UK Data Supports BoE Tightening… For Now

US – Europe – $-Bloc – China/Japan – Covid-19 Monitoring

US

Summary

• Strong retail sales likely.
• CPI to remain low but could show foods and services moving in opposite direction.

Fed

Chair Powell, vice Chair Brainard and Board member Waller this week were careful to not provide explicit guidance on the forthcoming FOMC meeting but instead provided their detailed economic assessments. Waller clarified that guidance was out and that it was ‘time to let the data do the talking’. 

I am still expecting 75bp for 2 reasons. First, the data shows that the US economy is not slowing below potential, as all 3 speakers explained was necessary to bring down inflation to target. Second, the Fed is strongly focused on financial conditions that it needs to tighten further in order to slow growth further. With markets pricing about 75bp, a lower hike would likely ease financial conditions.

The pre-meeting blackout started over the weekend.

Data

The economic surprise index (CESIUSD Index) improved during the week with the services PMI (ISM) surprising on the upside and initial claims on the downside. 

This week’s key data include:

CPI (Tuesday): I agree with the consensus of 0.3% MoM for core. I will be looking for a stabilization of core goods inflation, an increase in core services inflation, and a recovery in median price inflation.

Retail sales (Thursday): I agree with the consensus of 0.8% MoM ex auto and gas, which implies a real increase of close to 1% MoM. Given the switch from goods to services, this would be a very strong outcome.

PPI (Wednesday): I agree with the consensus of 0.3% MoM for core and will be focusing on semi-conductor prices. Chips price inflation has slowed since January but remains positive. I expected this to have continued in July.

Consumer confidence (Friday): I agree with the consensus on headline as well as ST and LT inflation expectations. Expectations are unlikely to have changed much since they reflect surveyed consumers actual experience of inflation and price pressures remain pervasive.

Other key data release includes small business optimism (Tuesday), NY Fed and Philly business surveys (Thursday), import price (Thursday), manufacturing production (Thursday) and initial claims (Thursday).

Events/Political Developments

The House this week could pass a short term funding bill to provide government funding past 30 September, when current funding expires. Funding would be extended until after the 8 November elections, into the lame duck session of Congress when a longer term bill would be voted.

However, the Democratic leadership wants to attach a provision reforming energy permitting, part of a deal reached with senator Manchin over the summer. The provision is unpopular with liberals which could delay the adoption of the bill. 

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

Europe

Summary

• Due to the mourning period following the Queen’s death, the BoE’s September meeting has been rescheduled until 22 September.
• It’s a heavy data week for the UK, with monthly GDP, inflation and labour market data out.
• UK data should show continued need for tightening – but the clock is ticking before the BoE pivots dovishly.
• Eurozone Final CPI to provide details on the breadth of recent inflation rises.

BoE Meeting Delayed – the Dovish Pivot Has Begun

The BoE will no longer be meeting to update on policy next week, instead they will meet on 22 September. This postponement should mean that they will have a view of August retail sales before they decide policy. Expectations are for this data to remain on a bearish path. In addition, it will mean they have more time to include next week’s August CPI outturns into their forecasts.

In our view, following last week’s UK government announcement for freezing household energy bills, a more complete dovish pivot is to take place by the November MPR. MPC comments to Parliament from the likes of Chief Economist Pill and Governor Bailey added to this conviction. BoE calculations in June for the UK government’s £15bn May stimulus, pointed to a +0.1ppt inflation impulse. If we extend this to the £90bn offered to households in the most recent package, and apply to June MPR forecasts, it would suggest a medium-term inflation rate only just at target.

But For Now, Data Supports Tightening

UK data released this week includes July GDP (Monday), July labour market data (Tuesday), August inflation (Wednesday), and August real retail sales (Friday). At present, these are expected to continue to show that the economy bounced back in July, the labour market remains very tight, and inflation continues to rise strongly MoM.

Together these point to continued need for BoE tightening (likely 50bp at the September meeting), but there are nuances to the number. Beyond the strong wage growth and low unemployment rate, we will be looking for signs that the labour market size remains strongly off the pre-COVID highs in terms of absolute magnitude.

Retail sales will meanwhile likely show a continued consumer pressure. The market is looking for nonfuel sales to drop 0.4% MoM, but the risk is probably to the downside there. Finally, at some point in the week the BoE will release its Ipsos expected inflation survey. As the survey will pre-date recent inflation-capping government policy it is unlikely to hold much weight.

Final EZ Inflation and ECB Speakers

Final CPI numbers for August should provide more context to the growing breadth of price rises across the bloc. More interesting will be the comments from the various ECB speakers following the 75bp delivered last week. Comments last Friday from both hawks (such as Knot, Muller and Vasle), and more neutral speakers (such as Kazimir and Villeroy) pointed to strong support for the more decisive action, and the need for more such action to come. Next week, the most important voice to hear will be the increasingly influential Schnabel (hawk). The influence of her hawkish views on medium-term price shock risks within the 75bp decision will be important to understand.

It will also be important to hear from the more dovish members including de Guindos (speaking several times), Centeno (Thursday) and Lane (next Saturday). We expect that Centeno, and de Guindos will help illustrate the broad-based support for further hiking, but will continue to stress the need for anti-fragmentation. Lane as the Chief Economist, meanwhile, will be particularly interesting to hear from as he justifies the quick pivot towards supporting an acceleration in hiking. We expect he will play up the uncertainty in forecasts and the upside risk for medium-term inflation.

$-Bloc

Central Bank Watch

Reserve Bank of Australia

The RBA delivered a fourth 50bp hike putting the cash rate at 2.35%. It is now 15bp off neutral and at its highest since December 2014. The statement itself changed little from August. They did, however, make two important changes:

1. The RBA noted that the effects of interest rates are yet to be felt. This is because the typical transmission of hikes to the consumer, through mortgages, for example, typically takes three months. The first hike was in May (four months ago) while data released has been through Q2. Therefore, we are likely to see the effects in the Q3 data, reflecting poor consumer confidence.
2. They are no longer normalising monetary conditions. It means the RBA is aware they are near neutral and that therefore hikes could now reduce to 25bp – that is our base case.

The decision was followed by a speech from Governor Lowe. It broadly reiterated the above and forced the market to curtail their expectations for the RBA, in line with our expectations.

We continue to see the RBA hiking 25bp in October. Meanwhile, on the terminal rate, while we think they could well pass 3%, we think that the market-implied terminal rate of 3.6% is too high.

Bank of Canada

The BoC hiked the overnight rate to 3.25% (+75bp) on Wednesday, as we expected. There were two main takeaways from the decision:

1. Excess demand, a tight labour market, core inflation above 5%, and high short-term inflation expectations remain an issue for the BoC. It is clear we are not at the end of the hiking cycle just yet.
2. However, the end is in sight. They are no longer ‘front loading’, meaning that a smaller hike shall follow.

Deputy Governor Carolyn Rogers echoed similar rhetoric a day later. Importantly, she issued stress on inflation expectations. It means the key data points into the next meeting (26 October), where our base case is a 50bp move, will be the August (20 September) and September inflation (19 October) prints as well as an updated consumer expectations survey (16 Oct) and business outlook survey (17 October).

Reserve Bank of New Zealand

Nothing major came out of New Zealand in the last week. We remain confident that the RBNZ will take the OCR to 4% through two 50bps hikes in October and November, and then re-assess the situation. It may mean another 25bp further down the line.

Norges Bank

This week saw Norway CPI fall 0.2% MoM, which took the year-on-year rate to 6.5%. Relying on the headline, however, would have left you blindsided for two reasons:

1. An August CPI of 6.5% YoY was 1.1pp above the Norges Bank June forecast.
2. CPI-ATE (underlying) inflation rose to an all-time high (4.7% YoY) despite pressures easing (-0.5% MoM).

As a result, we see Norges Bank hiking the policy rate to 2.25% (+50bp) on 22 September, 75bp seems unrealistic following a disappointing GDP print (mainland GDP: -0.3% MoM).

Riksbank

The Riksbank hiked the policy rate to 0.75% (+50bp) in their last meeting. They also produced a new set of forecasts that ended up being wrong; Swedish inflation overshot forecasts, while labour markets tightened more than expected. It means the central bank will have to take more aggressive action than previously expected. We see them doubling the policy rate to 1.50% (+75bp) on 19 September.

Calendar Preview

Australia

• CBA Household Spending (Tuesday, 00:00 GMT +1:00): The RBA is searching for data to confirm a slowdown in consumption. While this is not key data, it could help build a case.
• NAB Business Survey (Tuesday, 02:30 GMT +1:00): A non-ABS report the RBA read through. It gives you an idea of consumer and business expectations. It might be too early to see solid signs of a slowdown, but any clue will be taken heavily.
• Consumer Inflation Expectations (Thursday, 02:00 GMT +1:00): Any downward revision will help build a case for a smaller, 25bp move in October.
• Unemployment (Thursday, 02:30 GMT +1:00): We agree with the consensus for the unemployment rate to remain at 3.40%.

Canada

• Manufacturing Sales (Wednesday, 13:30 GMT +1:00): Canada has a strong economy that is heavily reliant on manufacturing and exporting. PMIs remain above 50, suggesting the sector remains in expansion.

New Zealand

• GDP (Wednesday, 13:30 GMT +1:00): The RBNZ forecasted the economy to grow at 1.8% through the second quarter, faster than the market currently is expecting (+1.00% QoQ).

Norway

• Region Survey (Tuesday, 09:00 GMT +1:00): The data inside the report will likely reflect the poor mainland GDP data, thus settling Norges Bank to 50bps.

Sweden

• CPIF (Wednesday, 07:00 GMT +1:00): CPIF (an adjusted CPI measure preferred by Riksbank) increasing at this rate should help all but deliver a faster pace of hikes from the central bank.

Links to BOJ Rinban , BOE OMO

China/Japan

Key data releases this week include China’s credit, retail sales and industrial production.

COVID-19 Monitoring

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.

Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank.

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.)