Chair Powell To Remain Hawkish / How Much Will UK Energy Prices Rise? / Quiet Week Follows a Faster RBNZ

US

Summary

• Chair Powell to remain hawkish at Jackson Hole.
• Consumption to surprise on the upside.

Fed

Fed officials, this week, continued to push back against market expectations of rate cuts in 2023. Markets paid some attention: end-2023 FF rose by 10bp, though markets still price cuts after March 2023.  And interestingly 5yr rates rose by much more than 2yr rates, 15bp against 2bp, which to me reads like markets think the Fed is not doing enough.

For Jackson Hole I expect Chair Powell to remain hawkish and focus on 3 themes:

1. The inflation half of the mandate remains the priority over the employment part.  With unemployment at a post-WWII low, the Fed has its work cut out.  Powell is likely to stress that convincing evidence that inflation is on its way back to 2% will be needed before the Fed stops hiking.
2. The June SEP FFR trajectory still applies. It implies that Powell will push back against rate cuts in 2023. This is because the Fed is unsure where the economy is going.  The July meeting minutes stated that participants expected the economy to grow below potential in H2. Since the July meeting however the NFP and more broadly the economic surprise index suggests this isn’t happening, at least not yet. In this context, the safest course of action is to stick to the June meeting FFR plans and convey the proverbial double handed economist message that tightening will be faster if the data is stronger and vice versa. 
3. Dance ever so gingerly around the ‘landing issue’. Unlike the Bank of England, the Fed has so far chosen to claim that a soft landing is the base case scenario. The ongoing growth acceleration, if it continues, would make it difficult for the Fed to maintain this narrative.  So, I expect Chair Powell to hint at increased risks of hard landing, without getting into too many details. There is after all no public, real time, Q&A after Powell’s speech.

Data

This past week, overall, the data was bullish growth and inflation, with retail sales ex auto and gas higher than expected, initial claims lower than expected, and a continuation of the pattern where continuing claims are rising far less than initial claims, which suggests laid off workers are finding jobs quickly.  The economic surprise index continued to recover.

Covid related hospitalizations fell (Charts 3 and 5).

This coming week, the most important data will be personal income and consumption (Friday). I am expecting a positive surprise, relative to the consensus on consumption at 0.3% MoM, as together with expectations on personal income at 0.6%, it implies an increase in the savings rate. The strong retail number suggests that households are spending rather than saving the increase in real income brought about by the decline in gas prices.  A strong labor market and rebounding consumer confidence also point in the direction of a lower savings rate.

Other key data include:

• PCE (Friday): I agree with the consensus of 0.3% MoM for core.
• Durable goods (Wednesday): Capital goods shipments have been flat in real terms in June. The consensus for July implies a further decline in real terms. A positive surprise would be a further sign that growth is accelerating. 
• New home sales: A negative surprise would not change my bullish view on growth and inflation, as housing represents only about 3.5% of GDP and real estate prices have decoupled from sales.
• GDP second estimate (Thursday): Headline number unlikely to change, per consensus, but details could give us a more precise baseline for Q3.
• Retail and wholesale inventories (Friday): For all the retailers reporting and the GDP data showing an inventory runoff, the headline numbers do not show much change.
• Goods trade balance (Friday): The consensus expects no change. A worsening could signal a growth pickup.
• Chicago Fed national activity (Monday), S&P PMIs (Tuesday), Richmond (Tuesday) and KC (Thursday) Feds manufacturing surveys: I agree with the consensus.
• Retail and wholesale inventories (Friday): For all the talk, and GDP data showing an inventory runoff, the headline numbers do not show much change.

Events/Political Developments

Following the adoption of the Inflation Reduction Act, a whittled down version of the administration Build Back Better Bill, President Biden’s approvals have improved by a couple percentage points from a post election low of 38%. Polls regularly show that inflation remains voters’ main concern. The adminitration has yet to make its case on how the Act will lower the inflation experienced by voters in their everyday life.

Links to New York Fed POMOs/TOMOs:  Repos, Treasury, MBS, CMBS

Europe

Summary

• August’s preliminary PMIs expected to show continued decline in sentiment (Tuesday).
• An opportunity to hear from one of the ECB’s doves and analyse the ECB’s minutes.
• The UK’s Ofgem releases its updated price cap for household energy bills (Friday).

Too Much Hawkishness Priced for the BoE – But it Could go Further

Last week was dominated by UK data. This included an upward surprise in UK CPI which drove pricing for BoE hawkishness significantly higher. I do not agree that the BoE will be able to deliver what the market is pricing (which currently includes 50bp at each of the next three meetings). However, in the near-term there could be more hawkish news.  

This week will see Ofgem provide its update for the price cap (the electricity and gas pricing which determines a large proportion of UK household energy bills) for October. The rise is likely to be substantial – estimated to be above 80%. Unless it substantially falls short of there (unlikely given the mechanical nature of the process), the market is likely to price a greater risk of overshoot in Q4 inflation, and with it more BoE hawkishness. Ultimately, the price rise will cause further pain to UK households, and a further decline in real consumption.

We have already seen consumer confidence numbers crash, and there seems to be little sign of rising. This week could provide further evidence that the deteriorating economic outlook across the UK and Europe is extending further into business sector. Preliminary August PMIs (Tuesday) are expected to show most of the European numbers declining further below 50 (led by manufacturing) and given the supply chain and energy pressures a downside surprise is likely.

For the Eurozone, two important elements will be the release of the last meeting minutes (Thursday) and hear from one of the more dovish policy makers, Panetta (Tuesday). In line with comments by Schnabel and de Guindos last week, I expect that both will indicate the increased focus on near-term inflation overshoots. That, more hawkish pivot, should help sustain expectations for another big hike come September.

$-Bloc

Central Bank Watch

Reserve Bank of Australia

Wage growth (0.7% QoQ, 2.6% YoY) came in lower than expected (0.8% QoQ, 2.7% YoY), but was in line with RBA forecasts. Meanwhile, unemployment inched one tenth lower to 3.4% despite employment falling 41k. Given neither truly disappointed, we remain confident the RBA will hike by 50bp on 6 September.

Bank of Canada

Inflation printed as markets expected for July, 7.6% YoY and 0.1% MoM, a drop from the 8.1% YoY and 0.7% MoM in June. However, price pressures are too broad for the Bank of Canada (BoC) to derail from their aggressive hiking path. However, the next BoC meeting is still far away: 7 September.

Reserve Bank of New Zealand

The RBNZ hiked the Overnight Cash Rate (OCR) to 3% (+50bps) on Wednesday, the fourth 50bp move in this cycle. It is, however, likely not the last of its kind, we expect them to follow up with similar sized moves in October and November. This would leave the OCR at 4%, a level that the RBNZ find ‘significant comfort’ in, they think that would be enough ‘to see inflation back to our remit [2-3%]’.

Data Preview

It’s a quiet week in Australia. That leaves us to focus on Canada and New Zealand, though the docket is light. Here are the important releases to watch:

Canada

• Wholesale Sales (Wednesday, 13:30 GMT): It will offer a first look at domestic production growth in Q3 having seen increases through June and July.

New Zealand

• Retail Sales (Wednesday, 23:45 GMT): I agree with consensus that expects a 1.7% MoM increase which should reflect positive month-to-month spending figures.
• ANZ Consumer Confidence (Thursday, 23:45 GMT): Stuck near recessionary lows, it should benefit from improved fuel prices.

Links to BOJ Rinban , BOE OMO

China/Japan

This week the BoJ Nakamura is speaking.

Key data releases this week include China’s industrial profits and Japan’s PMIs.

COVID-19 Monitoring

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank.

Ben Ford is Researcher at Macro Hive. Ben studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)