Markets to Watch This Week: Is the ECB Done? Don’t Be So Sure 

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

Last Week’s Highlights 

Dominique nailed it – the Fed finally acknowledged the US economy’s strength. The Fed stayed on hold, kept an extra 2023 hike, reduced the number of 2024 cuts from four to two, and kept the inflation trajectory unchanged but upgraded the growth trajectory. US rates bear steepened, with the 2-year yield rising 7bps, while the 10-year yield increased by more than 10bps. Higher real rates pressured equity markets, particularly the more rate-sensitive US markets, which underperformed last week (Charts 2 and 3). Here is the key quote from Chair Jerome Powell:  

‘We’ve covered a lot of ground, and the full effects of our tightening have yet to be felt. Today, we decided to leave our policy interest rate unchanged and to continue to reduce our securities holdings. Looking ahead, we are in a position to proceed carefully in determining the extent of additional policy firming that may be appropriate.’ 

European PMIs continued to hint at a weak economy. European flash PMIs came out last week, with the French services PMI particularly surprising to the downside. It was 43.9 versus 46 previously, with new orders disappointing. Curiously, the services PMI has diverged from the local INSEE business sentiment index, which looks a lot more solid. Also, within the French PMI, the employment component surprised higher. Therefore the impact on monetary policy is limited.  

The BoJ disappointed the hawks. The BoJ kept monetary policy unchanged, defying those who called for a further widening of its YCC band. Japan 10Y yields fell modestly, and both the yen and Nikkei are down 0.5%. This matched our view: we did not see the BoJ needing to act soon. Japanese domestic demand is weak as exports have boosted GDP growth rather than domestic forces, and wage growth is too low to drive inflation durably above the BoJ’s target. 

What to Watch 

Can the US consumer maintain a low savings rate to sustain consumption? Friday sees updated data for personal consumption and savings. Dominique continues to expect the savings rate to remain near the lows as consumers feel confident enough to continue spending.  

Sticking with the US, we see how consumer confidence is evolving. The University of Michigan’s (UoM) consumer sentiment reading (final) is out on Friday, while the Conference Board releases their consumer confidence index on Thursday. Given the upshift in the preliminary reading of UoM, Dominique expects the Conference Board’s gauge to be similarly bullish.  

Will European inflation force the ECB to remain hawkish? The main release of the week will be preliminary Eurozone aggregate and national inflation releases for September. This could be an early chance for the September ECB core inflation forecasts to be proven too optimistic. A higher outturn could trigger more hawkish pricing after the dovish hike at the last meeting. 

RBA needs inflation surprise to continue hiking. With the RBA confirmed as needing a surprise (versus forecasts) on inflation, this week’s August CPI (Wednesday) will be talk of the town. Survey contributors expect an increase to +5.2% YoY from +4.9% YoY, on average. This is likely to come from fuel prices, which are ~20% above September assumptions. Moreover, this release offers more details on services inflation, which should prove more persistent. Keep watching their preferred core numbers, which saw a small increase to momentum last month. 

Will weak inflation allow the NBP to cut further? While the absence of single-digit CPI did not impede a 75bp rate cut from the NBP, the expected drop in September flash CPI should ensure another rate cut in early October. Base effects are more favourable than last month, while retroactive changes to electricity tariffs should offset the rise in fuel prices through the month. 

The Week Ahead: Watch Dominique and Andrew review last week’s FOMC meeting. Dominique reflects on what drove her to correctly predict the Fed’s hawkish revisions to their SEP, while discussing the potential impact of this week’s GDP revisions.

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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