US
Key Points
- The Fed communicated further hawkishness this week and the negative data surprises I expect next week are unlikely to soften it.
- I expect Q3 GDP close to 0, against consensus of 2.7%.
Fed
The past week was the last one before the Fed pre-meeting blackout. During the week, the market repriced a more aggressive Fed Funds path and I agree that this is what the Fed is currently thinking (even though my view remains that the economy will weaken before the Fed has a chance to pull the trigger). The Beige Book conveyed stronger concerns over supply than demand and the assessment of inflationary pressures was upgraded relative to the Sep. Beige Book.
While the Q3 Index of Common Inflation Expectations at 2.06 was only up 1 bp over Q2 and remains below the level prevailing during 2004-14, the risks of de-anchoring of inflation expectations figured prominently in Clarida and Waller’s speeches.
The negative data surprises I expect next week are unlikely to change the Fed hawkishness as recent communications suggest the Fed is focused on current yoy inflation prints rather than on employment and growth.
Data
This was a data light week, IP was lower than consensus even after the impact of hurricane Ida, and unemployment claims remain on a slowly declining path.
This coming week is data heavy. The most important releases will be the advanced Q3 GDP estimate, the PCE price data and the ECI (Employment Cost Index). The BBG GDP consensus is 2.8% QoQ saar, based on consumption at 0.8% QoQ saar. I am expecting 0 based on consumption at 0.4% QoQ saar (which is itself based on the BBG consensus for Sep. real consumption). How the market reacts to a negative GDP surprise could depend on the September PCE price data that will be released a day after GDP.
Sep. PCE: I agree with the consensus of 0.2% mom, against 0.3% mom in August. I will be looking for a slowdown in my non holiday related basket (core excluding transportation, hotels and restaurants) that was up 0.36% in August.
Q3 ECI: The Employment Cost Index used to be the Bernanke and Yellen Feds favorite wage measure because it strips out most of the impact of changes in the distribution of wages. With the job losses skewed towards low wage workers the difference between AHE and ECI has been unusually wide. The market consensus is 0.9% QoQ in Q3 and I agree. But this would be well below market expectations for the Q3 PCE price index at 4.4% QoQ, which would show that there is no wage price spiral and that instead inflation is lowering household real income.
Sep. personal income and spending: I agree with the consensus of -0.2% mom and 0.6% mom respectively (nominal). These numbers imply a limited decline in the savings rate that makes sense to me since consumption tends to be more stable than income and income will fall due to the decline in unemployment benefit.
Oct. Conference Board consumer confidence: I will be looking for a further decline in the jobs plentiful minus jobs hard to find index
Dallas, Richmond, and Kansas City Fed business surveys: I will be looking for weaker numbers, except for the Dallas Fed where activity should benefit from higher oil prices.
Inventories: I will be looking for further increases, especially in car retail inventories, as a sign that the supply bottlenecks are starting to ease.
Other key data include the Chicago Fed national activity index, real estate data, and initial claims.
Events/Political developments
House Speaker Pelosi on Friday announced that centrist and progressive Democrats are within “striking distance” of a deal on the reconciliation social and environmental package. I see a higher than but close to 50% chance that a deal will be struck before President Biden flies out to Europe on Thursday . For details please see DQT Oct. 22.
Links to New York Fed POMOs/TOMOs: Repos, Treasury, MBS, CMBS
G20
The ECB, BoJ and BoC are holding their policy meetings this week. The ECB is expected to push back against market pricing hikes next year. By contrast, the BoC is likely to cut asset purchases further and could validate market expectations of hikes next year. The BoJ meeting is not expected to signal any change to policy.
This week the BoE’s Tenreyro is speaking.
Key data this week include CPIs in Italy, Germany, France, the euro area and Australia as well as PMIS in China and Australia.
Links to BOJ Rinban , BOE OMO
COVID-19 Monitoring
