China | Europe | Monetary Policy & Inflation | US
Key Events: What the Market Is Getting Wrong on the Doves!
- By Dominique Dwor-Frecaut, Ben Ford and Henry Occleston
- 6 min read
US
Summary
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- Retail sales to show that the US consumer is in great health.
- Fed minutes to show Fed still on track for another hike this year.
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US – Europe – $-Bloc and Scandies – China/Japan
US
Summary
- Retail sales to show that the US consumer is in great health.
- Fed minutes to show Fed still on track for another hike this year.
Fed
The main Fed events this past week were interviews of the NY and SF Fed presidents. Williams (dove, voter) expressed strong conviction that inflation would slow to about 2.5% by end-2023, which would allow the Fed to cut in 2024. By contrast, SF Fed president Daly (dove, non-voter) said the Fed was a long way from talking about cutting. Her cautiousness follows that of another prominent dove, Bostic, last week.
The main event this coming week will be the release of the minutes. I expect them to confirm that the Fed is still on track for another hike this year.
The only public speaker scheduled as of this writing is Kashkari (hawk, non-voter).
Data
This week’s data continued to point at strong growth and limited disinflation. The CPI was in line with expectations, but hyper core services recovered and OER did not slow. The Atlanta Fed nowcast of Q3 GDP rose to 4.1% from 3.9% a week ago. The Citi economic surprise index fell to 73.7 from 77.7 a week ago. WTIC spot rose to $83.7/barrel from $82.5/barrel a week ago.
Key data by order of importance includes:
Retail sales (Tuesday): the consensus on headline is 0.4% MoM (i.e., 0.2% in real terms), which seems a reasonable number. The consensus on the control group, that is an input to the GDP data, is 0.5% MoM, which I also agree with.
Inventories (Tuesday): This is not a number I follow closely, but this time around its release is likely to see the Atlanta Fed Q3 GDP nowcast, currently 4.1% due in part to a 1.1% contribution from inventories, revised down.
Import price index (Tuesday): I agree with the consensus that is consistent with a continued recovery in import prices. That would be in line with my LT expectations of positive inflation in core import prices.
Housing market indicators: NAHB index (Tuesday); building permits and housing starts (Wednesday): I agree with the consensus that basically shows a recovery in the housing market.
Manufacturing data: Industrial production (Thursday); NY Fed Empire (Tuesday), and Philly Fed (Friday): I agree with the consensus that expects a recovery in the nationwide IP and in the Philly Fed survey but a worsening of the NY Fed survey.
TIC (Tuesday): I agree with the consensus and will be looking for confirmation that foreign holdings of Treasury debt are flat (Households to Fund US Government Profligacy).
Jobless claims (Thursday): I agree with the consensus that sees somewhat lower initial claims.
Events/Political Developments
Oil prices rose further this week after a Russian oil tanker was attacked by Ukrainian drones in the Black Sea. Ukraine announced all Russian ships in the Black Sea were ‘valid military targets.’
Links to New York Fed POMOs/TOMOs: Repos, Treasury, MBS, CMBS
Europe: UK Data Details Are Key
Key Points
- UK labour market (Tuesday) and inflation (Wednesday) are the key releases this week.
- As the BoE made clear at its last meeting, the details will be most important.
- As July will see a large headline CPI drop due to energy price changes, as well as a relatively large number of quarterly re-pricings (which cluster around April), there is large room for surprises.
- Our lean is towards upside surprise in core inflation, but for the details to continue to confirm our dovish lean.
- We see continued value in positioning for relative BoE dovishness (vs ECB and Fed) and for 2024 cuts. This is best expressed via 2s10s GBP steepening vs EUR and by being short 1Yx1Y US OIS vs 1Yx1Y SONIA.
UK Labour Market to Show Continued Loosening
The UK labour market data for June will be released early on Tuesday morning. The release will be particularly important for the BoE after last month’s weaker outturn. Right now the BoE continues to estimate a very shallow rise in unemployment to the end of the year – we see upside to this. Whether this materialises in this week’s data is not so important to the overall picture (consensus expects unchanged at 4.0%) as the detail. Unemployment rate can get knocked about a lot by transitory things. Instead, it will be key to see whether underlying trends, such as the decline in full time employment, persist (Chart 1). We expect it will.
Wage growth will (as ever) also be important to watch. The market is looking for a slight rise in total regular growth to 7.4% YoY (from +7.3% in May). This does not seem unreasonable, but we would warn of two things:
- Wage growth has consistently surprised to the upside in the UK (hence the BoE’s ‘tweaking’ of their wage growth models, Chart 2).
- The recent change in composition of employment looks set to shift from supporting YoY growth, to subtracting from it (Chart 3).
In short, the market will be much more reactive to a downward surprise than an upside one, and that is what the fundamentals are increasingly pointing towards. That is not to say it will materialise at this release, but it should play out in the months ahead.
High Risk of Surprises in UK CPI
UK CPI (released Wednesday) will be the most important release of the week. Consensus is looking for a drop in both headline and core to 6.8% YoY. There are strong risks of surprises in the outturns. July data will see not only the new, lower household energy prices feed into the indices (likely to suppress headline), but a range of other quarterly repricing effects.
We have written in depth on repricing effects previously. Rental re-pricings are an important one to come in July (Chart 4). They surprised significantly to the upside in April and could provide upside risk to the core outturn. However, if that were to occur, we would fade any subsequent knee-jerk hawkishness. If anything, such an outturn would be a dovish sign: indicating strong pass-through of monetary transmission to the poorest households (renters) who have the highest marginal consumption.
Wage-intensive services inflation will be key to watch also. For now we expect that they will continue to show fading momentum (Chart 5). This should continue to support our view that there is value in positioning for relative BoE dovishness (vs ECB and Fed) and for 2024 cuts. This is best expressed via 2s10s GBP steepening vs EUR and by being short 1Yx1Y US OIS vs 1Yx1Y SONIA. However, if we do see a rise in core (and services) on rental inflation, but dovish detail, it could be a risk to our expectation for 10Y GBP inflation swaps to re-anchor. We would reassess the trade in such an instance.
$-Bloc and Rest of G10 Europe
- Australia: Room for misleadingly dovish labour outturns + AUD remains a fade on rallies (vs USD and CAD).
- Canada: Keep your eyes on core inflation momentum + GBP/CAD downside continues to make sense.
- New Zealand: RBNZ to pause and show little signs of needing to cut.
- Norway: Norges to deliver 25bp hike + short-term caution in NOK/SEK.
- Sweden: Core inflation to keep Riksbank on tightening path + Breman likely to reiterate at least 4% terminal.
- Switzerland: Sight deposits will be key in slowing SNB intervention narrative + positives in our call for EUR/CHF higher.
Australia
Hawkish Optionality Remains
The past week’s data did little to remove the risk of another hike from the RBA; the NAB Business Survey had less dovish details while Governor Lowe played both sides of the narrative in front of Parliament.
The NAB Business Survey had interesting details with profitability (+9.6), purchasing (+2.6) and selling costs (general: +2.0 & retail: +2.6), and forward orders (-1.0) all pushing higher. This indicates further inflationary pressures and that demand likely remains. Even the labour market details have not proven overly dovish with capacity utilitisation (84.5) and employment prospects (+5.5) sideways over the past three months. Meanwhile, labour costs have jumped from +2.3 to +3.8.
Governor Lowe’s appearance matched the persona we thought he would have to see out his tenure: why do something unsafe if someone else can do it for you? In short, he told Parliament that policy is restrictive, but there remains a tightening bias. Within the entire ordeal, there were two key points you need to take away:
- The inflation target window has shifted to 2025 from mid-2025, as we previously pointed out.
- Inflation remains key to another hike.
That is, if inflation looks more persistent than forecasted, the RBA will have to tighten again (but with an increasingly higher hurdle to hike). We remain short IBV3 (Oct 23) vs IBM4 (Jun 24) on the prospect of a hike later in the year and the possibility of markets pricing a cut more meaningfully at some stage next year.
This Week Could Back Dovish Side of Optionality
The coming week will prove important to the RBA with Q2 wages and the July labour force survey ready to digest.
Wages are expected to have increased by 0.9% through the second quarter, only 0.1pp stronger than growth in Q1 and directly in line with RBA forecasts – that will keep a September pause on the card. However, that does not mean the risk of a hike is gone further down the line. That is because, so far, public sector wage increases have lagged, and this is set to change with the new wage agreement (awards: +5.75% and min wage: +8.6%, affecting ~30% of labour forces) coming into effect on 1 July (i.e., start of Q3; Chart 6). There are also 250,000 aged care workers due a 15% raise, too. That is another 2% of the labour force.
The RBA did well through H1 2023 in terms of forecasting the unemployment rate. Through H2, they expect the unemployment rate to tick up to 3.9% from 3.6%. This would be in line with the weakening labour market indicators (business and consumer surveys, vacancies, ads). In the near-term, there is risk of a weaker print than last time out, in line with market expectations, on the back of July typically proving weaker than June and the past six months seeing two strong months followed by a weaker month (Chart 7).
Canada
CPI Key in Keeping Hike Possibility Afloat
So far, economic data the BoC have been watching has proven lacklustre. The labour market loosened while the GDP flash estimates for June is weak after the May number made up for strikes. With headline inflation proving beneficial, and the market continuing to price in one more BoC hike, a reason to price that hawkishness needs to be backed up. To do that, markets will need to see yet more stubbornness in the core inflation momentum. In short, at the following levels or below would begin to mean core inflation momentum is declining:
- CPI Median: 3.86% YoY.
- CPI Trim: +3.36% YoY.
Elsewhere, our bearish GBP/CAD 1.69×1.62 put spread has inched away from us. We remain supportive of the view given the BoE is overpriced on hikes and underpriced on cuts, economic data has room to worsen after endless positive surprises in the UK, and the outlook for oil remaining positive.
New Zealand
Mixed Data Will Do Nothing to Impact RBNZ This Week
The past weeks’ worth of data was mixed.
Business inflation expectations have shown limited progress with the one-, five-, and 10-year metrics decreasing by just 10bp (to 2dp) while the two-year increased by 0.04bps. Meanwhile, business expectations for wage growth have risen, for unemployment they have fallen two years out but increased one year out, while for house prices they have increased strongly. Even perception of monetary policy and expectations of the OCR have increased all time periods surveyed.
Card spending continues to show consumers ditching hospitality and apparel purchases, and, instead, focusing on consumables purchases – they have shown little sign of slowing (Chart 8).
And while you could make a hawkish argument on the previous two paragraphs, it is hard to do the same for the manufacturing PMI. All details except stocks are comfortably sub-50 with a large drop in output, too (Table A). This gives reason to believe the downturn in manufacturing experienced thus far will only continue (Chart 9).
RBNZ to Remain Boringly Hawkish
All eyes this week will turn to the RBNZ. I really think it will be just short of uninteresting. Our core belief is the RBNZ will want to show no signs of dovishness until inflation is under control and they are ready to cut. This will not happen until we have concrete evidence in the next inflation and labour market reports, which will not make an impact until the November meeting anyway. So, we are likely to see the RBNZ remain on pause, give little reason to do otherwise, and reflect this in their OCR forecast. We think the more interesting release of the week will continue to be the non-residential bond holding figures, which have increased starkly since 2019. The increased holdings are pushing up NZD’s fragility when cuts come and the reason to hold Kiwi bonds depletes (Chart 10). We continue to think finding room to be short NZD makes sense (we like picking up short NZD/CAD on any rallies) and receiving NZD 2Y OIS vs USD 2Y OIS also makes sense.
Norway
Core Keeps Pressure on Norges Bank
The July CPI reading saw headline drop to +5.4% YoY, far below expectations (+5.9% YoY) and where it was in June (+6.4% YoY). Most of the drop came from food and non-alcohol (Jul: +1.1pp contr. to YoY vs Jun: +1.7pp) and housing/energy (Jul: +0.7pp vs Jun: +1.2pp).
On food and non-alcohol, food makes up the majority of the move (Jul: +1.0pp vs Jun: +1.5pp). CPI food changes a roughly one-year behind changes to world food prices, with this cycle proving no different. There are at least roughly another eight months of declines there. And on housing/energy, electricity prices (Jul: -0.1pp vs Jun: +0.4pp) were the main driver, with all other contributions seeing relatively no change to their YoY contribution. Daily electricity prices continue to slide lower across Norway, meaning the YoY rate should continue to follow.
While the lower-than-expected headline read is welcome, Norges Bank will not give it any attention. Instead, their eyes will remain on core inflation. Core inflation (+6.4% YoY) was 0.1pp above Norges Bank forecast and in line with market consensus.
It means a 25bp hike will follow next week. Norges forecasted a 4.21% terminal and core is currently giving them room to follow that plan. The strong NOK will prove the only dovish part of the equation, but that should prove muted as it takes 6M to pass through to CPI (according to their research) while imported inflation remains above forecast.
Sweden
Core Inflation Remains the Focus
We got some disappointing household consumption data, as us and the rest of the market have long been looking for. However, for the Riksbank, while they want to concentrate on downside growth risks, they are unable to. That is because core inflation is likely to come in above forecast, once again. And with Breman scheduled to talk a couple days later, with a hawkish tone – the previous minutes revealed she was ‘probably’ expecting to vote for a September hike and ‘maybe’ even after that – there is room for SEK to gain where rate spreads matter – i.e., NOK/SEK.
We will also have the prospera inflation expectations survey. You can ignore that this time round, it will just be market participants.
Switzerland
Sight Deposits Hinting at Slowing SNB Foreign FX Sales
There is little bullish for CHF at this moment in time. Unemployment rose to 2.1% SA earlier this week, following the week prior’s core inflation disappointment. And while SNB FX reserves crept below 700bn, confirming further selling of foreign FX through July, the pace of sales is slowing right down. Moreover, sight deposit data out next week is showing signs of stalling. We talk about it further, and the promising signs for our call for EUR/CHF higher here.
China/Japan
Key data releases this week include Japan’s CPI and China’s retail sales and IP.