China | Europe | Monetary Policy & Inflation | US
Key Events: Wage Growth or Trump 2.0?
- By Dominique Dwor-Frecaut, Henry Occleston, Ben Ford, Caroline Grady and Mirza Baig
- 6 min read
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US – Europe – $-Bloc and Rest of G10 Europe – Emerging Markets
US
Summary
- Minutes to show 2024 Fed cuts dependent on inflation trajectory.
- CPI to show continued broadening of inflationary pressures.
Fed
This week’s most interesting comment was from Bostic (non-voter, dove) who said that he was not in a rush to either hike or cut and was expecting only one cut next year, towards end-year. The comment suggests the doves are starting to realize that inflation could be stickier than they initially expected.
Daly stated that in her view the market selloff was the equivalent of a hike and that the market was correct in not pricing a 2023 hike. I doubt that her view represents that of Powell who is no longer trying to jawbone short-term financial conditions and instead is focusing on the real economy.
There was another grass root event involving Powell this week and he again refrained to comment on current market volatility. None of the business and community leaders present mentioned it either. Instead, they were focused on labour shortages, inflation, and to a lesser extent supply chain difficulties.
The minutes are out this week and I expect them to convey that if the outlook is unchanged relative to the September FOMC meeting, another 2023 hike is likely. They are also likely to convey that the extent and timing of the 2024 cuts will depend on the inflation trajectory relative to the SEP. The Fed can no longer lift its inflation forecast without losing credibility, so if inflation turns out higher than in the SEP, FOMC participants are more likely to lift their FFR than their inflation forecast.
Speakers next week include: Barr (voter, dove), Logan (voter, hawk), Jefferson (voter, dove), Perli (non-voter), Bostic (non-voter, dove), Waller (voter, hawk), Kashkari (voter, hawk), Daly (non-voter, dove), Bowman (voter, hawk), Collins (non-voter, dove), and Harker (voter, dove).
Data
The NFP print was for the soft landers: very high unemployment and low wage growth. The Atlanta Fed nowcast of Q3 GDP was unchanged at 4.9%. The Citi economic surprise index rose to 50.5 from 45.1 a week ago. WTIC spot fell to $82.6/barrel from $90.8/barrel a week ago.
Key data by order of importance includes:
CPI (Thursday): I agree with the consensus of 30bp MoM. Last month showed a broad acceleration across categories and I expect it to continue (August CPI review).
PPI (Wednesday) and import prices (Friday): I agree with the consensus that implies that PPI has bottomed out.
NFIB small business optimism (Tuesday): I will be looking for a continuation of the recovery in the hard data as well as in price increases (Dom’s Quick Take: NFIB Survey Points at Risks of Renewed Wage and Price Pressures).
Jobless claims (Thursday): I agree with the consensus that is consistent with a tight labour market. The UAW strike is unlikely to impact the jobless claims as in Michigan strikers are not entitled to claim unemployment and so far production disruptions have been limited.
U Mich Consumer sentiment (Friday): I agree with the consensus and I am looking for a recovery in inflation expectations as previous prints were inconsistent with actual inflation or with voters polls.
Monthly budget statement (Thursday): We will get the final—and hefty—tab on FY2023. My biggest surprise on the budget has been the lack of market reaction at the huge deficit. I guess that is no longer the case.
Events/Political Developments
The ouster of Speaker McCarthy has raised the prospects of shutdown when the current CR expires on 17 November, since McCarthy’s downfall was in part caused by his willingness to compromise with the Democrats. Elections for a new speaker will take place on Tuesday and Wednesday, assuming they can be completed faster than the election of former Speaker McCarthy.
Europe: Final National Eurozone CPIs to Provide Important Detail for ECB
Key Points
- Final Eurozone national inflation will provide further details on wage intensive services inflation – and more of a clue on just how dovish the last read was.
- Our lean is that the detail will be less dovish than the headline.
- UK monthly GDP outturn is always highly volatile. The market is looking for a decent bounce-back after July’s drop – our lean is towards a downside surprise given recent surveys.
- We continue to see value in fading BoE hikes.
Final September Eurozone Nation CPI
On Wednesday, we will get Germany’s final read for September inflation. On Friday, it is France and Spain’s turns. The preliminary core Eurozone aggregate inflation print was undeniably dovish (core at +4.5% YoY, vs consensus +4.8%). That represented an undershoot in the MoM reading than a typical September, despite the increasing cost pressures from rising wages and energy prices.
The preliminary readings showed several important elements:
- German core inflation at +0.1% MoM – lower than seen in 2022 and 2021, but higher than typical.
- German services at -0.1% MoM, decently stronger than a typical September (given discounting usually seen).
- Much weaker French seasonal-adjusted manufacturing goods prices than typical (+0.8% MoM).
- Decently more discounting seen in French services than typical for a September (-1.6% MoM).
It will be important to see in the final prints next week whether the details are as dovish as first appears – in particular whether more volatile, seasonal elements may have softened inflation, and whether wage-intensive services inflation remains relatively strong.
Last week’s services PMIs suggest that wage pressures remain strong, and September saw firms increasingly passing on these costs to customers. Our lean is that wage-intensive services inflation will have stabilised or bounced back in September versus the dip seen in August (Chart 1).
UK Monthly GDP to Show UK Outlook Remains Weak
UK monthly GDP is always a volatile release, driven by weather, strikes, bank holidays and the like. July’s print saw a bigger-than-expected decline, with declines across industrial production, construction and services. For August, a bounce in services production (+0.3% MoM) and construction output (+0.3% MoM) are expected to lift the headline strongly, with consensus looking for +0.2% in GDP MoM.
The risk at this stage looks skewed to the downside on the reading. More importantly, looking ahead the UK consumer looks to be quite vulnerable. The pause in rate hikes will offset some of the pain, but the recent selling in rates will keep mortgage rates elevated.
We continue to expect that the BoE is done with hiking, and that its November MPR will be very dovish. We continue to like to receive Feb 2024 MPC-dated SONIA and be long March 2024 SONIA futures.
$-Bloc and Rest of G10 Europe
Emerging Markets
Key Points
- Czech disinflation to continue, but not enough for a November rate cut from the CNB.
- A very favourable base in play for Hungarian CPI should allow a 4pp drop in YoY inflation.
- Monetary Authority of Singapore is widely expected to remain on hold at this week’s semi-annual policy review on 12th (Thursday).
- China returns after a week-long holiday and reports credit, CPI, and trade data. Market will be on lookout for some flexibility in the USDCNY fixings.
- India’s inflation likely dropped in September as food prices moderated. Trade data may reveal a widening of trade deficit as September’s oil move partly comes through.
- We expect Banxico’s MPC minutes to lean hawkish, and don’t expect any new news from the CPI prints due next week from Mexico and Brazil.
Further Disinflation in Czechia
September’s CPI release on Tuesday is the last inflation print before the next CNB policy meeting on 2 November. CNB forecasts see 7.2% (from 8.5% in August) while consensus is slightly higher at 7.4%, probably reflecting the recent rise in fuel prices. We expect CPI will remain unacceptably high for the CNB and do not see the easing cycle starting in November. Moreover, disinflation will reverse in October reflecting the unhelpful base effect (-1.4% MoM) from last year’s introduction of household energy price support. The CNB would face a difficult communication challenge to explain why easing started and then inflation moved higher. By the next meeting in late December the CNB will have both the October and November inflation prints which will allow them to show the temporary nature of the October increase.
Hungary CPI to Benefit From a Very Favourable Base
A 4.1pp increase in September 2022 MoM inflation leaves a very favourable base for the forthcoming CPI release. While it will still leave Hungarian inflation above the rates seen in Czechia and Poland, at an expected 12.4% (versus 16.4% in August). The gap will close considerably. Accelerating disinflation will not, however, mean accelerated rate cuts. Moderate currency weakness, inflation still way above the 3% target, and future cuts coming on the policy rate rather than the effective rate, means a slower pace of easing from October. We continue to see a 50bps cut taking the policy rate to 11.5% by yearend.
Monetary Authority of Singapore on Hold
We expect the MAS to keep the three parameters (mid-point, slope, and width) of the SGD NEER policy band unchanged again at its semi-annual policy meeting on 12 October.
Core CPI has fallen from its peak of 5.5% to 3.4%, but MAS is still projecting it around 2.5-3.0% by yearend. The Authority does not have an explicit target, but its comfort zone is around 2% in core CPI. The overall trends in Singapore CPI are consistent with the global experience, whereby inflation is moderating towards pre-Covid levels, but could rebound quickly on new shocks or premature easing.
China – Watch the Fixings and Data
China returns from a week-long holiday, during which US bond yields have surged by 40bps and the broad USD index has strengthened. Any reasonable estimate of USD/CNY fair value has shifted higher, and so markets will be on the lookout for any signs of flexibility in FX fixings.
China’s September credit data, due 9-15 October, will probably pick up for a second month. We do not forecast this number, but would be looking at the details, as last month’s increase was largely on the back of government bond issuance while mortgage borrowing remained weak.
China’s consumer price inflation probably stayed stuck near zero in September. Producer prices likely continued to fall, but by a smaller margin. It’s going to take time for recent policy support to fuel enough demand to lift prices, although there are early signs of green shoots in manufacturing.
China’s trade data is due on 13 October. Export growth is bottoming out, but we don’t expect a meaningful recovery at this time.
India CPI to Moderate and Deficit to Widen
India has two notable data releases next week – CPI on 12 October and trade with no specific date. Headline CPI is likely to drop from 6.8% YoY in August to below 6%, as a surge in food prices moderates. The RBI signalled a more hawkish stance by announcing pre-emptive liquidity tightening measures, and we expect rates to remain more vulnerable to upside inflation surprises than downside ones.
We think there is risk of a wider trade deficit than market consensus of USD23bn on higher oil prices. The number forms part of our high frequency BoP tracker, which was tracking a modest deficit in August, and we expect it to widen in September, creating risk of further reserve depletion.
Mexico & Brazil Inflation
Mexico CPI on 9 October, with consensus expecting headline to moderate to 4.5% and core at 5.75%. We agree that overall, it will be a softer print, but it should not change Banxico narrative which remains hawkish. On 12 October, Banxico will release minutes of its September meeting, where we think there is room for more hawkish comments relating to recent fiscal developments and financial conditions.
In Brazil, the September IPCA will be released on 11October. The YoY figure is expected to pick up once again to 5.2%, primarily due to base effects resulting from tax-induced deflation last year. Food inflation should continue to subside on record high harvest, while fuel prices may contribute to headline inflation – recall Petrobras hiked domestic fuel prices in August.