- ADP private sector jobs data will be the highlight; higher US rates are helping the dollar; reports suggest the Democrats are moving closer to a deal on fiscal stimulus; Colombia September CPI came in a tad above expectations at 4.51% y/y
- Eurozone data came in very weak; reports suggest Prime Minister Johnson will accept a hike in the minimum wage; Poland is expected to keep rates steady at 0.10%; SARB is undergoing a gradual hawkish shift
- RBNZ started the tightening cycle with a 25 bp hike to 0.5%, as expected; Australia is tightening mortgage lending standards; Korea September CPI came in slightly above expectations at 2.5% y/y; the situation in energy markets remains tense, especially in Europe
The dollar is finally getting some traction. DXY is up for the second straight day after three straight down days and trading just below last week’s high near 94.50. A break above that sets up a test of the September 2020 high near 94.742. The euro remains heavy and is trading at the lowest level since July 2020 near $1.1530 and is on track to test the lows from June and July 2020 just below $1.12. Sterling is holding up better but is trading back below $1.36. We look for a test soon of last week’s low near $1.3410 as the negatives continue to pile up. Lastly, USD/JPY traded near 111.80 and is on track to test last week’s high near 112.10. After that is the February 2020 high near 112.25 and then the April 2019 high near 112.40. We believe the drivers that favored the dollar in Q3 will remain in play for Q4.
ADP private sector jobs data will be the highlight. Consensus sees 430k vs. 374k in August. Yesterday, ISM services PMI came in at 61.9 vs. 59.9 expected and 61.7 in August. Most importantly, the employment component came in at 53.0 vs. 53.7 in August and was the 7th straight month above 60, which is really unheard of in normal times. Last week, the manufacturing PMI employment component rose to 50.2 from 49.0 in August. Obviously, all eyes are on the September jobs data Friday. Consensus sees NFP up 488k vs. 235k in August, with the unemployment rate is expected to fall a tick to 5.1%.
Higher US rates are helping the dollar. The 2-year yield traded today above 0.29% and is approaching last week's high near 0.32%, while the 10-year yield traded near 1.57%, which was last week's high. Of note, average hourly earnings are expected to rise 4.6% y/y vs. 4.3% in August. Wage pressures have been picking up and this increases the risks that the current spike in inflation is more than transitory. We continue to believe that the bar to tapering is quite low and that an NFP number at or above August’s 235k will be enough for the Fed to pull the trigger at the November 2-3 FOMC meeting.
Reports suggest the Democrats are moving closer to a deal on fiscal stimulus. With themselves. Leaders of the progressive wing suggest a price tag for the “human infrastructure” bill of between $2.5-2.8 trln, while President Biden has proposed something between $1.9-2.2 trln. While this is above the $1.5 trln that Senator Manchin has proposed, we doubt the White House would have made a larger offer without some assurances from Manchin and the other moderates. So the two sides are not very far apart, it seems, and some accounting gimmicks could get a deal done soon.
Our base case has always been one of compromise. Our best guess remains that the Democrats agree on a figure somewhere in the neighborhood of $2.5 trln and wrap it together with a debt ceiling increase that can be passed without any Republican support via budget reconciliation before the October 18 drop-dead date. Once that is passed, then the infrastructure bill will be passed with bipartisan support before the end of the month.
Colombia September CPI came in a tad above expectations at 4.51% y/y, increasing the risk of more expressive rate hikes in the next meetings. The accelerating price pressure was led mostly by headline items – food and energy – bringing CPI well above the upper end of the bank’s 2-4% target range, though core inflation eased slightly to 3.03% y/y for 3.11% in August. Still, the hawks showed themselves at the last meeting, with three of the seven MPC member voting for a 50 bp hike that was greater than the 25 bp delivered. Their case just got stronger and we see a high chance they will win the day in the next meeting October 29.
Eurozone data came in very weak. August retail sales were expected to rise 0.8% m/m but instead rose only 0.3%. Also, July was revised down to -2.6% vs. -2.3% previously. Elsewhere, Germany reported very weak August factory orders. Orders were expected to fall -2.2% m/m but instead plunged -7.7%. However, July was revised up to 4.9% m/m vs. 3.4% previously. ECB policymakers must be aware that rising inflation is coming at a time of a weakening real sector. While the hawks are making a lot of noise, we believe caution will prevail and that the ECB maintains its accommodative stance through at least next year. ECB’s Centeno speaks today.
Reports suggest Prime Minister Johnson will accept a hike in the minimum wage as part of his vision to remake the U.K. economy. This continues recent Tory efforts to co-opt some key planks of the Labour platform. Johnson has been hinting that a wage boost for the lowest earners could eventually be seen. A government commission is reportedly set to recommend a 5.7% increase in the minimum wage and Johnson has said he’ll accept whatever is recommended. A boost in wages for the lowest earners typically gives the biggest bang for the buck as their marginal propensity to consume is much higher than it is for the highest earners. With the BOE strongly hinting that it will soon start to take away the punch bowl, we suspect the government is looking for ways to keep the party going. Stay tuned.
National Bank of Poland is expected to keep rates steady at 0.10%. While the market is positioned for another dovish hold today, we warn of a hawkish tilt as risks pile up. Last week, September headline inflation came in at 5.8% y/y vs. 5.5% expected and actual in August. This was the highest since June 2001 and further above the 1.5-3.5% target range. Minutes to the September 8 meeting will be released Friday and are expected to be very dovish. Some bank officials have pointed to the November meeting as key for policy, as new macro forecasts will be released then. It may behoove them to start edging away from its ultra-dovish stance today.
The South Africa Reserve Bank is undergoing a gradual hawkish shift, despite the chronic economic weaknesses. The banks’ bi-annual policy review released yesterday confirmed the renewed focus on inflation, which id almost entirely coming from the energy and commodity side. However, officials also mentioned the closing output gap and the need to avoid having to play “catch-up with inflation.” This suggest a higher likelihood of a hike at the November 18 meeting. The SARB’s model flagged a Q4 hike but not many believed them. Until now, that is. Indeed, breakeven rates have been rising sharply, implying a greater risk that inflation could become unanchored.
Reserve Bank of New Zealand started the tightening cycle with a 25 bp hike to 0.5%, as expected. It stated that “The current Covid-19 restrictions have not materially changed the medium-term outlook for inflation and employment.” Looking ahead, “The committee noted that further removal of monetary policy stimulus is expected over time.” WIRP suggests subsequent 25 bp hikes are almost fully priced in for the November 24 and February 23 meetings. Of note, the bank’s expected rate path was just updated at the last meeting August 18 to show the average OCR rising to 0.6% by end-2021, 1.6% by end-2022, 2.0% by end-2023, and 2.1% by Q3 2024, the end of the forecast period. The path will be updated again at the November 24 meeting and should give markets a better idea of how the tightening cycle is likely to unfold.
Australia is tightening mortgage lending standards. After the RBA delivered another dovish hold this week, the Australian Prudential Regulation Authority tightened lending standards for mortgages. The banking regulator cited growing risks to financial stability from a booming housing market as it told lenders to assess any new borrower’s ability to meet loan repayments at an interest rate that is at least 3 percentage points above the loan product rate, up from the 2.5 percentage points used now by banks. The RBA has long insisted that it would rely on macro-prudential measures to cool the housing market rather than the rather blunt tool of rate hikes. At this week’s meeting, the RBA affirmed its commitment to keep rates steady until at least 2024 and we think today’s regulatory move is meant to underscore that.
Korea’s September CPI came in slightly above expectations at 2.5% y/y, reinforcing the view that the bank will remain on a tightening path. The inflation target is 2.0%, and core is running at 1.9%. The increase in headline was driven largely by transport costs and some household goods, and services to a lesser extent. This means that the BOK will continue to pull ahead of most Asian central banks with another hike at its November meeting, though rates will remain well below that of most other EM Asia central banks.
The situation in energy markets remains tense, especially in Europe. The Dutch front-month futures contract trade to a record high of €130 a megawatt/hour. The drivers are well known, and there doesn’t seem to be any incremental new news. Supply tightening seems to be the primary driver here, possibly aggravated by Russian geopolitical flexing to apply pressure on the Nordstream process. On the demand side, the recovery continues, and much will depend on how cold of a winter Europe will get.