- U.S. August retail sales data will be the data highlight; weekly jobless claims will also be reported; regional Fed manufacturing surveys for September will continue rolling out; minutes from the Chilean central bank’s latest meeting were unambiguously hawkish
- ECB Chief Economist Lane said markets should look beyond the size of its asset purchases in assessing the bank’s monetary policy stance; U.K. Prime Minister Johnson announced a cabinet shuffle; as if the U.K. doesn’t have enough uncertainty to reckon with, it appears that a fire has knocked out a cable that supplies electricity from France
- Japan reported softer August trade data; Australia reported weak August jobs data; New Zealand reported strong Q2 GDP data; we have reached another chapter in China’s Evergrande saga as one of its onshore units halted trading in all its bonds
The dollar is gaining traction ahead of retail sales data. DXY is trading firmer near 92.80 after two straight down days. A break above 93.048 is needed to set up a test of the August 20 high near 93.729. The euro broke support near $1.18 and is trading at the lowest level since August 27 near $1.1765. A clean break below $1.1760 is needed set up a test of the August 20 low near $1.1665. Sterling continues to find support near $1.38, while USD/JPY is stabilizing near 109.35 after trading at the lowest level since August 17 yesterday. We remain positive on the dollar but acknowledge that a sustained rally will depend largely on the economic data in the coming days and weeks.
U.S. August retail sales data will be the data highlight. Did consumption hold up as job growth slowed last month? Headline sales are expected to fall -0.7% m/m vs. -1.1% in July, while ex-autos are expected flat m/m vs. -0.4% in July. The so-called control group used for GDP calculations is also expected flat vs. -1.0% in July. It’s worth noting that despite the drop in July, sales remain well-above pre-pandemic levels. Furthermore, after retail sales weakened in July, there was speculation (later borne out by personal spending data) that consumers were shifting from goods to services. Still, with enhanced unemployment benefits ending this month, there are some potential consumer headwinds ahead. That’s why it’s so important for job creation to continue.
Weekly jobless claims will also be reported today. Initial claims are expected at 323k vs. 310k last week and continuing claims are expected at 2.74 mln vs. 2.783 mln previously. Last week’s reading for both series were new pandemic lows. Next week’s initial claims data will be very important as it will be for the BLS survey week containing the 12th of the month. Continuing claims are reported with a one-week lag. July business inventories and TIC data will also be reported today. There are no Fed speakers this week due to the media embargo for next week’s FOMC meeting.
University of Michigan consumer confidence ties into this question about consumption. Preliminary September reading will be reported tomorrow and is expected at 72.0 vs. 70.3 in August. That August reading was the lowest since April 2020 and so some recovery would be welcome. Confidence is clearly suffering from the spread of the delta variant, but also from rising inflation and uncertainty about the economic outlook.
Regional Fed manufacturing surveys for September will continue rolling out. Philly Fed is expected at 19.0 vs. 19.4 in August. Yesterday, Empire survey came in at 34.3 vs. 17.9 expected and 18.3 in August. That was the first reading for September and it's a good one as it suggests upside risks to the Philly Fed. August IP was also be reported yesterday and rose 0.4% m/m vs. 0.5% expected and a revised 0.8% (was 0.9%) in July. Some moderation is to be expected but we see underlying strength continuing in the U.S. manufacturing sector.
Canada August CPI is worth discussing. Headline came in at 4.1% y/y vs. 3.9% expected and 3.7% in July, while common core came in at the expected 1.8% y/y, up a tick from July. For now, the BOC views this spike in inflation as transitory. It also sees the Q2 GDP contraction as an outlier and looks for an H2 pickup. When all is said and done, the BOC is likely to taper again in late 2021 or early 2022 and it is sticking to forward guidance suggesting lift-off in H2 2022.
The minutes from the Chilean central bank’s latest meeting were unambiguously hawkish. This led to CLP outperformance and a flattening of the local swap curve. We were unsure whether the 75 bp hawkish surprise hike at the last meeting was a one-off acceleration or the start of a front-loaded tightening cycle. Now it seems clear that it’s the latter as the bank tries to get ahead of accelerating inflation due in large part to the impact of the potential fourth round of pension fund withdrawals.. The bank said the policy rate should be raised until it is near a neutral stance by the middle of H1 2022, adding that “Considering the frequency of the monetary policy meetings under the rules in place since 2018, this translated into the MPR needing to be raised by between 50 and 75 bp over several meetings.” Next policy meeting is October 13 and another 75 bp hike seems likely. We assume rates will top 4.0% by the middle of next year from the current level of 1.50%, en route to become a high-yielding currency.
ECB Chief Economist Lane said markets should look beyond the size of its asset purchases in assessing the bank’s monetary policy stance. Asked whether the subdued medium-term inflation outlook shouldn’t warrant an increase rather than a withdrawal of stimulus, Lane said “it’s not a good idea to identify the monetary policy stance with the volume of asset purchases. The efficient approach is to emphasize persistence. We’re happy that our monetary accommodation is strengthening the underlying inflation dynamic and over time -- this will continue to build. We have a coherent policy setting.”
If persistence is the watchword, then the ECB should take pains to extend its asset purchases beyond March, when PEPP is set to expire. Lagarde has already hinted that PEPP could somehow be folded into its long-standing AP and extended beyond March. She too pushed back against the notion that the ECB tapered last week when it decided on a “moderately lower” pace of asset purchases under PEPP. Madame Lagarde also said that PEPP’s fate would be discussed at the December 9 meeting, effectively rendering the October 28 meeting a non-event.
U.K. Prime Minister Johnson announced a cabinet shuffle. The highest profile move was Foreign Secretary Raab, who was replaced by Trade Secretary Truss. Raab was made Justice Secretary, a clear demotion that was perhaps softened a bit by adding Deputy Prime Minister to Raab’s portfolio. The Education and Housing Secretaries were also sacked along with Justice. The shuffle smacks of panic, as recent polls are showing a sharp drop in Johnson's popularity. Most importantly, however, Chancellor Sunak keeps his job and so plans to hike payroll taxes will continue to weigh on Johnson’s popularity.
As if the U.K. doesn’t have enough uncertainty to reckon with, it appears that a fire has knocked out a cable that supplies electricity from France. With very little spare capacity, experts warn that any sort of outage could leave millions without power in the U.K. Of note, about 7.5% of U.K. demand has been met by France. The fire at a U.K. converter station will require half of that cable’s supply to be cut off until the end of Q1 2022, with the other half scheduled to come back online September 25. Blackouts coupled with surging energy prices would be a very tough double whammy for the U.K economy and is yet another risk that policymakers must take into account.
Japan reported softer August trade data. Exports rose 26.2% y/y vs. 34.1% expected and 37.0% in July, while imports rose 44.7% y/y vs. 40.0% expected and 28.5% in July. As a result, the adjusted trade balance registered a rare deficit of -JPY271.8 bln, while July was revised to -JPY5.9 bln vs. a surplus of JPY52.7 bln previously. Regional trade is likely to continue slowing along with the mainland China economy, which has been a key driver of growth in its trading partners. As a result, the BOJ is likely to be unhappy with recent yen strength and so is likely to continue with its accommodative polices for the foreseeable future. The domestic economy is holding up better than expected in Q3 so far, but the longer the lockdowns continue, the greater the downside risks as we move into Q4.
Indeed, the Cabinet Office just cut its monthly economic assessment. This was the first downgrade in four months and comes as the government just extended the state of emergency through the end of September. The Cabinet Office said the economy as continues to improve from an extremely low base, but acknowledged that the pace of recovery has weakened. It noted that consumption is showing further weakness and also viewed the recovery in production as fragile. However, it upgraded its outlook on home construction.
Australia reported weak August jobs data. Employment fell -146.3k vs. -80.0k expected and a revised 3.1k (was 2.2k) gain in July. The details were not good, as full-time jobs fell -68.0k and part-time jobs fell -78.2k. The unemployment rate actually fell a tick to 4.5% vs. 5.0% expected, moving closer to the 4% level where the RBA sees wage pressures picking up. That said, this was due largely to the participation rate falling to 65.2% from 66.0% in July and so there are unlikely to be wage pressures just yet.
Last week, the RBA commenced tapering. The new weekly QE pace of AUD4 bln will be maintained until at least mid-February rather than mid-November, as the bank said the extension was needed due to a delay in the economic recovery and increased uncertainty stemming from the most recent outbreak. The weak jobs data bears out this cautious stance, though the RBA has said in the past that the recovery from lockdowns is typically pretty quick. Much will of course depend on how the virus numbers look going forward but we suspect the RBA will continue the tapering process in a measured manner. With regards to lift-off, the RBA maintains forward guidance for 2024. Governor Lowe just this week pushed back against market expectations for 2022 or 2023 lift-off.
New Zealand reported strong Q2 GDP data. Growth came in at 2.8% q/q vs. 1.1% expected and a revised 1.4% (was 1.6%) in Q1. This means the economy had much greater momentum than was known as the nation went into lockdowns in Q3, and should give the RBNZ greater confidence to hike rates. After the RBNZ delivered a dovish surprise hold August 18, Assistant Governor Hawkesby later said a 50 bp hike was discussed and that the surprise decision to stand pat was due to fear of bad optics rather than economic risks. WIRP suggests a 25 bp hike is fully priced in for the October 6 meeting, with solid odds of a potential 50 bp move. After that, a 25 bp hike is fully priced in for the November 24 and February 23 meetings. No wonder NZD continues to outperform AUD, with the AUD/NZD trading at new lows for this move near 1.0290 and on track to test the March 2020 low just below 1.0.
We have reached another chapter in China’s Evergrande saga as one of its onshore units halted trading in all its bonds. The reason was a downgrade from local rating agency China Chengxin International Credit Rating, cutting it from AA to A and placing it on watch for further downgrades. Trading should resume tomorrow. As Bloomberg points out, the events surrounding Evergrande are leading to contagion across several of the country’s assets, especially property developers.