China | Europe | Monetary Policy & Inflation | US
Key Events: Make or Break Week for ECB Decision
- By Dominique Dwor-Frecaut, Ben Ford and Henry Occleston
- 6 min read
US – Europe – $-Bloc and Rest of G10 Europe – China/Japan
US
Links to New York Fed POMOs/TOMOs: Repos, Treasury, MBS, CMBS
Europe
Key Points
- European data and ECB speakers will be the main attraction this week – it could be the make or break for whether they hike in September or choose to pause.
- Eurozone inflation will be key to watch – our lean right now is that there is downside risk to the core number. But the details will be important.
- There are plenty of ECB speakers to listen to, as well as the minutes. We will be watching for details of how they react to the data, and what would be needed to be seen in the forecasts to justify a pause or a hike.
Eurozone Inflation – Risks to Downside, Watch Details
The flash inflation outturn on 31 August will be a strong input into the ECB’s decision to hike or not. Analysts are pretty fairly split between a 5.2%, 5.3% and 5.4% YoY for core. Those would, respectively, represent a MoM reading of +0.25%, +0.35%, +0.45% (Chart 1). The first would represent a dovish outturn, the third a hawkish outturn, but the detail will be important regardless, as one-off aggregate readings will not alone decide whether the ECB hike or pause.
Our lean at this stage given the large beat in July (when repricing are generally more common) is that August core inflation is likely to exhibit a smaller beat vs typical August MoM inflation than July did (Chart 2). That makes 5.2-5.3% quite possible. However, September is likely to see more repricing, and hence higher chance of another strong beat.
ECB Comments and Minutes
The week is well stocked with opportunities for ECB speakers to make themselves heard. Nagel, de Cos and Holzmann are scheduled to speak on Monday, Schnabel and de Guindos will speak on Thursday, after the CPI, unemployment data and the minutes for the last ECB meeting are published that day.
Recent Comments More Dovish
Negative survey outturns and recent comments from the edge of the Jackson Hole conference have suggested the base-case at this stage is for a pause in September, with the next CPI outturn important in determining whether or not this is the case. Much of this came about from Reuters reporting on conversations with eight anonymous policymakers. This included details that:
- Policymakers are increasingly concerned about deteriorating growth prospects. Debate is ‘still open’ for September, but momentum behind a pause is building.
- Several of the sources see chances ‘evenly split’ between hike and pause, smaller number saw a pause as more likely.
- None said they saw a hike as most likely, even if that was their preference.
- All sources agreed that if they pause the ECB will make it clear that more policy tightening could still be needed.
- Sources agreed nothing would be settled until after the inflation reading.
- Some cautioned against reading too much into surveys because there has been a growing gap between hard data and sentiment readings (we agree).
- Advocates of a pause in rate hikes argue that negotiated wage growth is still relatively benign.
Lagarde Stressed the Long-term Inflation Risks
Speaking at Jackson Hole, President Lagarde maintained the “setting interest rates at sufficiently restrictive levels” that she introduced at the last meeting presser, but sounded more hawkish than some recent policymaker comments on the longer-term inflation outlook. Included in this were the energy outlook, de-globalisation and AI effects on labour markets. She anticipates supply shocks will become more frequent, and investment will be front-loaded (in defence and energy). This will push central banks to focus on re-anchoring inflation expectations. She noted two hawkish developments since the pandemic:
- Firms have switched from avoiding price rises to retain market share to raising prices in tandem with competition. She noted a doubling of frequency of price changes in some sectors vs pre-2022.
- Labour market tightness has left workers in a better position to bargain for higher pay. She implied second round effects were being seen or at least the risk was elevated now.
She concluded that these impacts could persist, and could drive inflation to become self sustaining. She recommended three elements to deal with this:
- Total, unwavering clarity on inflation target and commitment to deliver it.
- Flexibility in forecasts by using the inflation outlook, the underlying dynamics of inflation, and the policy transmission to assess inflation outlook.
- Humility in discussing the limitations of what they know and what policy can achieve.
Next Week’s Comments to Provide Insights into September Meeting
ECB comments next week, particularly the minutes and those coming after inflation will be able to better contextualise a number of things:
- What would be needed to be seen in the forecasts to justify a hike?
- How the ECB is reacting to the inflation outturn – in particular the trend in underlying inflation that Lagarde has stressed.
For now, we continue to see value in positioning for greater ECB hawkishness, particularly in terms of the cuts priced in 2024 as compared to the BoE. We see best value paying 6M Fwd 1Y EUR OIS and positioning for relative 2s10s EUR flattening vs GBP.
$-Bloc and Rest of G10 Europe
Interesting (Sometimes Academic) Reads
Starting from this week, this section of the key events report will come with some papers that I think are interesting or have read in the past week. They will range from papers released by the central banks I cover to purely market based papers that look at FX, rates and/or modelling. Please reach out if you wish to discuss any of them.
- Jump-Only Momentum and Reversal in Currency Markets – an interesting alternative take on how to think about intraday movements of currencies, and how you can model them.
- Liquidity Risk and Currency Premia – many argue liquidity plays a role in currency returns. However, how you model liquidity is a bit harder to pin down. The authors split liquidity into four variations and show that certain types of liquidity can drive FX returns.
- Exchange Rates and Economic Fundamentals: A Methodological Comparison of BEERs and FEERs – we are building FX models here at Macro Hive, and we have noticed that many others are doing it incorrectly and violating key assumptions. Here’s the original paper proposing the estimation of BEER and FEER models that contains the correct methodology.
- Stop-loss adjusted labels for machine learning-based trading of risky assets – when modelling, it is common to just use spot returns or some (integer/fractionally) differenced series. However, the authors argue that in reality you (usually) implement trades with some sort of stop loss, so why not have a labelling scheme to reflect it.
Australia
PMIs Lower Across the Board
PMIs fell across the board in Australia. This is a continuation of the pattern we have seen in services, which is now at its lowest level since January 22, and a reversal in some of the rise manufacturing had, albeit stopping prior to 50.
Concentrating on services, price pressures fell with slower increases in input costs supporting lower selling price inflation – though rates of input and output costs were above historic averages in August. Meanwhile, confidence rose to a seven-month high. That’s because they’re optimistic about better sales. This is being passed onto increased staffing.
Turning to manufacturing, new orders fell, which led to fewer purchases. However, much like services, a positive expectation continues to build which is leading to further recruitment. Worse, increased lead times accompanied another monthly increase in input cost inflation that was passed on.
Overall, we continue to believe the RBA will remain on hold in September. Instead, the pressure for another hike comes on the back of a likely hawkish outturn in wages and core and services inflation through Q3. Our base case remains a 25bp November hike.
Retail Sales Normalising, Goods Disinflation to Dominate CPI
The next week will consolidate the past week’s bore fest. We have retail sales (Monday), another Bullock speech (Tuesday), a monthly CPI indicator (Wednesday), final PMI numbers (Friday), alongside a slurry of real estate and loan data.
July retail sales (expected: +0.2% MoM) will find it hard to prove as poor as they did in June (-0.8% MoM). However, recent months have proven more volatile than usual, with the ABS noting that end-of-year spending may have shifted. Overall, we see retail sales heading back towards usual levels (Chart 3).
Turning to CPI, and goods disinflation will take charge here (see the ABS’s inclusions here – we are about to get ‘Month 1’) with transport, energy and food remaining key components in the headline number. Transport (+1.1% MoM) saw a large increase in June and may well continue into July with school holidays heading into their peak period. Energy is playing a big part too, with electricity bills soaring in July thanks to the latest AER DMO. However, the Energy Relief Bill will offset some of increase – this muddies the picture somewhat. Thus, there is likely room for surprise on the market’s expected +5.2% YoY (Chart 4).
Boring Bullock, Continued Slowdown in Construction
(Soon to be Governor) Bullock is due to speak on ‘Climate change and central banks’ at the Sir Leslie Melville Public Lecture. We are expecting little that would impact monetary policy but given the growing impact of climate change on the agenda, it could mean something interesting for the latter stages of her tenure ship. The construction data could prove boring, too – it should continue to show lower approvals and roughly sideways completed work (Chart 5).
Canada
Poor Outturn in Canadian Retail Sales
Retail sales swamped in the nominal numbers that they show on Bloomberg. We want the real number. There’s no good news there, however. Headline retail sales volumes declined 0.2% MoM while core retail sales volumes slipped 1.1% MoM – the second monthly decline in a row (Chart 6). There was little to scream about in the details; the decline was largely broad based, excluding car sales.
We are, however, yet to say the Canadian economy is falling over. The RBC Consumer Spending tracker is stubbornly positive while StatCan have put the forward estimate for July at +0.4% (for 45.4% of companies surveyed).
Turning to this week, we have current account, GDP and PMI data to contend with. Current account data will prove interesting with the Canadian REER trading closer to direct portfolio flows as of late. It appears to be positive for it, too – Bloomberg M&A data implies the direct portfolio netflows favouring further CAD strength (Chart 7). Portfolio netflows have been a negative for the Canadian REER, though this hasn’t played out. There is likely some moderation in the number needed (Chart 8).
New Zealand
Retail Sales Another Sign of a Slowing Economy
As is feeling a common theme at the moment, retail sales were worse than expected. Headline slipped -1.0% QoQ versus the -0.4% QoQ expected. Core proved a lot worse down -1.8% QoQ through the second quarter, worse than the -1.6% QoQ through the first quarter.
Looking at the details, the majority of the categories worsened, with department stores and pharma the only positives. Department store sales are somewhat misleading, growth is slowing and going back to trend. Meanwhile, pharma is below trend. Looking forward, they can continue to worsen with core card sales down again in July – though the relationship between card and retail sales has worsened over the past few quarters.
This week, all eyes will turn to the ANZ survey. It has been able to pick up through the last few reports and fail to show a fragile economy, in contrast to signals we are getting from the NZIER QSBO. Also, important will be looking to services inflation expectations, giving there’s a lot of stubbornness in NZ on this side (Chart 9).
Norway
Daily FX Purchases to Slip Below 1bn
GDP proved weaker than expected last week, flat versus both Norges and the market expecting a moderate increase through the second quarter. The details are uninspiring, too. A jump in car purchases, due to a low print in Q1 thanks to a new tax on electric vehicles that started in 2023, was the only positive note to household consumption. Meanwhile, real estate remained a negative with investment in dwelling services falling for the second quarter running and construction the most negative contribution to GDP. PMIs suggest this tune of negativity may come to a halt. They were up sharply in July and are due next week (Table A).
Focusing on next week, we are looking for Norges daily foreign FX purchases (i.e., NOK selling) to decrease from 1.0bn to 0.8/0.9bn, which is different from the one bank that has submitted to the Bloomberg survey (Chart 10). We are also watching for unemployment to remain below forecast (1.9%) which would keep hawkish pressure on Norges (Chart 11).
Sweden
Odd Data Pattern in Sweden Labour Market Continues
The labour market outturn proved stronger than expected. Unemployment (SA) dropped to 7.0% from 7.9%. That’s way below market expectations (7.6%) and a distance below Riksbank Q3 forecasts (7.5%; Chart 12). Employment (SA) jumped (+51.4k) following last months (-20.9k) decline (Chart 13). Most of the strength is coming from full-time employment, rather than the labour market being supported by large part-time strength (Chart 14). Overall, the employment rate (70.5%) is higher than the Riksbank forecast (69.5%) for Q3.
Interestingly, there has been a strong data pattern throughout 2023: employment changes have alternated between far stronger than usual to far weaker than usual. This month was far stronger than usual (Chart 13). Also, there’s some labour hoarding going on. While the unemployment rate was able to drop, underemployment (i.e., those that are still employed but working fewer hours or earning less than they should) is at fresh highs (in terms of # of people) and climbing higher (in % of labour force). Periods when unemployment and underemployment have converged have led to sharper moves higher in unemployment (Chart 14).
Overall, this releasee shouldn’t exactly stress the Riksbank. They believe in the ‘Swedish wage formulation model’. In short, unionised wage agreements across the country cap the ability for a domestic-led wage-price spiral. We had confirmation earlier in the year that the Riksbank were happy here. Second, they look at the labour market using a ‘labour market indicator’ as many of the central banks like to do these days. In short, that shows that the labour market is easing up (Chart 16).
Return of the Speakers
Next week we have Floden (Monday, neutral), Bunge (Tuesday, neutral to hawkish) and Breman (Wednesday, neutral to hawkish) all speaking. All speeches are on monetary policy or economics/inflation, so expect plenty of comments to come out of them.
In the June minutes, here were the key points from each speaker (so you’re looking for any deviation from this):
- Floden: If core inflation is in line with forecast, there is a strong weakening of the economy, and perhaps a stronger krona, then there’s case for a pause in September. However, if continued beats then there’s reason to go past 4%.
- Bunge: Focusing exclusively on core inflation and expects at least one more hike this year. I.e., she is looking to the possibility of a November hike.
- Breman: Fails to rule out a 50bp hike and looks pretty certain to vote for a 25bp hike in September. Thinking about a November hike.
Switzerland
Yet to Conclude Positivity in Sight Deposits
Sight deposits have fallen lower. It puts them towards the lowest they have been in the past month (Chart 17). However, this pace is far slower than what was seen earlier in the year and in 2022. We think it further confirms that SNB foreign FX sales are slowing. We will have them again next week and we look for further evidence.
China/Japan
