Swinging Right
- Germany’s far-right AfD won a state election. We don’t see any immediate market implications.
- This week’s US jobs data will guide financial markets.
- China’s August official composite PMI points to stagnant growth but details are mixed.
US financial markets are closed today in observance of Labor Day. USD pared back some of last week’s gains triggered in part by a favorable US macro backdrop. US economic growth remains robust, driven by strong consumption, and the progress on inflation is encouraging.
US real personal spending rose more than expected in July (actual: 0.4% m/m, consensus: 0.3%) suggesting private consumption expenditure will remain a key growth driver. Indeed, the Atlanta Fed’s GDPNow model was revised higher and projects Q3 growth of 2.5% SAAR vs. 2.0% on August 26.
Meanwhile, US underlying inflation momentum eased in July. The annualized one and six-month Dallas Fed Trimmed Mean PCE inflation rates dropped to multi-year lows at 1.7% and 2.4%, respectively. Still, inflation remains far from the Fed’s 2% target. In July, annual headline PCE, core PCE, and Trimmed Mean PCE printed at 2.5% (prior: 2.5%), 2.6% (prior: 2.6%), and 2.7% (prior: 2.8%), respectively.
Regardless, the Fed is increasingly concerned with downside risk to employment and the negative feedback loop this could have on consumption spending. As such, this week’s jobs data - ISM employment indexes, JOLTS and non-farm payrolls - will guide financial markets. Job numbers that point to a soft landing in labor market conditions would trigger an upward adjustment to Fed funds futures in favor of USD and Treasury yields. In contrast, a worsening job market could reinforce the case for 100bps of Fed easing by year-end and further weigh on USD and Treasury yields.
EUR/USD is firmer around 1.1065 and German DAX futures are pointing to a slightly negative open after hitting a record high last week. The Alternative for Germany (AfD), which German intelligence describe as “rightwing extremist”, won elections in the eastern state of Thuringia and placed second in the neighboring state of Saxony. This is the first regional election victory for a far-right party since World War II.
We don’t see any immediate market implications. First, a snap German election is unlikely because nationwide support for the three members of Chancellor Olaf Scholz’s ruling coalition - his Social Democrats, the Greens and the Free Democrats – is near record low. This means it’s not in their interest to trigger an early general election. The next national election is due in just over a year. Second, it could prove difficult for the AfD to form a government in Thuringia as all other political groups have ruled out cooperating with the party.
Market expectations for lower ECB policy rates remains a drag for EUR. Friday, ECB Governing Council member Francois Villeroy de Galhau said “it would be fair and wise to decide on a new rate cut” at the September 12 meeting, adding that market expectation for a policy rate between 2% and 2.5% next year “seems reasonable to me.” There are no policy-relevant Eurozone economic data or scheduled ECB speakers today.
AUD is outperforming. RBA Deputy Governor Andrew Hauser stuck to the bank’s hawkish guidance. Hauser said overnight “we are not yet as confident, as Jay [Fed Chair Jay Powell] is in the US, that inflation in Australia is back on a sustainable path back to target…Therefore we have to hold rates where they are for the time being.” However, the decline in in the Melbourne Institute inflation gauge to a three-year low of 2.5% y/y in August argues for a lower RBA cash rate by year-end. RBA cash rate futures are pricing in around 66% odds of a 25bps cut by December.
The plunge in iron ore prices should curtail AUD upside traction. Iron ore futures fell by over 3% overnight and have retraced about 50% of the August upswing partly because of worsening property sales figures in China. Moreover, sluggish Chinese economic activity remains a drag for iron ore prices. China’s official composite PMI printed at 50.1 in August vs. 50.2 in July consistent with stagnant growth. The details showed a deeper downturn in the manufacturing sector (actual: 49.1, consensus: 49.5, prior: 49.4) and a modest pick-up in non-manufacturing activity (actual: 50.3, consensus: 50.1, prior: 50.2). Of note, the private Caixin manufacturing PMI improved to 50.4 in August (consensus: 50.0) from 49.8 in July.
