US
Key Points
- I expect a small negative surprise on CPI and a small positive surprise on retail sales this week. The consensus retail sales forecast implies an acceleration of the growth slowdown.
- Internal democratic disagreements on the $3.5tn social package are likely to become more strident and more public this week.
Fed
This past week Williams, a dove, reacted somewhat hawkishly to the August NFP miss, stressing that average employment gains remained strong, that the substantial condition on inflation had already been met and that ‘There has also been very good progress toward maximum employment.’ In addition, Nick Timiraos, often the unofficial voice of the Fed at the WSJ, announced a November taper. These support my expectations of a formal taper announcement at the September FOMC meeting and actual taper in November or December.
There are no public speakers this week as the pre-meeting black out started this weekend.
Data
The economic surprise index continued on its downward trend and the GDP forecast revision index (GFRIUS Index) was revised down this week.
Key data this week are CPI and retail sales:
- CPI: I expect a negative surprise relative to the BBG consensus of 0.3% core MoM. Based on a further slowdown of inflation in holiday related items and on unchanged inflation in non-related items, I expect MoM core CPI below 0.25%.
- Retail sales: I expect a small upside surprise to the consensus of- 0.8% MoM. Based on 0 MoM growth in restaurant spending and a 0.5% MoM contraction in non-restaurant spending, (compared with a 1.5% MoM contraction in August), the September retail sales MoM contraction is likely to be closer to 0.4%. A bigger contraction than I expect would signal that the consumption slowdown is gathering momentum
Other key releases include University of Michigan consumer and NFIB small businesses confidence, New York and Philly Feds business surveys, industrial production, TIC, unemployment claims and real estate data where the consensus view, that implies a further loss of economic momentum, seems reasonable to me.
Covid news continued to broadly improve this week. Test positivity and hospitalizations fell (Charts 1 and 3). The 7 day average daily immunizations slid to about 800 (000s), but the administration announcements of tighter vaccines mandates could see the number pick up. The TSA passenger throughput stabilized this week, likely due to the Labour Day weekend, one of the busiest periods of the year in US airports and therefore the improvement may not last. Google mobility indicators slowed further (Chart 2).
I expect the slowdown in mobility indicators to continue despite the decline in infections because I believe the former reflects the end of catchup demand for holidays goods and services and broadening demand weaknesses as well as the impact of the delta variant.
Events/Political developments
The $3.5tn social package is likely to further unravel this week. Both the White House and Senate majority leader Schumer ignored Senator Manchin call for a pause on large spending, calling Mr Manchin ‘persuadable’ and saying that ‘we are moving full speed ahead’. Senator Manchin neither denied nor confirmed a rumour that he would be open to a $1.5tn package.
Meanwhile other internal democratic divisions on the package became more apparent. Centrist House democrats sought to introduce limits on the government ability to negotiate the prices of drugs paid for by Medicare and Medicaid, a key provision of the $3.5tn package, because it would generate significant savings that were to be used to fund social programs. In addition, democrats in both Houses are still debating internally the taxation of MNCs and of capital gains as well as lifting the cap on state and local taxes deductions. President Biden, House Speaker Pelosi, and Senate Budget Sanders are said to have different spending priorities.
Furthermore, Treasury Secretary Yellen wrote again to Congress this week to warn that the Treasury will run out of resources in October and needs lawmakers to raise the debt ceiling. The debt ceiling can be either suspended or raised, and while the latter can be done through reconciliation the former cannot i.e. suspension requires support from the Republicans, which they have ruled out. This leaves a debt ceiling increase through reconciliation as the more likely scenario, but the current reconciliation bill does not include a debt ceiling provision. This is in part because the Democrats want to pressure Republicans to assume their share of responsibility in accruing more debt during the past suspension. I expect the debt ceiling to be raised through reconciliation sometime in October.
Key dates on the budget are:
Mid-September i.e. this week, House and Senate re meant to have their version of the $3.5tn bill ready to be put to a floor vote, which seems unlikely.
By 27 September the Bi-partisan Infrastructure Framework is to be put to a floor vote in the House, per Speaker Pelosi agreement with centrist democrats.
By 1 October a CR (continuing resolution) will need to be passed to avoid a government shutdown. A full budget consists of 12 spending bills that are unlikely to be ready by 1 October and instead Congress is likely to pass a CR, a stop gap measure that extends spending at current levels.
By end October the debt ceiling will need to be raised to avoid a default, which seems likely through reconciliation.
Links to New York Fed POMOs/TOMOs: Repos, Treasury, MBS, CMBS
G20
The RBA’s Ellis, Jones and Low and the ECB’s Rehn and Makhlouf will be speaking.
Key data this week include China’s retail sales, IP, investment, real estate prices and Canada’s and UK’s CPI.
Links to BOJ Rinban , BOE OMO
COVID-19 Monitoring
