China | Europe | Monetary Policy & Inflation | US
Key Events: GDP Revisions to Support the Hawks, Watch Out!
- By Dominique Dwor-Frecaut, Henry Occleston, Ben Ford, Caroline Grady and Mirza Baig
- 6 min read
Summary
- Fed doves and hawks to make their cases this week in public speeches.
- Major GDP revisions could change Fed estimates of the output gap but not Fed policy.
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US – Europe – $-Bloc and Rest of G10 Europe – Emerging Markets
US
Summary
- Fed doves and hawks to make their cases this week in public speeches.
- Major GDP revisions could change Fed estimates of the output gap but not Fed policy.
Fed
The outcome of the FOMC meeting was in line with my expectations: the Fed stayed on hold, kept an extra 2023 hike, reduced the number of 2024 cuts to two from previously four, kept the inflation trajectory unchanged but upgraded the growth trajectory. For full details see FOMC Review – Fed to Lift Terminal Rate if Inflation Disappoints.
Post-FOMC speakers this week included Cook (dove, voter), who delivered a speech on AI without clear consequences for monetary policy. By contrast, Bowman (hawk, voter) highlighted the risk that ‘energy prices could rise further and reverse some of the progress we have seen on inflation in recent months.’ She further saw risks that the growing role of non-bank credit providers has weakened the transmission of monetary policy and expects further rate hikes will be necessary to bring inflation back to target (the highest 2024 dot is 6.1% and could be hers).
As of this writing this week’s speakers include Kashkari (hawk, non-voter), Bowman, (hawk, voter), Goolsbee (dove, voter), Cook (dove, voter), Powell (hawkish), Barkin (hawk, non-voter), and Williams (dove, voter). At the FOMC meeting 7 out of 19 participants expected no additional 2023 hike and I therefore expect hawks and doves to make their respective cases in their speeches.
Data
This week’s data took a breather. The Atlanta Fed nowcast of Q3 GDP was unchanged at 4.9%. The Citi economic surprise index fell to 54.9 from 64.8 a week ago. WTIC spot rose to $91.3/barrel from $90.8/barrel a week ago.
Key data by order of importance includes:
PCE: I agree with the consensus but I am looking for a broad based acceleration of inflation similar to what we saw in the CPI.
Personal income and spending: I agree with the consensus. I am looking for only limited change in the savings rate. (See Household Savings to Remain Low).
GDP: I agree with the consensus. Besides the third estimate of Q2 GDP, we will get data revisions going back to 1979. I think current GDP estimates could be revised up because they are inconsistent with the employment data, and GDP data tends to get revised more than employment data. If so, this could support the Fed’s current policy plans.
U Mich consumer sentiment final (Friday): I am looking for an upward revision in inflation expectations since the advance release showing a decline was inconsistent with actual inflation and the adaptive nature of inflation expectations.
Regional PMIs: Dallas Fed (Monday), Richmond Fed (Tuesday), KC Fed (Thursday), MNI Chicago (Friday): I agree with the consensus that sees the manufacturing surveys remaining in contractionary territory.
Residential real estate: House prices and new home sales (Tuesday): I agree with the consensus showing continued MoM price increases as well as new home sales consistent with continued upward trend.
Conference Board consumer confidence (Tuesday): Recent performance of the U Mich survey suggests scope for a positive surprise relative to consensus in the Conference Board survey.
Jobless claims (Thursday): I agree with the consensus that is consistent with a tight labour market.
Trade balance and inventories (Friday): I agree with the consensus.
Events/Political Developments
With eight days left until the end of FY2023, a government shutdown now appears likely as far-right House Republicans are refusing to support a short-term continuing resolution. In addition, following the announcement by House Speaker Kevin McCarthy of impeachment proceedings against President Joe Biden, House Democrats have announced that they would not vote alongside moderate Republicans.
Europe: Room for Strength in September Eurozone Core Inflation
Key Points
- The main release of the week will be preliminary Eurozone aggregate and national inflation releases for September.
- This could be an early chance for the September ECB core inflation forecasts to be proven too optimistic. This could trigger some more hawkish pricing after the dovish hike at the last meeting.
September Repricing Could Drive EZ Core Inflation Beat
Despite hiking as we had expected in September, the ECB’s updated forecasts painted a surprisingly dovish picture. GDP growth was revised down towards market expectations for the year, but it was the inflation outlook that looked at odds with reality. Their average forecast for Q3 2024 core CPI was left unchanged at +5.2% YoY, while their Q4 2024 forecast was revised down 0.1ppt to +4.1%. This would require a decline in seasonal-adjusted MoM core inflation beyond even what was seen even in August (Chart 1).
As we have noted frequently before, history suggests firms tend to reprice far less in August, but much more in September (particularly in wage-intensive services, including accommodation prices). Interestingly, the MoM beat in core inflation so far this year has tended to correlate with the typical repricing pattern (Chart 2). If that was to be the case again, then we could see a strong outturn in MoM inflation (perhaps as high as +0.9% MoM).
Important to note is that the YoY base effects will almost certainly cause the YoY core CPI print to decline. Even a +0.9% MoM outturn (a very hawkish result) would leave the YoY 0.1ppt down vs August at +5.2%. We see the risks skewed towards a hawkish surprise.
As we have noted frequently before, history suggests firms tend to reprice far less in August, but much more in September (particularly in wage-intensive services, including accommodation prices). Interestingly, the MoM beat in core inflation so far this year has tended to correlate with the typical repricing pattern (Chart 2). If that was to be the case again, then we could see a strong outturn in MoM inflation (perhaps as high as +0.9% MoM).
Important to note is that the YoY base effects will almost certainly cause the YoY core CPI print to decline. Even a +0.9% MoM outturn (a very hawkish result) would leave the YoY 0.1ppt down vs August at +5.2%. We see the risks skewed towards a hawkish surprise.
$-Bloc and Rest of G10 Europe
Interesting (Sometimes Academic) Reads
The Bank of Japan ended the week on a disappointing note – Bilal’s latest on BoJ and JPY. I think something still interesting is the possibility of BoJ intervention. And, to that point, there are two new papers I have liked:
- The Lasting Effect of Yen-Buying Interventions: Two Cases of Japanese FX Interventions in 1997-98 and 2022 – this paper has only just been posted and comes with a couple nice facts. Namely, the effect of FX intervention has lasted for over 10 business days in 2022. A similar experience was found in 1997-98.
- The Trend Effect of Foreign Exchange Intervention – one reason the impact lasts two calendar weeks is that it can turn the direction on the currency. And, to that point, in some cases it is powerful enough to generate long-term FX trend effects.
Elsewhere, the RBA September Bulletin was published. There are pieces on Australian Productivity and New Timely Indicators of Wages Growth which I need to read this weekend with both being incredibly timely.
Australia
RBA Minutes Only Present Small Change
The past week presented us with the opportunity to understand the RBA’s thinking. Overall, there were some changes to messaging but not enough to change our base case of a November hike. Here are the important points to know about the minutes:
Cases Considered
- Both 25bp and a pause were considered. 25bp considered on the back of the potential for inflation to remain above target for an extended period. A pause was centred on the fact that effects of monetary policy is yet to be fully felt.
Changes to Messaging
- August: ‘a credible path back to the inflation target with the cash rate staying at its present level’ vs September: ‘recent flow of data was consistent with inflation returning to target within a reasonable timeframe while the cash rate remained at its present level.’
- August: ‘it was possible that some further tightening of monetary policy might be required to ensure that inflation returns to target in a reasonable timeframe’ vs September: ‘members noted that some further tightening in policy may be required should inflation prove more persistent than expected.’
What it Means for the RBA
- The above basically suggests that it will now take a surprise to inflation forecasts/more inflation persistence to force another RBA hike. We think this could happen alongside a stronger release in wages.
- Current RBA forecasts imply trimmed mean inflation at +0.9% QoQ through Q3. That is the number to beat on 25 October.
- For now, we have the August CPI next week where there are risks of a move higher to the headline number. However, it will be the services details that matter – we have greater detail than in July. There, persistence could continue opening up the possibility of that stronger-than-forecasted core measure.
All Eyes on CPI
With the RBA confirmed as needing a surprise (versus forecasts) on inflation, this week’s August CPI (Wednesday) will be talk of the town. As it stands, survey contributors are expecting an increase to +5.2% YoY from +4.9% YoY, on average. This is likely to come on the back of fuel prices which are ~20% above September assumptions. Moreover, in this release we will have more details on services inflation, which should prove more persistent. The numbers to watch will continue to be their preferred core numbers, which saw a small increase to momentum last month (Chart 3).
Canada
New piece: Taking Profit on GBP/CAD Put Spread Up Over 50%
Uncomfortable CPI Release
The past week saw core inflation momentum rising (Chart 4)! The BoC had been worried when it was stagnating, it now looks like it could be rising again. Overall, they still want to see an accumulation of evidence before they are hiking, but data is certainly building.
The week ahead is less impactful with the July GDP indicator out. The prelim estimate from StatCan had it ‘practically unchanged.’ Either way, we saw it prudent to take profit on our GBP/CAD put-spread, up over 50%.
New Zealand
The Consumer Is Alive (At Least in Q2) … Could ANZ Survey Continue to Rebound?
The economy jumped +0.9% QoQ through the second quarter after a (revised) +0.0% QoQ performance to start the year. This was far stronger than the RBNZ’ forecast, too (+0.5% QoQ). Given the cyclone in Q1, it will be hard to read too much promise from the better-than-expected number through Q2, as some may just be noise. Overall, the release will fail to force an RBNZ October hike, but it will keep the RBNZ writing a hawkish pause into the script.
If there were to be another hike, it would be labour market and inflation dependent. We will get CPI (16) mid-October, where non-tradables inflation remains key, while the labour market reading at the (31) end of October will be key to see whether the labour market has returned to MSE.
However, this week, eyes will be on the ANZ survey. Last time out saw a strong rebound across activity indicators but still moderating pricing intentions. Overall, a continuation would likely suggest that the Kiwi economy has not been hurt as much as first expected to force disinflation (at least for now, we think).
Norway
A Hawkish 25bp
We had expected Norges Bank to hike the policy rate by 25bp to 4.25%, along with everybody else, but also expected an upward revision to the forecasted policy path to 4.3%. And while they did hike by 25bp, they decided to revise the projected terminal rate to 4.5% and pencil in a November hike!
This managed to happen despite core inflation supportive of a less hawkish outturn. Instead, Norges had pinned worry on wages outturns. In short, wage outturns have been strong in Norway and Norges want to ensure there is little wage-price passthrough.
Next week we will have eyes on the September unemployment numbers. Markets are expecting it to remain steady at 1.9% which would prove in line with Norges forecasts. We will also get updated Norges Bank FX intervention numbers – we are in the process of updating the methodology there – DNB Markets expect another print at 1.1bn NOK.
Sweden
New piece: Option Market Divergence Could Force EUR/SEK Above 12
Hard Done by Norwegian Neighbours
The Riksbank were a touch shafted by Norges. Prior to the release, we had expected the Riks would be the more likely of the two to up their terminal forecast by more than expected. And while they did hike by 25bp to 4% and forecast a 4.1% terminal rate (in line with our expectations). We expect they will likely try to claw back some of this hawkishness via speeches which should help NOK/SEK remain more grounded than if NOK yields were allowed to escape SEK yields.
Elsewhere in the announcement, they remained uneasy with services prices (concentration remains on core vs forecast) and an ‘unjustifiably weak krona’, they announced they will go to eight meetings in 2024, from the five in 2023, and finally announced FX hedging will commence from 25 September.
The FX hedging will not materially impact SEK, but I have had plenty of questions on what is going to be happening, so here are the key points:
- USD 8bn and EUR 2bn will be hedged over four to six months with room to go beyond that. They will do this by entering into forward swaps. At this stage the swaps will be rolled over with new swaps until otherwise noted.
- Swaps will mature on specified dates. This is more relevant on the EUR side as they can use it to meet EU payments (2023: 45.9bn SEK; 2024: 46.2 SEK). Previously, they have completed payments as large as 3bn SEK in one go. It means the majority of the market action will take place in USD.
- The pace may prove inconsistent. Unlike when they funded their reserves, which saw linear pace changes, they operate with some discretion.
- Details of the operations will be released at a two-week lag to operation.
Elsewhere, we will get the latest update from the ETS survey. It is key to watch as it tracks GDP well and has restarted it’s decline over the past quarter (Chart 5).
Switzerland
Wrong Call on SNB, Right Call on CHF
We were wrong on the SNB, they paused in line with just 4 of 31 surveyed on Bloomberg. They paused because they believe enough work has been done to counter remaining inflationary pressures. This comes alongside dovish changes to forecasts which align with a worsening economy and slightly lower inflationary pressures. At this stage, it appears the SNB are looking to hedge against the idea of a more pronounced economic slowdown abroad. Thus, it appears we’ll need to see resilient global growth plus inflation off path to force another hike.
On top of the decision, they stated that they would be active in the FX market. However, there was one key word missing from this statement that appeared in June: ‘remain.’ Perhaps just a subtle hint that the SNB will not always be in the market looking to prop up CHF – that has been part of our case for a EUR/CHF correction since July. We will have more solid data on that next week (Friday) with Q2 FX intervention data out – we continue to track sight deposit data (Monday).
Emerging Markets
Key Points
- Rate meetings in Hungary (Tuesday) and the Czech Republic (Wednesday) are the highlight of the week in CEEMEA.
- Poland’s flash CPI release (Friday) will also provide important guidance for the 4 October policy meeting.
- We expect Bank of Thailand to hike next week by 25bps to 2.5% – though it will be a close call.
- Banxico will be on hold at 11.25% and reiterate their stance to maintain that level for some time.
Another 100bps Cut From the NBH Is a Done Deal
Another 100bps rate cut was largely preannounced with the 12 September statement on simplifying the monetary policy instruments. The NBH confirmed that excess reserves (currently paying 14% interest) will be renumerated at the base rate (currently 13%) from 1 October. We expect the current one-day quick deposit tenders to end with the main liquidity draining operation switching back to the currently inactive 1-week deposit facility. Forward guidance in the statement and press conference will be important as we expect a slowing in the pace of easing going forward.
CNB to Remain Hawkish
CNB policymakers have maintained their very hawkish tone in recent speeches. We see any rate cut as highly unlikely. Headline CPI at 8.5% is much too high for the Board to consider starting the easing cycle. And while Q2 wage growth was lower than projected, the CNB needs time to determine whether this will be sustained. The uncertainty over January / February repricing and still-elevated inflation expectations for corporates also rules out near-term rate cuts. We expect all policymakers to vote for rates on hold once again and expect yet another pushback in the statement on the expected timing of rate cuts.
Poland CPI to Drop to Single Digits
While the absence of single digit CPI did not stand in the way of a 75bps rate cut from the NBP, the expected drop in September flash CPI should ensure another rate cut in early October. Base effects are more favourable than last month while retroactive changes to electricity tariffs should offset the move higher in fuel prices through the month. Still-high core inflation and an expected stalling in disinflation in Q1 2024 should point to a cautious approach on rates. But the 15 October election is driving policy.
Bank of Thailand Set to Hike
We expect BoT to hike rates by 25bps to 2.5%, though this is a close call. The upside surprise in August CPI, recent weakness in THB, and the relatively hawkish FOMC all play into this meeting. The last MPC minutes noted that the BoT has been trying to rebuild policy space. Indeed, after Taiwan, Thailand has the lowest policy rate in the region.
Singapore CPI is expected to moderate with another drop in core CPI to 3.5%. This will be the last CPI print ahead of the October policy review. The MAS does not have an explicit target, but its comfort zone is around 2% in core CPI, and its forecast for the end of this year is 2.5-3%.
Korea and Thai trade data will be released next week. We expect to revise our estimate of the Thai current account based on this data. Both Thailand and Korea have import elasticities to oil prices, though there is typically a month’s lag, and thus the recent spike in prices may not be evident in the data next week.
Chinese PMI will be released on 30 September. We expect the composite to tick higher to a touch above 52.0, in line with consensus expectations.
Banxico is set to hold rates at 11.25% on 28 September. While the central bank was relatively hawkish at the last meeting, inflation slowed faster-than-expected in September. Mexico has one of the highest real rates in EM. But we think Banxico would prefer to see core closer to target, and do not expect a shift in signaling next week.