Fed to Hint at 75bp in September / Dovish BoE Outlook into Next Week / Central Bank Watch

US

Summary

• CPI to show continued acceleration in core services inflation.
• Fed speakers to hint at 75bp in September.

Fed

Fed speakers and a bumper NFP got markets to price a 75bp hike in September as well as take out some of the rate cuts priced in 2023.

As of this writing there are 4 speakers scheduled, Barkin, Evans, Kashkari and Daly.  After the NFP I expect them to hint at a 75bp hike at the September meeting and possibly a higher trajectory for the FFR. 

The next big issue for the Fed is the lifting of the FFR trajectory in the September SEP.

Data

This week’s strong  PMIs and NFP fit in with my big picture view of resilient growth and accelerating inflation (please see July 2022 NFP Review: Labor Market Tightens Further).

Covid related hospitalizations seemed to be plateauing this week (Charts 1 and 3).

The most important data will be the CPI (Wednesday). I agree with the consensus 0.5% MoM for core. I will be looking for a slower decline in core goods inflation, continued acceleration in core services inflation, and a further increase in the Cleveland Fed median and trimmed mean CPIs.

Other key data include:

• The University of Michigan Consumer Confidence (Friday): I agree with the consensus that expects a decline, which I will look at as further evidence of inflation pressures.
• PPI (Thursday) and import prices (Friday): I agree with the consensus of limited change/decline in core MoM as global supply chains are still improving.
• Initial claims (Thursday): A further increase in initial claims without an equivalent increase in continuing claims, roughly the consensus forecast, would continue to signal that workers are getting laid off but finding new jobs quickly. This reflects the current combination of strong growth with economy wide post pandemic restructuring.

Events/Political Developments

The deal struck between Senate Majority Leader Schumer and centrist democratic Senator Manchin that funds a combination of climate, health care and budget reduction initiatives, is likely to become law after a compromise was found with  Senator Sinema.  The final deal removes the higher  taxation of large corporations and wealthy Americans that was part of the original deal.

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

Europe

Bank of England

• The Bank of England (BoE) hiked by 50bps, its sixth consecutive hike. The need for a rise in rates was unanimous, although one MPC member (arch-dove Silvana Tenreyro) voted for a smaller, 25bp, move. The details of the MPR, however, were extremely dovish.
• Active gilt sales are set to begin from September, likely at the rate of £10bn per quarter (around the middle of previous guidance). This is not as heavy as we had expected. However, the MPC seems adamant that it is not derailed. We see upside potential there.
• As we had expected, the MPR increased their forecast for near-term inflation significantly (now at 13% in Q4), while their medium-term inflation forecasted dropped further below target.
• The BoE now expects a recession at the end of this year, and for output to fall a further 1.5% in 2023. Unemployment was meanwhile set to rise.
• We remain strongly of the view that the BoE will not hike anything like the 120bp priced into year-end.
• We continue to see value in gilt steepeners vs EGB flatteners.

Data

Data releases are light in volume next week, we are looking at:

• Ge, It, Fr, and Sp CPI (Wednesday and Friday):The preliminary CPI numbers have already printed larger than expected.
• RICS House Price Balance (Thursday, 00:01 GMT): The index has already topped. A surprise to the upside would not be taken well while below 60% would help our view that the BoE will not hike anything like the 120bp priced into year-end.

Dollar Block and Other G20 countries

A Light Week Follows Mixed Messages from the RBA

Reserve Bank of Australia

The RBA hiked the cash rate by a further 50bps to 1.85% on 2 August, as widely expected. We read two key takeaways from the statement:

1. The introduction of ‘keeping the economy on an even keel’ to the statement and their highlighting of the narrowness of the path and the uncertainty of the outlook were dovish outturns.
2. Policy is ‘not on a pre-set path’, suggesting 50bps at the next meeting is not guaranteed, although this remains our base-case. Disappointing data may change this and warrant a 25bps hike. We’re watching out for the NAB business survey for July (9 Aug; below), and an update on the labour force for July (18 Aug). Q2 Wage growth is unlikely to change the mood.

The Statement on Monetary Policy was released Friday. It was more hawkish than the statement both in forecasts and the description of inflation. Here’s what we saw of interest:

• Core trimmed mean inflation is forecast to peak at 6% over 2022. The subsequent fall is not quick; it is forecasted to be at 3% by 2024 year-end.
• Wage growth is expected to reach 3.9% YoY in December 2024. This surpasses 3.5% YoY; the level Governor Lowe had previously cited as being consistent with at-target inflation.

Reserve Bank of New Zealand

• Market pricing has moved in line with our thinking: we do not see the RBNZ hiking above 4%. Little has done to change our mind as of late.
• They are up next in the $-Bloc, we see them hiking by 50bps.

Bank of Canada

• The next BoC meeting is still far away: 7 September.
• By the end of August, we’ll have the May and June GDP numbers, as well as the June and July inflation prints. They’ll be our guide. It means pricing for the meeting could be volatile – its currently at 65bps.

Data

An empty week for Canada leaves Australia and New Zealand in focus, though far from heavy. Here are the important releases to watch:

Australia

• Westpac Consumer Confidence (Tuesday, 01:30 and 02:30 GMT): Westpac consumer confidence is nearing COVID and GFC lows. Another sharp fall in confidence will be hard for the RBA to ignore.
• NAB Survey (Tuesday, 02:30 GMT): ABS Australian inflation figures are quarterly. It makes it hard for the RBA if they were just to use them. Unsurprisingly, they do not; the NAB Survey is one alternative. Price indicators will continue to be a key watch, they have been signaling increased and broadening pressures through the last couple editions.

New Zealand

• House Sales (Wednesday, 22:00 GMT) and Food Prices (Thursday, 23:45 GMT): Both will be a key watch, they feed into official inflation numbers.

Links to BOJ Rinban , BOE OMO

China/Japan

Data releases this week include Japan’s GDP and China’s credit, retail sales, CPI, IP, fixed investment and PPI.

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.)