Key Events: Is Tipping in the US Distorting the Data?

US – Europe – $-Bloc and Rest of G10 Europe – China/Japan

US

Summary

• NY Fed president Williams to be less sanguine on disinflation than a month ago.
• Household net worth to remain above pre-pandemic.

Fed

The main Fed event this past week was Chair Powell JH speech where he expressed concerns over growth acceleration and labor market rebalancing see Dom’s Quick Take – Powell’s JH Speech Supports More Rate Hikes in 2023-24..  This was more hawkish than Bostic who this week warned about the risks of hiking too much.

The Fed will release the Beige Book this week and we will get the usual highly nuanced view of the economy this time around likely to ever so gently signal strength.

This week Collins (dove, non voter), Logan (hawk, voter), Harker (dove, voter), Williams (dove, voter) and Bostic (dove, non voter) will be speaking.  So will ex-St Louis Fed president Bullard who is listed in the BBG calendar despite having resigned 2 months ago. 

I will be especially focused on Williams’ and Logan’s speeches: I expect Williams tone to be less dovish than in his early August NY Times interview.  I also expect Logan to echo Chair Powell’s concerns.    

Still, I don’t think that the market has caught on Powell’s greater concerns over disinflation and I don’t expect this week speakers to change market perceptions.  This week’s data releases are also not important enough to change those perceptions.

The pre-meeting blackout starts at the end of the week.

Data 

This week’s data continued to point at strong growth and limited disinflation.  PCE was in line with expectation but super core services rose sharply and shelter  did not slow.  Payrolls showed better labor demand/supply balance though the labor market remains overheated.    The Atlanta Fed nowcast of Q3 GDP fell to 5.6% from 5.8% a week ago and compared with trend of 2%.    The Citi economic surprise index fell to 52.1 from 59.6 a week ago.   WTIC spot rose to $85.0/barrel from $80.5/barrel a week ago.

Key data by order of importance includes:

Services ISM (Wednesday): I agree with the consensus.  The more interesting part of the release could be prices paid that have been perking up in the manufacturing PMI, though the correlation with eg PPI changes is unclear. 

Q2 household balance sheets (Friday): I will be looking for an increase in net worth, already above pre-pandemic levels,  as well as an increase in non mortgage debt.  Those could explain the ongoing decline in the household savings rate from already low levels, a new headache for the Fed.

Non Farm productivity (Thursday):  a negative surprise is likely due to this week  downward revision of Q2 GDP but the actual number is likely to remain well above annualized trend of about 1%

Consumer credit (Friday): I agree with the consensus that implies slowing credit growth.

Jobless claims (Thursday): claims to show continued labor market tightness

Trade balance (Wednesday), inventories (Friday), Factory orders (Tuesday) : I agree with the consensus

Events/Political Developments 

To avoid a government shutdown, Congress has to agree on a budget (highly unlikely), or pass a continuing resolution (CR) to extend funding at current levels by September 30^th  (end of FY2023). 

Despite hard right Republican House members calling for a shutdown if the Democrats don’t agree on deep expenditure cuts, a government shutdown appears very unlikely.  Past government shutdowns have backfired against Republicans and the precedent of the debt ceiling in June shows Republicans have limited appetite for strong deficit restraint.

Europe: Flurry of ECB Speakers

Key Points

• BoE Governor Bailey’s testimony to parliament, as well as the Decision Maker Panel survey will provide new colour for BoE thinking. Unless we get a real surprise in inflation or unemployment data later in the month we expect they will hike once more and then can pause.
• There are a lot of ECB speakers on the agenda. Last week’s release of the minutes pointed to an agreement for GC members not to discuss hiking or pausing in September. While Schnabel seems to have stuck to this, some of the more hawkish members have not. This week could see some response from the doves.

More Information Ahead of BoE

BoE Governor Bailey’s testimony to parliament (Wednesday), as well as the decision makers’ panel survey (Thursday) will provide some more information on the BoE’s outlook ahead of their September meeting. The DMP will be interesting to see how inflation expectations are reanchoring (Chart 1). However, more important than comments and surveys will be the hard data, for which this week is relatively sparse (we get labour market data on 12 September, and inflation on 20 September). For the next meeting, at this stage our lean is towards another hike (in line with market pricing), but for room to pause thereafter. We therefore continue to see value in fading hawkish BoE pricing.

ECB Comments

Last week’s minutes and comments from Schnabel were priced as more dovish by the market. The former showed that at the July meeting talk was strongly shifted towards stagflation, and there had been some arguments to revise down the September CPI forecast. This sounds very dovish, but in the context of now having seen the July and August prints, the prospect for a downward revision seems quite reduced. Meanwhile, Schnabel (like Lagarde before her) played up the risks to long term inflation, but also provided a balanced message on whether to hike or pause come September. Again, this sounds dovish (and the market duly took it as such), but becomes less so in the context of the apparent ECB agreement in July to: “neither hint at further rate increases nor signal it would pause in hiking rates…”

Some of Schnabel’s hawkish colleagues have clearly felt less restricted by this (Nagel recently said much to early to pause, Holzmann says another “hike or two” possible). The week ahead offers more possibilities for more sound-bites, and we would not be surprised if we began to hear stronger tone from the doves too. Panetta speaks on Monday (he will probably remain balanced), Visco speaks on Tuesday (he will probably be stronger_. There will also be ample opportunity to hear more from the hawks, with Wunsch, Knott, Nagel and Holzmann all speaking through the week.

Eurozone GDP

Eurozone final Q2 GDP is released on Thursday. While the median consensus is for an unchanged +0.3% QoQ outturn, following national readings the risk seems almost certainly skewed to the lower side.

Ultimately, given the ECB’s focus on wage growth and profit margins the relative resilience of corporate profits will be an important factor. The ECB doves are hoping that rises in employee compensation will be absorbed within corporates through lower profit margins, but the data so far does not support this (Chart 2).

$-Bloc and Rest of G10 Europe

China/Japan

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.

Photo Credit: depositphotos.com

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