- All eyes are on Fed Chair Powell’s opening remarks at Jackson Hole; Bullard gave us some insight into the Fed’s current dilemma; July CFNAI and weekly jobless claims are worth discussing; Brazil reports mid-August IPCA inflation
- Germany reported weak August IFO business climate survey; ECB officials are split; U.K. August GfK consumer confidence was reported
- Japan reported soft August Tokyo CPI; China announced more measures to support the property sector
The dollar continues to gain ahead of Powell. DXY traded at a new high for this move today near 104.309 and is on track to test the May 31 high near 104.699. Break above sets up a test of the March high near 105.883. The euro traded at a new low for this move today near $1.0765 and is on track to test the May low near $1.0635. Break below sets up a test of the March low near $1.0515. Sterling traded at a new low for this move today near $1.2560 and is on track to test the May low near $1.2310. Break below sets up a test of the March low near $1.1805. USD/JPY is trading higher near 146 as the new 145-150 trading range holds. We look for further upside in this pair. The relative fundamental story continues to move in favor of the greenback. Today’s speech by Powell should confirm the Fed’s hawkish stance, which will be dollar-positive.
All eyes are on Fed Chair Powell’s opening remarks at Jackson Hole. He is scheduled to begin at 805 MT/1005 ET and will be streamed on the Kansas City Fed’s YouTube channel here. Anyone looking for short-term policy implications are likely to be disappointed. From the Symposium’s press release: “Papers will share how these developments are likely to affect the context for growth and monetary policy in the coming decade.” Thus, while we do not expect Powell to tip the Fed’s hand regarding Fed policy, he should make it clear that the Fed remains committed to meeting its inflation target over the medium and long term. Please see our preview here and the full Symposium agenda here.
Bullard gave us some insight into the Fed’s current dilemma. He warned that “This reacceleration could put upward pressure on inflation, stem the disinflation that we’re seeing and instead delay plans for the Fed to change policy,” adding that if inflation picks up, “that would suggest a higher rate profile for the Fed than otherwise.” Usually, the opinion of an ex-Fed official isn't worth a whole lot but Bullard literally just stepped down and so he is privy to all the ongoing Fed debates. After September, Bullard's view may start to get stale but we think he is spot on now and right in the thick of the Fed debate.
As we’ve noted, the divide between the Fed hawks and doves remains wide. We consider Collins a centrist but her latest comments lean hawkish as she said that the Fed has “more work to do” and that it must remain patient and resolute. She added that the may need “additional increments” of tightening but may be near the hold point. Most importantly, Collins said it’s “not helpful” to map out a preset path on rates and that the Fed won’t signal at this point exactly where the peak rate is. She stressed that the Fed would have restrictive rates for some time. This is the proper message for the Fed to send right now, in our view. Markets have taken note, as WIRP suggests over 20% odds of a hike in September that rise to nearly 60% in November, both highs for this cycle.
On the other hand, Harker crystallizes the dovish view. He feels the Fed has “done enough” in terms of tightening and sees steady rates through year-end. Harker added that if inflation comes down quicker, the Fed may cut rates sooner. This is way too dovish. The doves seems to be putting more and more faith in a soft landing but even if one is achieved, we think it's very dangerous to be thinking about rate cuts. The doves shouldn't even be thinking about thinking about cutting rates. It’s worth noting that market pricing for an easing cycle has been pushed out into May from March previously.
July Chicago Fed National Activity Index is worth discussing. The headline reading came in at +0.12 vs. -0.22 expected and a revised -0.33 (was -0.32) in June. Recall that a positive headline reading means the US economy is growing above trend, which speaks to its ongoing resilience. The 3-month moving average came in at -0.13 vs. -0.27 expected and a revised -0.15 (was -0.16) in June, the best since March. Also recall that the recession signal comes when the 3-month moving average hits -0.7 and we are far from that. This series has taken on greater significance given that the 3-month to 10-year curve remains deeply inverted. The continued resilience in the economy is noteworthy and suggests the Fed still has more work to do in getting to the desired sub-trend growth. Indeed, the Atlanta Fed’s GDPNow model is now tracking Q3 growth at 5.9 % SAAR vs. 5.8% previously. Next model update comes next Thursday.
Regional Fed August surveys continue to roll out. Kansas City Fed manufacturing index was reported yesterday at 0 vs. -10 expected and -11 in July. Its services index will be reported today. Final University of Michigan consumer sentiment will also be reported today.
Weekly jobless claims are worth discussing. Initial claims came in at 230k vs. 240k expected and a revised 240k (was 239k) last week. The 4-week moving average rose to 237k vs. 235k last week. Continuing claims are reported with a one week lag and this week’s data was for the BLS survey week containing the 12th of the month. These came in at 1.702 mln vs. 1.705 mln expected and a revised 1.711 mln (was 1.716 mln) last week. Bloomberg consensus for August NFP is now 168k vs. 187k in July, while the Bloomberg whisper number is 170k.
Brazil reports mid-August IPCA inflation. Headline inflation is expected at 4.12% y/y vs. 3.19% in mid-July. If so, it would be the highest since mid-April but still within the 1.75-4.75% target range. The jump is due in large part to low base effects and while this will persist next month, the central bank is likely to continue cutting rates in 50 bp clips as signaled previously. Next COPOM meeting is September 20 and another 50 bp cut to 12.75% is expected. The swaps market is pricing in 125 bp of total tightening over the next three months followed by another 125 bp of tightening over the subsequent three months. July current account and FDI data will also be reported.
Germany reported weak August IFO business climate. Headline IFO came in at 85.7 vs. 86.8 expected and a revised 87.4 (was 87.3) in July, driven by a drop in current assessment to 89.0 vs. 90.0 expected and a drop in expectations to 82.6 vs. 83.6 expected. The headline is the lowest since October. IFO official warned “The current numbers of our surveys point to the fact that there might be a slight negative growth in the third and over the fourth quarter. But we do not expect a deep recession as many are forecasting or talking about.” Of note, final Q2 GDP data were reported today, with growth unchanged from the preliminary at 0.0% q/q.
European Central Bank officials are split. Centeno said “We have to be cautious this time around because downside risks that we identified in June in our forecast have materialized. This is an inversion of what happened throughout the pandemic recovery because usually we have been surprised on the upside.” On the other hand, Nagel said “It’s for me much too early to think about a pause. We shouldn’t forget inflation is still around 5%. So this is much too high. Our target is 2%. So there’s some way to go.” Finally, Vujcic said “We are now certainly in the restrictive territory. Whether we are in a restrictive-enough territory remains to be seen. And this is something that you will only see from the inflation data that will come in the next prints.”
European Central Bank tightening expectations remain subdued. WIRP suggest odds of a 25 bp hike stand near 35% September 14, rise to 55% October 26 and top out near 65% December 14. These odds will rise and fall with the data but Madame Lagarde clearly accentuated the negative at the July ECB meeting and that’s what markets should focus on. What’s very interesting to us is that the ECB may stop hiking before the Fed does and we don't think the markets have priced this risk in yet. Lagarde speaks Saturday at Jackson Hole.
U.K. August GfK consumer confidence was reported. It was delayed from last week and came in at -25 vs. -29 expected and -30 in July. Bank of England tightening expectations have ebbed. WIRP suggests less than 10% odds of a 50 bp hike September 21, while a 25 bp hike November 2 is largely priced in. the odds of only last 25 bp hike top out near 50% in February. Broadbent speaks Saturday at Jackson Hole.
Japan reported soft August Tokyo CPI. Headline came in a tick lower than expected at 2.9% y/y vs. 3.2% in July, core (ex-fresh food) came in a tick lower than expected at 2.8% y/y vs. 3.0% in July, and core ex-energy remained steady as expected at 4.0% y/y. Tokyo core was the lowest since September 2020 and bodes well for the national CPI data. However, we note that some energy subsidies expire in September and are likely to be extended by the Kishida government. July department store sales were reported at 8.6% y/y vs. 7.0% in June and continues the recent string of strong data.
Bank of Japan expectations remain muted. National core inflation of 3.1% y/y is the lowest since March and should fall further in August. This would support the Bank of Japan’s wait-and-see stance as the most recent forecasts show it falling back below the 2% target in both FY24 and FY25. Next policy meeting is September 21-22 and no change is expected then.
China announced more measures to support the property sector. Reports suggest local governments can end the rule that disqualifies people who’ve taken out mortgages and repaid them from being considered a first-time homebuyer in major cities. In addition, the government will reportedly extend the personal income tax rebate for those buying new homes within one year after selling old homes through the end of 2025. Once again, policymakers are pushing on a string in their efforts to prop up the bloated and overextended property sector. Markets were not impressed, as China equities posted another losing day.