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This Week
Bilal discusses the potential for additional steepening in the US 2s10s real yield curve; Dominique covers the resilient US growth picture and implications for the Fed; John asks whether equities are range trading or entering a slide;
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This Week
Bilal discusses the potential for additional steepening in the US 2s10s real yield curve; Dominique covers the resilient US growth picture and implications for the Fed; John asks whether equities are range trading or entering a slide; Caroline expects a Polish CPI decline to confirm September rate cuts; Henry argues the August inflation outturn’s detail will be more important than the headlines for the ECB’s next policy decision; Ben thinks this week’s data will strengthen the case for long NOK/SEK; Viresh discusses Marathon Petroleum’s refinery shutdowns and the impact on oil.
Bilal Hafeez – Global Macro
The rise in US yields since mid-July has mainly been driven by higher US real yields and, more specifically, a steepening of the 2s10s real yield curve. This move has prompted more discussion on whether the neutral rate of the US economy has risen – if it has, longer-term real yields should be higher. More likely, this steepening is driven by near-term growth news.
As for the trade, despite recent 2s10s real yield curve steepening, it is still heavily inverted (Chart 1). This suggests there could be further steepening to come – at least from a medium-term perspective.
Dominique Dwor-Frecaut – US Macro
Resilient GDP growth has surprised FOMC members. The Atlanta Fed nowcast for Q3 is nearly 6% saar – three times the trend (Chart 2)! This could explain why Powell feels less confident the policy stance is strongly restrictive.
Stronger growth threatens the rebalancing of labour demand and supply and therefore wage moderation. At Jackson Hole, Powell said ‘evidence that the tightness in the labour market is no longer easing could also call for a monetary policy response.’ This comment likely reflects the stabilisation of the Atlanta Fed’s median wage YoY growth and the recent acceleration in MoM wage growth (Chart 3).
While not my base case, continued wage acceleration could see the Fed lift its terminal rate forecast, starting with an additional FFR hike in December 2023. For now, I expect one more 2023 hike in November and three hikes in 2024, starting around mid-year.
John Tierney – US Equities
Are equities settling into a trading range now, or is the slide set to resume? It depends on the data. Powell offered a modestly hawkish view on rates – but also implied that the Fed is still hoping to tame inflation without a hard landing. That spells dovish to us.
Fiscal spending should keep the economy chugging along, although softer discretionary consumer spending is a downside risk. We would see equities continuing to slide as an evolving buy-the-dip opportunity.
About 33 companies report this week, including electronics retail bellwether Best Buy, which may provide clues on whether the drought in consumer demand for tech products is near a bottom. But the big draw this week is economic data on consumption, housing prices, and the all-important monthly labour market report.
We continue to see some risk that the longer end of the yield curve rises further. We like to be tactically underweight in the interest-sensitive homebuilder sector, via the XHB ETF.
Caroline Grady – Emerging Markets
Thursday’s flash CPI print and detailed Q2 GDP will be the last important data point before the 13 September NBP meeting. We see downside risks to the 10% consensus CPI forecast with lower local petrol prices in recent weeks. On the growth data, we expect domestic demand to be the weakness spot in the deep -3.7% QoQ contraction.
Recent weakness in IP and retail sales data suggests any near-term turnaround in growth is unlikely. And with inflation likely back in single digits, if only just, and inflation expectations continuing to decline, this should give the NBP the needed ammunition to being its easing cycle on 13 September.
We do not expect rate cuts to trigger any PLN weakness. Declining rate differentials have not stood in the way of PLN strength YTD. And with a PO-led coalition broadly expected to win the 15 October election, our bias is for near-term PLN strength.
Henry Occleston – Eurozone & UK Macro
This week’s flash inflation outturn (31 August) will be a strong input into the ECB’s decision to hike or not at the September meeting. Expectations are fairly split between +5.2%, +5.3% and +5.4% for YoY core inflation (highest ranking forecasts skewed to the upside). Those outturns would, respectively, represent a MoM reading of +0.25%, +0.35%, and +0.45% (Chart 5).
In my view, the first (+5.2%; +0.25%) would represent a dovish outturn, the middle (+5.3%; +0.35%) would be balanced, and the third would be hawkish (+5.4%; +0.45%). But the detail will be important regardless, as one-off aggregate readings alone will not decide whether the ECB hike or pause.
Given the large beat in July (when generally stronger repricing is seen), our current lean is that August core inflation will exhibit a smaller beat versus typical August MoM inflation than July did. That makes +5.2-5.3% YoY quite possible. However, September is likely to see more repricing, hence a higher chance of another strong beat then. The ECB will know this and should take whatever read we get in that context.
Unemployment data will also be important on the same day, as will ECB policymaker comments thereafter.
Ben Ford – $-Bloc & Scandies
This week will present several reasons why the case remains positive for NOK/SEK, with Norway FX intervention and unemployment data out alongside Sweden survey data.
On the Norwegian side, we have argued for a while that Norges Bank’s daily FX intervention will hurt the bearish NOK argument. And that has proven true. Now, our tax-based model is forecasting a decline in sales below NOK 1bn a day. Meanwhile, the Norwegian labour market is expected to remain tight with an unemployment rate below forecast. This should further boost potential Norges Bank hawkishness, supporting the currency.
Crossing the border, the Swedish slowdown is happening, but perhaps slower than expected. This week, we focus sharply on the Economic Tendency Survey. The survey had stalled through the second quarter, and its move to year lows in July was welcome for those bearish on SEK. We think it could continue to fall, indicating further economic depression incoming.
Viresh Kanabar – Commodities
Friday afternoon saw US crack spreads for RBOB and low-sulphur diesel spike higher as Marathon Petroleum’s 596,000 b/d Garyville, Louisiana, refinery shut down units following a massive naphtha tank fire.
We are watching this situation closely, as inventory levels for both diesel and gasoline remain below their five-year lows. With diesel stocks currently flashing ‘red’, any disruption will result in higher prices. Latest indications this morning suggest that Marathon is preparing to restart units, which has reversed most of Friday’s rise.
Diesel prices remain important to watch given the commodity is an input into farming. So higher diesel will likely impact food prices, which could have a knock-on impact on food services.