- All eyes are on the Kansas City Fed’s Jackson Hole Symposium; some are looking for Powell to make an explicit tapering announcement this morning; yesterday, three FOMC hawks laid out the case for tapering sooner rather than later; July personal spending, income, and core PCE data will be the highlight; weekly jobless claims data are worth discussing
- The account of the July 21-22 ECB meeting showed an intense debate about its new strategy; ECB is widely expected to discuss changes to its asset purchases at the next meeting September 9
- August Tokyo CPI was mixed; Australia reported weak July retail sales
Measures of cross market implied volatility are mixed ahead of Powell’s Jackson Hole speech today. U.S. interest rate implied volatility has been trending higher in recent sessions with the MOVE index near at 63, well above the 1-year average but still far lower than the highs for the year (over 70). On the other hand, equivalent measure for the U.S. equity markets and G7 FX remain depressed. The VIX is still sub-18% (vs. 1-year average of 23%) and the G7 FX 3-month implied vol index is at 6% (compared to a 1-year average of 7%). We see room for a big shake-up today if Powell brings the fireworks.
The dollar is holding steady ahead of Powell’s speech. DXY is stabilizing just above 93 after findings support near 92.80 for three straight days. The euro has run into stiff resistance just below $1.18, while sterling is trading heavy near $1.37 after having trouble trading much above $1.3750. USD/JPY continues to trade just above 110 and a clean break of 110.15 would set up a test of the August 12 high near 110.80. We remain positive on the dollar and believe that a hawkish tone from Powell this morning could bring on the next leg of the rally.
All eyes are on the Kansas City Fed’s Jackson Hole Symposium. The agenda has been released and can be found here. Fed Chair Powell will give his opening remarks at 9 AM CT/10 AM ET. Please see our preview here. We believe the market was positioned for a dovish Jackson Hole and that's not happening. The Fed really needs to keep the tapering timeline going and so we expect more hawkish talk to emerge from Jackson Hole. The 10-year yield got as high as 1.37% yesterday before easing back to 1.35%. Elsewhere, the U.S. 7-year auction yesterday saw strong demand. Indirect bidders took 61.1% of the $62 bln offered vs. 58.4% previously, while the bid-to-cover ratio was 2.34 vs. 2.23 previously. This caps off a week of heavy issuance in which demand was also strong for 2-and 5-year paper.
Some are looking for Powell to make an explicit tapering announcement this morning. While it is certainly possible, we think the September 21-22 FOMC meeting is a more likely venue. New macro forecasts will be released then. More importantly, the Fed will have gotten another jobs report on September 3 that will hopefully be strong enough to trigger tapering. It’s clear that once tapering starts, the Fed wants to get it over quickly, perhaps in the span of six months rather than twelve. As such, our current call is for an explicit tapering announcement at the September FOMC, tapering of $20 bln in USTs and $10 bln in MBS at each meeting starting November 3, and completion by March 2022. If the economy continues to develop as the Fed expects, then this would allow for a waiting period of 6-9 months before rate lift-off in Q4 2022.
Yesterday, three FOMC hawks laid out the case for tapering sooner rather than later. Bullard played down the risk that the delta variant should delay tapering. He added that the Fed should “get going” and finish in Q1 2022, noting that the economy is booming and doesn’t need much stimulus. Lastly, he added that financial stability concerns argue for tapering. Kaplan said that “It would continue to be my view that when we get to the September meeting, we’d be well served to announce a plan for adjusting purchases and begin to execute that plan in October or shortly thereafter.” Lastly, George said it’s time to begin adjusting accommodation and that the Fed should start tapering this year. She said “I think it’s important to get started and the conditions of pace, timing of when we end, I’m open minded to listening to the debates around that. But I am less interested in deferring that decision.”
We think much of the FOMC is coalescing around this view. The Fed has clearly been taken off guard by how high and also how quickly inflation has gotten. While most officials see progress towards full employment, they probably had hoped that unemployment would be closer to 4% when they started tapering. However, inflation is running way too hot now and we think the Fed will do the right thing and take the foot off the accelerator in September. By our unofficial count, we have 10 Fed officials calling for tapering soon, or what the minutes show as "most."
July personal spending, income, and core PCE data will be the highlight. Retail sales for the month came in much weaker than expected, but some believe that this reflects a switch towards services consumption. If so, this would be picked up in the personal spending data. Consensus sees a 0.4% m/m gain vs. 1.0% in June, while personal income growth is seen picking up two ticks to 0.3% m/m. Core PCE is expected to pick up a tick to 3.6% y/y. If so, this would be the highest since May 1991. Advance goods trade (-$90.9 bln expected), wholesale and retail inventories, and final University of Michigan consumer sentiment (70.8 expected)will also be reported.
Weekly jobless claims data are worth discussing. That is because the continuing claims data were for the BLS survey week containing the 12th of the month, and they rose to 2.862 mln SA from a revised 2.865 mln (was 2.82 mln) the previous week. While the weekly miss is disappointing, we note that continuing claims were still down -434k (-510k not SA) for the August survey week compared to the July survey week. The weekly upside miss doesn't really capture the fact that claims have still been trending down in recent weeks. Current consensus for NFP is 787k vs. 943k in July but there are a lot more clues to come next week.
The account of the July 21-22 ECB meeting showed an intense debate about its new strategy. Policymakers agreed on new forward guidance at that meeting, pledging an even longer period of steady or lower interest rates and requiring an even more pronounced rise in inflation before raising rates. However, that only came after the ECB rewrote the guidance twice to reach a compromise after a number of objections were raised. The account showed that "A large majority of members indicated that they could support the revised forward guidance proposal. At the same time, a few members upheld their reservations, as the amended formulation did not sufficiently address their concerns." In the end, the German and Belgian central bank chiefs opposed the wording, which stipulates that rates would not be raised until inflation reaches 2% "well ahead" of its forecast horizon and becomes likely to stay there on a sustained basis.
The ECB is widely expected to discuss changes to its asset purchases at the next meeting September 9. PEPP is scheduled to end next March but Madame Lagarde has hinted that it could be folded into the existing APP and continue beyond March. However, the account of the July meeting shows much disagreement remains amongst policymakers and so a consensus seems unlikely until the December 16 meeting. Of note, July eurozone M3 was reported yesterday and rose 7.6% y/y as expected vs. 8.3% in June. This was the slowest rate since March 2020 and is extremely disappointing in light of ongoing ECB asset purchases.
August Tokyo CPI was mixed. Headline came in at -0.4% y/y vs. -0.3% and a revised -0.4^(was -0.1%) in July, while core (ex-fresh food) came in flat y/y vs. -0.1% expected and a revised -0.3% (was +0.1%) in July. This is the first non-negative core reading since last July but certainly does not mean deflation risks are over. July national data last week showed ongoing deflation risks, as national headline came in at -0.3% y/y and core at -0.2% y/y. Revisions to the data show the longest stretch (12 months) of national core deflation since the 28-month month period that ended in June 2011.
The Bank of Japan next meets September 21-22 and no change is expected. Indeed, the bank is most likely on hold for the foreseeable future. Its latest forecasts see core inflation remaining well below the 2% target through FY23, which means that policy won’t be tightened until FY24 at the earliest. New forecasts will be released at the October 27-28 meeting but are not expected to show any material change with respect to inflation. With Suga’s popularity under water, we still expect another fiscal package in the coming weeks.
Australia reported weak July retail sales. Sales fell -2.7% m/m vs. -2.5% expected and -1.8% in June. In particular, sales in the state of New South Wales fell -8.9% m/m as the lockdown bites. The economy is likely to underperform in H2 as daily new cases of Covid nationwide have made record highs for two straight days, which means lockdowns are unlikely to end anytime soon. Next RBA meeting is September 7 and no change is expected as the RBA signaled at the August meeting that tapering would proceed as planned. However, several banks are now calling for a delay in tapering and we suspect it will be a lively debate for the RBA next month.