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[Quick Facts]

1. Inflation will dog the world economy next year, postponing rate cut calls.

2. The BOJ may change its monetary policy in a debt-forex dilemma.

3. UAW leaders approve a contract agreement with Ford as GM talks drag.

4. The EU is divided on the Israeli-Palestinian conflict.

5. The U.S. consumer confidence index fell in Oct., reflecting continued concerns about inflation.

6. Timiraos: The Fed is expected to pause rate hikes again.

[News Details]

Inflation will dog the world economy next year, postponing rate cut calls

Three-quarters of more than 200 economists interviewed in a survey thought that the world economy would face high inflation next year. The main risk is that inflation turns out higher than they forecast, suggesting interest rates will also remain higher for longer. Increasingly more economists don't expect rate cuts to happen until the second half of next year, though some still expect a number of central banks to start cutting rates in the middle of 2024. This is a significant change from earlier this year.

The latest survey, which interviewed more than 500 economists from Oct. 6 to 25, showed that most of the 48 global economies covered in the survey had their 2024 growth expectations revised downward, while their inflation expectations were revised upward.

The BOJ may change its monetary policy in a debt-forex dilemma

As the Bank of Japan's (BOJ) interest rate decision approaches (October 31), there are rumors that the Bank of Japan will once again adjust its monetary policy. Those rumors may not be groundless. In fact, on the eve of the BOJ's July interest rate decision, Nikkei News reported that the BOJ would consider keeping long-term interest rates "somewhat" above the current 0.5% ceiling. This news was confirmed the next day.

Recently, the Bank of Japan has been trapped in a debt-forex dilemma due to factors such as higher U.S. bond yields. Japan's 10-year government bond yields have risen above 0.88%, hitting a new high since 2013; the yen fell below the 150 mark per dollar, the lowest level in nearly a year. Then the Bank of Japan reduced the bond yields through the unplanned purchase of bonds. This also makes the BOJ officials consider whether to further adjust the Yield Curve Control (YCC) settings.

Discussions around Japan's monetary policy normalization are increasing. The latest speculation suggests that the YCC trading range could widen further or could be abandoned completely. The BOJ's October policy meeting is undoubtedly the center of market attention.

UAW leaders approve a contract agreement with Ford as GM talks drag

United Auto Workers (UAW) leaders approved a new tentative contract agreement with Ford Motor on Sunday, which includes a substantial $8.1 billion investment in company manufacturing. Meanwhile, negotiations at General Motors (GM) are ongoing without any finalized deal.

Last Wednesday, Ford reached a tentative agreement with the UAW that ended a six-week-long strike by workers. Under the agreement, Ford will offer workers a four-and-a-half-year labor contract with a record 25% pay raise over the course of the contract.

It's unclear what stood in the way of a deal between GM and the UAW, but sources say a key issue is the pension costs for retirees.

The EU is divided on the Israeli-Palestinian conflict

Josep Borrell, High Representative of the European Union for Foreign Affairs and Security Policy, called for a "pause in hostilities" in the Gaza Strip to allow the delivery of humanitarian aid. His comments were challenged by Austrian Foreign Minister Alexander Schallenberg, who pointed out that Borrell's remarks went beyond the unified position reached earlier by EU leaders.

In a joint statement earlier last week, EU leaders shied away from talking about a cease-fire, despite some member states urging stronger language.

EU leaders argued for five hours before reaching a united position on Oct. 26, calling for humanitarian corridors but not a cease-fire. The argument on Oct. 28 showed the enduring divisions within the EU over the war.

The U.S. consumer confidence index fell in Oct., reflecting continued concerns about inflation

The final U.S. consumer confidence index fell by about 6% in October after two consecutive months of virtually no change. Much of this decline was driven by higher-income consumers and those with large stock holdings, as this indicator is consistent with recent weakness in the stock market. Consumers' expectations for business conditions over the next year fell by 16%, and expectations for consumers' personal finances over the next year declined by 8%, reflecting continued concerns about inflation and uncertainty about the impact of negative news at home and abroad.

Timiraos: The Fed is expected to pause rate hikes again

The Fed's favored indicator, the core PCE price index, released last Friday, accelerated in September from a month earlier, with its growth rate rising to 0.3% from 0.1% in August. The Wall Street Journal reporter Nick Timiraos said it's not expected to change the Fed's decision in the November policy meeting.

Timiraos said in the article that the decline of inflation slowed in September, and the potential price increase has sped up, but it's not enough to prompt the Fed to raise interest rates next week. The recent improvement in inflation has been enough for Fed officials to decide to leave rates unchanged next week. The trend in inflation could keep the Fed on a continued pause in raising rates.

Inflation is still high, but it has cooled significantly over the past 20 months with Fed rate hikes. The annualized core price growth from April through September was 2.8%, which is still above the Fed's target of 2%, but it has slowed sharply from the previous six months when it was at an annualized level of 4.5%.

In addition, in the Fed's latest economic outlook released last month, Fed officials' median forecast for core PCE inflation this year was 3.7%. This means that the Fed could have already exceeded its mandate to reduce inflation this year in the first three quarters, as PCE inflation has been already significantly below the level expected for the whole year. This may increase the possibility that the Fed will remain on hold.

A measure of underlying inflation indexes closely watched by some Fed officials was stronger in September, such as services inflation excluding housing and energy. It indicates that Fed policymakers may have a case to be open for another rate hike in the coming months.

[Focus of the Day]

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