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FOMC Minutes, Fed Hiking Rates slowly

At the November 2nd FOMC meeting, members unanimously agreed to hike the Fed Funds rate by 75bps to bring the key rate to 3.75%-4.0%.The statement from the meeting said members agreed that ongoing rate hikes were necessary until rates were “sufficiently restrictive”. In addition, the statement noted that “in determining the pace of rate hikes, we will consider cumulative tightening, policy lags and economic and financial developments”. However, during the press conference which followed, Fed Chairman Powell stated that the incoming data suggests that the ultimate level of rates will be higher than previously anticipated.

The FOMC Minutes released on Wednesday showed that a substantial majority of officials said a slowing in the pace of rate hikes would be appropriate soon. 

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This week’s currency pair, USD/CNH

This week will bring a lot of US macroeconomic data and speech from US Fed Chairman Powell, which should give the markets a clearer direction of where the Fed may be headed next regarding monetary policy. Powell speaks at the Brookings Institute on Wednesday. The topic is the economy and labor market. The statement after the November 2nd FOMC meeting stated that “ in determining the pace of rate hikes, we will consider cumulative tightening, policy lags, and economic and financial developments”. The markets took this to be dovish. However, in the press conference that followed, Powell said that the incoming data suggests that the ultimate level of rates will be higher than previously anticipated. However, the pace of tightening is not as important as the terminal rate. Markets took this to be hawkish, Traders will be looking for Powell to clarify these statements and try to determine if the Fed will hike by 50bps or 75bps at the December meeting. In addition, the US will release the Fed’s favorite measure of inflation, Core PCE. Expectations are for a YoY print of 5% vs a September reading of 5.1%. If this number is stronger, the Fed may feel comfortable leaning towards a 75bps hike in December. The US will also release Non-Farm payrolls on Friday. Expectations are for a print of 200,000 vs a previous reading of 261,000. The Unemployment rate is expected to remain unchanged at 3.7%.

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Australian inflation fell but just ‘weight’ a minute

Australian inflation rose only to 6.9% y/y, down from a peak of 7.4% and lower than the 7.5% expected. Housing, food and non-alcoholic beverages and transport were most significant contributors. CPI rose 0.2% m/m, below its long-term average of 2.5%.

The RBA will be happy to hear that inflation was much lower than expected, even if it does remain historically high. But the ABS report also highlighted that they performed their annual weight adjustment to the CPI basket, and that inflation would have been 7.1% if last year’s methodology was used. But even a move down from 7.4% to 7.1% is noteworthy as it leaves the potential that inflation has in fact peaked.

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Powell’s Brooking November 2nd FOMC Press Conference

In Fed Chairman Powell’s press conference after the FOMC meeting on 2nd November, he said that incoming data suggests that the ultimate level of rates will be higher than previously anticipated. In addition, he noted that, how high rates rise is more important than the pace of tightening. At the time, the markets took this to be hawkish as it was the first time Powell mentioned rates would be higher than anticipated and that the pace was not as important as the terminal rate.

Inflation and the labor market at the Brookings Institute. Powell repeated many of the same comments from 2nd November, while adding that the time for moderating the pace of rate hike increases may come as soon as the December meeting. This was now seen as dovish, as Powell is basically telling the markets that the FOMC will Only hike by 50bps in December .

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Consensus is for the RBA to hike by 25bp tomorrow

What has happened since the last RBA meeting:-
10th November: Australia’s Central Bank says nearer to point when it can wait on rates.
CPI fell to 6.9% y/y, down from 7.4% and beneath the 7.5% – suggesting inflation has peaked.
Governor Lowe reiterated his belief that the economy can have a soft landing.
PMI’s continued south, business sentiment has been flat.
Consumer inflation expectations hit a record high according to one survey.
OIS curve is pointing lower as the case for a higher terminal rate diminishes.

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Gold Falls Victim to Strong US Data

Gold has sold off thanks to a rebound in US dollar and bond yields. The fact that the yellow metal has turned lower from a key level makes today’s reversal eye-catching as the chart suggests that at least a temporary top may be in for now.

Gold fell along with the major currency pairs today as the dollar found support on the back of some stronger-than-expected US macro data. Factory orders surged by more than expected, rising 1% month-on-month, while the closely-followed ISM services PMI came in at 56.5 compared to 53.3 expected and 54.4 last.

With US data continuing to remain largely positive, some investors are starting to re-question the market pricing of the terminal interest rates in the US, currently priced in at just below 5%. If incoming data continues to remain favorable, then inflation is likely to persist longer and that may encourage the Fed to be even more reluctant to pause its hiking early in the first half of 2023.

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The Australian Q3 GDP Economy | Xtreamforex

Australian economy expands by 0.6%, a little softer than expected. The impacts of high inflation and higher interest rates are becoming apparent – notably, the real estate sector on lower turnover subtracted 0.2ppts from activity in the period.

The Australian economy expanded by 0.6% in the September quarter. That was a little softer than anticipated, market median 0.7% and Westpac 0.8%. Annual growth is 5.9%. The level of activity is 6.5% above levels prior to the pandemic, at the end of 2019.

The Real Estate sector – in the form of ownership Transfer Costs plunged by -11.2%, subtracting 0.2ppts from activity. We had allowed for a more modest fall, recent quarterly outcomes have been -1.1%, -2.5% and -2.1%. This provides further evidence that the Australian economy is in transition. 

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