Markets to Watch This Week: A Cautious Hike for the ECB?

We standardise WoW price changes across different markets to allow for cross-market comparisons.

Last Week’s Highlights

Beige book pointed to goldilocks. The quarterly Beige Book was released last week, continuing to point to strong growth, falling inflation and a loosening labour market. Here are our highlights on each point:

• Real GDP growth has picked up: ‘Economic growth was modest during July and August’ vs ‘Economic activity increased slightly since late May’. To put things in context, Q2 growth was 2.1% while the Atlanta Fed GDP nowcast for Q3 is currently 5.6% (although this will likely get revised lower by the end of Q3).
• The labour market is cooling: ‘Job growth was subdued across the nation’ vs ‘Employment increased modestly this period’. 
• Inflation is moderating: ‘Most Districts reported price growth slowed overall’ vs ‘Prices increased at a modest pace overall’.

Japan GDP was weaker than expected. Japanese GDP came in at 1.2% QoQ, up from 0.8% previously. Driving this increase was foreign demand, which rose 1.8% QoQ, while private consumption fell 0.6% QoQ. A rebound in auto-related exports is one reason for the strong foreign demand and has boosted the Japanese economy to date. The BoJ will continue to watch signs of domestic strength and further wage pressure before tightening, and this report supports their stance to stay dovish.

Brent continued its march higher! EIA data showed US commercial crude inventories fell by 6.3mn barrels while gasoline stocks also fell by 2mn barrels. Diesel stocks rose by 0.7mn barrels, while other oils saw a much larger stock build. Large reductions in commercial crude inventories continue to support oil higher; however, it looks like much of this increase was priced in given the bulk of Brent’s move occurred before the release.  

RBA kept rates at 4.1%. In line with market expectations, the RBA kept rates unchanged at 4.1%. Despite this, the Aussie dollar weakened last week by 1.2% (Charts 1 and 2). Much of the statement was as expected, but Governor Lowe did hint at a slowing economy:

‘Inflation is coming down, the labour market remains strong and the economy is operating at a high level of capacity utilisation, although growth has slowed’.

What to Watch

How will higher energy prices impact CPI? Dominique agrees with the consensus and expects core inflation to rise 0.2% MoM. However, as always, the details will provide the underlying story. She expects OER inflation to remain around 50bps, core services excluding housing above 20bps, and core goods inflation negative. The other question: how much passthrough will there be from higher oil and crack spreads into headline inflation?

All eyes on the ECB this week. Given the fundamental picture, despite slowing Eurozone growth, Henry’s lean is that the ECB must tighten further to get inflation onto a trajectory consistent with their medium-term inflation forecast. Recent negative survey sentiment has dampened the mood, but the survey data has become less useful as a forecast for hard data since COVID. The ECB know this. A cautious hike makes sense given the ECB’s metrics and the recent data. In such an instance, we would expect them to stress they are almost done.

Weaker UK labour market has surprised to the downside, will it continue? Tuesday will see the UK labour market data released. We consider it the most important UK data of the week. Market expectations are for another rise in unemployment to 4.3%. There could be upside risk here, although we warn that single outturns can be shifted greatly by MoM changes in participation. More telling will be whether full-time employment continues to shrink and if part-time employment is also weakening (it has provided much of the growth in employment since the start of the year).

The Week Ahead: Watch Dominique and Andrew as Dominique outlines why the Fed is unlikely to hike in September, while growth forecasts for 2024 should be revised higher. Also tune in to hear about our the newest addition to the Hive!

Viresh Kanabar has worked in the UK financial services industry for over 8 years including in Consulting and Investment Risk. Most recently he launched The Macro Journal Substack where he puts out regular in-depth reports covering all areas of global macro.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-market research.

Photo Credit: depositphotos.com

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