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[Quick Facts]

1. EU expects imports of Russian gas to drop to 40-45 billion cubic meters this year.

2. The Fed issues the FOMC statement and Powell speaks during the press conference.

3. Canada's economy hit rock bottom as its manufacturing sector slumped for the sixth consecutive month.

4. Lacker says investors shouldn't bet on the Fed ending rate hikes.

5. U.S. Treasury slows the pace of longer-dated debt issuance.

6. U.S. ADP employment growth in October fell short of expectations.

[News Details]

EU expects imports of Russian gas to drop to 40-45 billion cubic meters this year

The European Commission issued a statement after the EU-U.S. Task Force on Energy Security meeting on October 31. It said that the EU has significantly reduced its dependence on Russian fossil fuels, including phasing out coal imports, cutting oil imports by 90%, and reducing natural gas imports from 155 billion cubic meters in 2021 to about 80 billion cubic meters in 2022, which is expected to be about 40-45 billion cubic meters this year. The statement said the EU has taken measures to accelerate the transition to clean energy, diversify energy supplies, and conserve energy. The EU said the meeting discussions focused on the diversification of Europe's natural gas supply sources and the growing trade in liquefied natural gas between the U.S. and Europe.

The Fed issues the FOMC statement and Powell speaks during the press conference

FOMC statement overview: Members agreed to keep rates unchanged at 5.25%-5.50%, continue the plan of balance sheet reduction, and assess the extent of "further" policy tightening.

Interest rate outlook: The statement added more attention to the tightening of "financial conditions." Powell said that further rate hikes may be needed and he would advance policy cautiously based on progress. He refuted the view that it would be difficult to raise rates again after a pause. It's nearing the end of the rate hike cycle, but no rate cuts are considered or discussed. There are risks of doing too much or too little. The dot plot is less informative over time.

Inflation outlook: The Fed is committed to returning inflation to the 2% target. There is still a 'long way to go' on inflation. Wages are not a major driver of inflation and the labor market is likely to be more important going forward.

Economic outlook: U.S. economic activity expanded at a strong pace in Q3. Tight financial and credit conditions may depress economic activity. Concerns are being raised about the impact of geopolitics on the economy. Job growth has slowed but remains strong.

Bond market: Financial conditions have tightened significantly. Rising longer-dated bond yields may have implications for policy. Expectations of a rate hike have not led to a rise in longer-dated bond yields. It's unclear how much a rate hike the rising bond yields equal to.

After the rate decision was announced, interest rate futures expected a 19% probability of a rate hike in December. A full rate cut would be seen by next June. The overall rate hike bets were reduced from earlier.

Canada's economy hit rock bottom as its manufacturing sector slumped for the sixth consecutive month

Data released on Wednesday showed that Canada's manufacturing PMI (at 48.6) remained in contraction for the sixth consecutive month in October as confidence in the outlook fell to a three-year low due to lower output and rising cost pressures. The PMI has been below the 50 threshold since May, which is the longest duration since February 2016.

Firms reported higher fuel costs, with input prices climbing from 50.4 in September to 55.1, the highest level since April; perhaps the most worrisome thing is the rise in input price inflation since September, which has added pressure on firms amid falling demand. This pipeline pressure only enhances the likelihood that rates will remain higher for longer.

Lacker says investors shouldn't bet on the Fed ending rate hikes

Jeffrey Lacker, the former Richmond Fed president, said the Fed may not take the option of raising rates off the table. There is no reason for Powell not to consider raising rates or signaling a pause in rate hikes for an extended period. That's because the task of curbing inflation is far from done.

In addition, wage gains do not appear to have declined materially, and the risk of recession has receded over the past 6 to 12 months. We still have a long way to go.

U.S. Treasury slows the pace of longer-dated debt issuance

The U.S. Treasury Department's quarterly debt issuance program saw a slightly lower-than-expected increase in longer-dated debt issuance, suggesting that officials may be concerned about the spike in yields over the past few months. The Treasury said it would offer $112 billion of 3-, 10- and 30-year Treasury securities next week, compared with market expectations of $114 billion. The main difference this time compared with August is the slowdown in the growth of the 10- and 30-year Treasury offerings. Some traders expected the slowdown to be greater. Treasury yields have soared since the August statement was released, with the 10-year yield up more than 75 basis points since then. While U.S. Treasury Secretary Janet Yellen denied that increased government borrowing is causing yields to rise, market participants have growing concerns about the widening U.S. fiscal deficit. The Treasury Department also made it clear that it would increase its issuance of longer-dated bonds once every quarter.

In addition, the U.S. Treasury will continue to issue six-week of cash management bills (CMBs) on a regular basis until at least the end of March next year, and it will decide whether to include them as a permanent maturity category in the benchmark bond issuance in the next refinancing statement.

U.S. ADP employment growth in October fell short of expectation

The ADP report released on Wednesday showed that private-sector employment increased by 113,000 in October, with the market expecting a 150,000 increase. However, this likely understates the health of the labor market, which remains tight.

A survey by the Conference Board on Tuesday showed that consumers were optimistic about the labor market in October. The weaker-than-expected increase likely reflects a strike by the United Auto Workers (UAW) against three major automakers, which may have weakened manufacturing employment. The government reported last week that at least 30,000 UAW members were on strike during the October survey.

[Focus of the Day]

UTC+8 15:30 Switzerland CPI (Oct)

UTC+8 17:10 Japanese Prime Minister Fumio Kishida holds a press conference

UTC+8 20:00 The Bank of England announces interest rate decision

UTC+8 20:30 Bank of England Governor Bailey holds a monetary policy press conference

UTC+8 22:00 U.S. Factory Orders MoM (Sept)