US
Key Points
- As expected Chair Powell’s JH speech repeated the taper expectations contained in the July meeting minutes: it could happen this year! Liftoff is altogether another story and will depend on the Fed estimation of post-pandemic full employment.
- The Consensus forecast of about 250k slowdown in NFP is plausible.
Fed
As I expected Chair Powell repeated the taper message already communicated through the minutes of the July meeting: ‘if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year’. Chair Powell further indicated that in his view the inflation condition for the taper had been met. I expect the taper to start at the December or November meetings, based on my expectations that inflation will continue to slow and the need to find a compromise with the more dovish FOMC members.
Powell stated that the 2014-15 taper/liftoff sequence should not be used as a precedent since this time around liftoff would only happen once full employment had been reached. This leaves figuring out the shape of post pandemic full employment, in practical terms the extent to which participation can recover, as a Fed key policy challenge. The JH program included a paper on participation but other than saying that participation is procyclical and tends to lag unemployment it offered few clues. I expect the Fed to look at a combination of wages rising faster than productivity and of limited increases in participation as a sign that the economy has reached full employment (I will be discussing this further in future research).
Powell also listed indicators that could lead the Fed to shift to a more hawkish stance: broadening of inflationary pressures so far limited to a few items; no slowdown in inflation for these items; wages above productivity growth; and de-anchoring of inflation expectations.
As of this writing Bostic is the only public speaker this week.
Data
I expect that by end-year data developments will have made the Fed hawkish leanings irrelevant. The economic surprise index (CESIUSD index) fell further this week. The most important data of the week, personal income and spending, was consistent with my expectation of a marked Q3 growth slowdown. July real consumption fell 0.1% MoM even though disposable income increased by more than expected due to higher government transfers. These reflected the start of the monthly Child Tax Credit payments (that will be offset by lower tax refunds in 2022). However, with the savings rate rising to 9.6% from 8.8% in June, the increase in nominal consumption was not large enough to offset inflation.
The most important data of the week is the NFP. As of this writing the BBG survey is 750 (000s), down from 943 (000s) in July. This slowdown seems plausible as the strong June-July numbers in my view reflect pent-up demand for holiday goods and services, enabled by the administration $1.9tn COVID ‘relief’ plan. The holidays ended in August, half of US states have already ended pandemic-related unemployment benefits and real consumption has been flatlining since March. I also expect participation to increase by no more than the consensus forecast of 10bp due to the flat real wages. In addition, over the next few months, I expect the labour market slowdown to pickup pace.
Other key data this week include:
- ISM, Dallas and Chicago Feds PMIs: I agree with the BBG survey expectations of a slowdown
- Conference Board consumer confidence: I expect a negative surprise. The discrepancy between the U Mich and the CB consumer confidence indices is at a series high. I expect the discrepancy to b resolved by the CB index moving closer to the U Mich, which implies a negative surprise.
- Real estate market data, unemployment insurance claims, factory orders and productivity.
Covid news remained positive this week. Test positivity did not increase and hospitalizations continued to increase at a slower pace, with red states’ 7 day average hospitalizations starting to fall (Charts 1 and 3). The 7 day average daily immunizations remained around 900 (000s), against 500 (000s) at end-July and red states are catching up on blue states. Excess deaths have been increasing but this is a lagging indicator. A study reported in Science shows much stronger immunization from infections than from vaccines: this could explain why red states hospitalizations are starting to fall, despite lower immunizations. Red states have implemented much less restrictive policy responses which saw higher infection rates and therefore a build up of infection-based immunity.
Indicators of mobility, both the TSA passenger throughout and Google, slowed further this week, though this could reflect the end of the summer holidays as much as the impact of the delta variant (Chart 2).
Events/Political developments
The bipartisan and reconciliation sagas were on hold this week, following the compromise agreed to by centrists. The House voted on 24 Aug to go ahead with 3 bills: BIF, $3.5tn social spending and voting rights. The voting rights bill has no chance to make it through the Senate as it will get filibustered by the Republicans, it was included in the vote mainly for symbolic and electoral reasons, and has no market impact.
The agreement Pelosi reached with the centrists stipulates that BIF will be voted by 27 September, irrespective of where the $3.5tn package stands; and that the final shape of the $3.5tn package /FY2022 budget voted by the House will be written to pass the Senate which in practice means that it will conform to the wishes of Senate centrists such as Joe Manchin and Kyrsten Sinema.
The House is currently scheduled to be back in session on 20 September, which will leave very little time to vote on the budget (or more likely a continuing resolution) by 30 September as well as the BIF (bipartisan infrastructure framework) and the $3.5tn social spending package.
The US pullout from Afghanistan is turning out to be such a debacle that it could add to the risk of the GOP regaining control of one or two chambers of Congress next year. A GOP victory would likely translate into further fiscal policy tightening in FY2023.
Links to New York Fed POMOs/TOMOs: Repos, Treasury, MBS, CMBS
G20
The ECB’s Holman, Knot and Weidman are speaking this week.
Key data this week include CPI and PMIs in Germany, France, Italy, and the euro area. PMIs will also be released in Australia, China, the UK, and Canada.
Links to BOJ Rinban , BOE OMO
COVID-19 Monitoring
