NFP to Surprise on the Upside / A Dovish Outlook for the BoE

US Key Points

• NFP likely to be higher than the 250k expected by the consensus
• Fed speakers to stress that the US economy is not in recession

Europe Key Points

Skip to Europe Section

• The BoE likely hike the bank rate to 1.75% (+50bps) on 4 August. We, however, do not completely discount a smaller move.
• More information on the path for active gilt sales is expected. We expect they will ultimately come to lean on QT more than hiking to tighten policy.
• Further out, we remain of the view that the market will be disappointed by the ultimate policy path.

US

Fed

My read of the Fed meeting is that, having been forced by the data to break his very specific June forward guidance, Chair Powell this time around was less precise. Markets chose to focus on his more dovish comments and ignore the hawkish ones please see Fed review: less guidance, more evidence.

As of this writing there are 3 speakers scheduled, Evans, Mester and Bullard. I expect all 3 to argue that the US is not in recession, and Evans, a dove, argue for slower hikes from here. Mester and Bullard are hawks so could be more vague on their expectations.

Data

The data this roughly fitted with my big picture view of resilient growth and accelerating inflation, for detailed discussion of the GDP print see Growth to turn positive in H2.

Covid hospitalizations continued to gather pace and though hospital capacity remains ample it has started to tighten(charts 1, 3 and 4). 

This is a data light week. Key data include:

• NFP: I am expecting a positive surprise relative to the consensus of 250k.  Trend growth is positive and real wages have been falling.  I also expect
• ISM PMIs: I agree with the consensus and expect services to remain stronger than manufacturing.
• JOLTS: I expect continued high ratio of vacancies to unemployed and low ratio of actual hires to vacancies.

Other data includes trade balance and jobless claims.

Events/Political Developments

Senate Majority Leader Schumer and centrist democratic Senator Manchin struck a deal  this week on a $739bn bill that funds a combination of climate, health care and budget reduction initiatives though higher tax revenues. If Senator Sinema, the other centrist democrat, approves the bill, it could become law.

Links to New York Fed POMOs/TOMOs:  Repos, Treasury, MBS, CMBS

Europe

Attention Turns to Final PMIs and the BoE

Last week saw the preliminary July CPI print higher than expected. It’s no surprise then that the economic confidence readings dampened further than expected. In contrast, the Q2 GDP releases and unemployment numbers beat market expectations. This week we’re watching out for the final PMI releases which are expected to confirm a slowdown in manufacturing and a services sector teetering on the edge of a slowdown. Elsewhere on the mainland, there’ll be a second round of employment numbers. Meanwhile, we expect the Bank of England to hike the bank rate to 1.75% (+50bp) on Thursday 4 August.

Bank of England to Hike 50bps Now, But Under-Deliver Later

You can read our Bank of England preview here.

50bp is on the table for the 4 August BoE MPC meeting. That is the clear tone of MPC policy makers’ recent comments. Given the current inflation climate, and the need to get to the neutral rate, right now this looks like a credible possibility. However, beyond that, we remain of the view that the market will be disappointed by the ultimate policy path.

The rationale for this has not changed since we first set this out as our base case. In fact, it has grown stronger: this will be arch-hawk Michael Saunder’s last MPC meeting; business and consumer surveys continue to deteriorate, and active QT is set to begin in September.

Even if the BoE shifts more hawkish, it would be hard to dissuade me from my view. First, consider that near-term inflation within the MPR will likely be revised significantly higher. This is because the Ofgem energy price cap rise for October (TBA early August) will need to rise a lot more than previously assumed. However, this is not actually a hawkish outcome. A 50% (or more) rise in energy bills is beyond the scope of the BoE. Second, why would the BoE move in a record clip (+50bps) if they’re going to pause straight after? The arguments from the hawks in the BoE have pretty consistently been that more now means less later. Front(ish)-loading hikes in that context is not entirely unreasonable. The ECB only last week said that their ultimate target is unchanged by the change in pace. Meanwhile, an opportunity to pause to assess the effect of the larger move when they are about to enter active QT would also make sense.

There’ll also be an updating of the MPR and with it the BoE’s forecasts for major economic data. It will be important to see the expected effect of announced UK Government household support measures. The inflation forecast will likely be of most interest (unemployment will still be forecast to remain low, while economic output will likely be revised down somewhat). On inflation, we think a Q4 peak CPI assumption will likely remain unchanged. And further out, the medium-term headline inflation forecast (predicated on market pricing for rates) is likely to undershoot the target even more than previously.

Dollar Block and Other G20 countries

We made our case two weeks ago for the RBA to take the cash rate to 1.85% (+50bps) on 2 August. That’s because unemployment (3.5%) is at a level not seen in the past 48 years, the business liaison has suggested wage growth is accelerating, inflation is moving towards Governor Lowe’s year-end forecast of 7% YoY, while the economy grew 0.8% QoQ for 2Q. Most analysts (19 of 20) see a similar picture while markets have pretty much priced the move (47bps). 

At the time we also pointed out reasons to be cautious in following market pricing further out. That’s because the housing market had weakened, and Westpac-MI consumer confidence had registered its lowest reading since August 2020. And since, data has disappointed market expectations. Namely, prices grew at 6.1% YoY for 2Q, lower than the 6.3% YoY markets had expected, while retail sales (0.2% MoM) were weaker than expected (0.5% MoM) for June. It has meant year-end pricing has been reduced from 3.15% to 3.00%. 

At the meeting, we will also get a first look at the RBA’s updated forecasts. These will be published in full on 6 August. We expect the RBA to lift its inflation profile while it will also lower its unemployment projections, both would come as no surprise to markets. 

Elsewhere, there will be updates to monthly housing data: house prices (1 Aug), new loan approvals (2 Aug), and building approvals (3 Aug). Meanwhile, the trade surplus will likely widen further on the back of rising coal prices.  

Turning to the other members of the $-Bloc (New Zealand and Canada), attention next week will turn to unemployment. In New Zealand, it is expected to inch 0.1pp lower to 3.1% in 2Q. This is in line with RBNZ projections. The number of people employed is also expected to have grown through the quarter (+0.4% QoQ exp.). Meanwhile, in Canada, unemployment is expected to retreat from its 50Y record low (5.0% vs 4.9%) and participation is expected to remain at 64.9%.  

Other key data releases this week include PMIs in Japan, China, Canada and Australia as well as China’s current account and FX data.    

Links to BOJ Rinban , BOE OMO

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Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

Ben Ford is Researcher at Macro Hive. Ben studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)