from UK house builders.


Economic Data


The economic calendar lightens a bit this week, however the data we see will be important! The biggest economic data prints will come later in the week. On Thursday, the US will release CPI for October. Expectations are that the headline print will drop slightly to 8% YoY vs 8.2% in September. In addition, the core rate is expected to drop to 6.5% from 6.6% in September. Both these prints are obviously much higher than the Fed’s 2% inflation target. On Friday, the UK will release its first look at Q3 GDP. As Bailey hinted, the expectation is -0.5% vs +0.2% in Q2. Is the UK economy entering a recession? Also, on Friday, the US will release the preliminary reading for Michigan Consumer Sentiment for November. Markets will be paying attention to the inflation components of this report. Other economic data releases due are this week are as follows:


Monday

China: Trade Balance (OCT)

Germany: Industrial Production (SEP)

UK: Halifax House Price Index (OCT)

Germany: Construction PMI (OCT)

Tuesday


US: 2022 Midterm Elections

Japan: BoJ Summary of Opinions

New Zealand: Business Inflation Expectations (Q4)

EU: Retail Sales (SEP)

US: IBD/TIPP Economic Optimism NOV

Wednesday

Japan: Reuters Tankan Index (NOV)

Australia: Westpac Consumer Confidence Index (NOV)

Australia: NAB Business Confidence (OCT)

Australia: Building Permits Final (SEP)

China: CPI (OCT)

China: PPI (OCT)

Mexico: CPI (OCT)

Crude Inventories

Thursday


Japan: Machine Tool Orders (OCT)

US: CPI (OCT)

Mexico: Interest Rate Decision

Friday





New Zealand: Business NZ PMI (OCT)

Japan: PPI (OCT)

Germany: CPI Final (OCT)

UK: GDP Growth Rate Prel (Q3)

UK: Manufacturing Production (SEP)

UK: Industrial Output (SEP)

UK: Trade Balance (SEP)

US: Michigan Consumer Sentiment Prel (NOV)