Markets Reactions to the GDP Report and the Week Ahead | Daily Market Analysis

Key events:

Eurozone - CPI (YoY) (Oct)

The economy does not stand still, and the figures of more than three weeks ago do not reflect the current situation. Time, it should be said, has generally flattened lately, and what was going on a few weeks ago may well be considered "old times."

For instance, the U.S. Consumer Confidence Index fell from 107.8 to 102.5 in October, and the manufacturing shipments index from the Richmond Fed fell to -10, instead of the -5 the market was forecasting.

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As for the second point, GDP growth is largely the result of a shrinking trade deficit. If it weren't for mortgage rates above 7%, layoffs by tech giants, and the latter's weak quarterly results, maybe the reaction would have been quite different, and not necessarily positive.

For the past six months, if not more, Fed members have been talking about the role of macroeconomic data in monetary policy decisions.

A U.S. slide into recession would probably reduce the regulator's "hawkishness. Fighting inflation is good, but a repeat of the Great Depression will not be tolerated under any circumstances.

For now, the forecasts for a tightening of monetary policy remain unchanged: the target range of the rate will be 3.75-4% per annum.

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But, nevertheless, UST 10 yields have been steadily declining lately. You can argue all you want. But Big Money has already smelled the new trends. It's already 3.93. TMF (Leveraged Treasury Bond ETF) is up 13 percent in the last week.

Speaking of oil and other commodities, oil prices continued prior momentum, consolidating in the area of two-week highs.

China's epidemiological situation is worsening, which is negative for the energy market, but it is supported by a shortage of petroleum products in the United States, where the spread between the nearest gasoline futures reached a decade high yesterday. Shortages of some fuels, like diesel, are also evident in Europe, so black gold prices have all chances to close October with the first monthly gain since May.

The OPEC+ decision to cut production by 2 mln bpd starting from January as well as the approach of December 5, when the "ceiling" on Russian oil prices will come into effect, create risks to supply reduction. At the same time, Chinese refineries are actively buying oil and plan to increase exports of oil products.

Over the last month the backwardation in the nearest Brent futures rose to $1.92 from $1.27 per barrel, which indicates the strength of the market.

According to calculations by BloombergNEF, even a complete cessation of Russian gas supplies to Europe in early November would allow Europe to comfortably survive the winter and finish the heating season with a level of gas reserves at 38%. Analysts point out that this will contribute to a permanent reduction in demand, which will be observed at least until the end of March.

Base metals declined for the second consecutive session. Aluminum was under pressure amid noticeable growth of reserves of this metal at the LME, which recently reached a critical low level. According to Bloomberg, they rose 70% in October, while demand has been declining.

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Among other things, the results of the Fed meeting will be published on Wednesday evening. The key rate could be raised by 0.75 p.p. – To 3,75-4%. Worth paying attention to the statement (explanatory note), data on the balance sheet rollback and Jerome Powell's press conference. CME FedWatch estimates that the rate may rise another 0.5 p.p. in December.

Friday will be the key macro release of the month, the official U.S. labor market report for September. According to analysts' consensus forecast, non-farm payrolls rose by 220 thousand after 263 thousand. The unemployment rate rose from 3.5% to 3.6%. A preliminary assessment of the situation may be the ADP private sector employment report which will be presented on Wednesday.