Drivers for the Week of September 6, 2021

September 06, 2021
Here's a look at the main drivers in Developed Markets this week.
  • Markets are still digesting the jobs data and the implications for Fed policy; August PPI data Friday will be the highlight for this holiday-shortened week; the Fed releases its Beige Book report Wednesday for the September 21-22 FOMC meeting; Fed speakers this week should reveal how the Fed is viewing the August jobs miss; BOC meets Wednesday and is expected to keep policy steady
  • ECB meets Thursday and no change is expected; many of the hawks point to still-favorable financing conditions as justification to slow the pace of PEPP; Germany has a busy week; U.K. has its monthly data dump Friday
  • The political outlook for Japan has been upended by Suga’s surprise resignation last week; Japan has a busy data week; RBA meets Tuesday and is expected to commence tapering

The dollar is likely to remain under pressure this week. DXY has fallen six straight days and is trading at the lowest level since August 5 near 92.12. The July 30 low near 91.782 is the near-term target, followed by the June 23 low near 91.513. The euro traded Friday at the highest level since July 30 near $1.1910 but has since fallen back. A break of the June 25 high near $1.1975 is needed to signal further gains. Sterling remains stuck below $1.39 and a break above the July 30 high near $1.3985 is needed to signal further gains. USD/JPY continues to drift below 110. While we remain positive on the dollar, it is likely to trade with a soft tone until the U.S. data point to imminent Fed tapering.

 

AMERICAS

Markets are still digesting the jobs data and the implications for Fed policy. The 235k NFP gain was very disappointing despite the upward revision to 1.053 mln for July. Yet it’s not entirely clear if this is a supply issue or a demand issue for the labor market. Because of this uncertainty, we have moved back the Fed’s expected tapering announcement from the September 21-22 FOMC meeting to the November 2-3 meeting. By that time, the Fed will have gotten the September jobs report. Unfortunately for the Fed, the October jobs report comes November 5, two days after the FOMC decision. There will be some debate in the market about whether the Fed will actually start tapering at the December 14-15 meeting or wait until January 25-26. Does one month really make much difference? 


The hawks at the Fed will most likely focus on the outsized 4.3% y/y gain in average hourly earnings in August. These readings have been distorted this past year due to the pandemic but appear to be normalizing. We note that pre-pandemic readings were in the 3.0-3.5% range. How can wages be going up so much if the labor market weren’t tightening? We have been warning that wages would have to go up to attract more workers back to work and that seems to be playing out. If there were to be any one reason for the Fed to go ahead with a tapering announcement in September, it would be strong wage growth.


July JOLTS job opening will be reported Wednesday. Openings are expected at 10.0 mln vs.10.073 mln in June. If so, it would remain near the record high and supports the view that businesses are struggling to attract workers. Of note, the BLS household survey showed total unemployed falling to 8.383 mln in August, a new pandemic low. Job openings have been higher than the number of unemployed since May, something that hasn’t happened since (wait for it) February 2020. While there are always some skill mismatches, excess job openings supports our view (again) that wages are likely to move higher. Weekly claims data Thursday should show continued improvement, with initial claims expected at 335k vs. 340k the previous week and continuing claims expected at XX mln vs. 2.748 mln the previous week. If so, both would continue to make new pandemic lows. This week brings an end to the emergency unemployment benefits, though some states have already eliminated them.


August PPI data Friday will be the highlight for this holiday-shortened week. Headline PPI is expected to rise 8.2% y/y vs. 7.8% in July, while core is expected to rise 6.6% y/y vs. 6.2% in July. CPI data will be reported next Tuesday. Given the upside earnings surprise in August, all of these inflation measures will take on even greater importance. For now, U.S. yields remain stuck in familiar ranges. However, if wages and inflation continue to move higher and brings tapering closer, then an upside breakout for yields seems very likely. 

 
The Fed releases its Beige Book report Wednesday for the September 21-22 FOMC meeting. Since the last FOMC meeting July 27-28, most of the real sector data have softened. The survey and PMI data suggest bottlenecks persist and this should be reflected in the report. Also, it appears job growth has slowed since the last FOMC meeting July 27-28 and this too should be picked up in the Beige Book report. However, we suspect most Fed districts will say that firms continue to have trouble filling job vacancies. 

 
Fed speakers this week should reveal how the Fed is viewing the August jobs miss. Will they still talk about tapering sooner rather than later? Many of the speakers are in the hawkish camp and so their remarks will be very important in terms of managing market expectations. Williams and Kaplan both speak Wednesday, followed by Daly, Evans, Bowman, and Williams Thursday. Mester speaks Friday. Then as of Friday midnight, the media embargo goes into effect and there will be no more Fed speakers until Powell’s post-decision press conference the afternoon of September 22.


Other U.S. data are minor. Consumer credit will be reported Wednesday and is expected to rise $25.0 bln vs. $37.69 bln in June. Wholesale inventories (0.6% m/m expected) and trade sales will be reported Friday.
Bank of Canada meets Wednesday and is expected to keep policy steady. The weak Q2 GDP print from last week should keep the bank cautious but we still expect tapering to continue in Q4. At the last policy meeting July 14, the bank tapered its QE to a weekly pace of CAD2 bln, reflecting the “continued progress towards recovery.” The bank also affirmed its forward guidance that it is likely to hike rates in H2 2022, though exactly when is still unclear after the Q2 GDP shocker. At the July meeting, the bank downgraded its 2021 growth forecast by 0.5 ppts to 6% this year but upgraded the 2022 and 2023 forecasts to 4.6% and 3.3%, respectively. New forecasts won’t come until the October 27 meeting. 

 
The Loonie tends to gain on BOC decision days. It has not weakened on one since last October, covering six straight meetings. Going further back to the June 2020 meeting, the Loonie has only weakened once over the past ten meetings.With an election looming, however, fiscal stimulus will likely take up the slack. The Trudeau government last week unveiled plans to spend CAD78 bln over the next five years as part of his campaign platform. Yet despite Trudeau’s fiscal largesse throughout the pandemic, the latest Nanos poll shows the opposition Conservatives pulling ahead with 36% support vs. 31% for Trudeau’s Liberals and 18% for the New Democratic Party. Trudeau has been criticized for calling an election in the middle of a pandemic and that decision may come back to haunt him on September 20. A Conservative victory would have significant implications for fiscal policy going forward, to state the obvious.


Key Canadian data will be reported this week. August Ivey PMI will be reported Wednesday. Jobs data will be reported Friday, with a 66.8k gain expected vs. 94.0k in July and the unemployment rate expected to drop two ticks to 7.3%. A strong jobs report could give Trudeau some tailwinds going into the elections.

 

EUROPE/MIDDLE EAST/AFRICA


The European Central Bank meets Thursday and no change is expected. At the last meeting July 22, all policy rates and QE programs were kept unchanged. However, the forward guidance was changed to reflect the changes made in its strategy review. The ECB said it was committed to running persistently accommodative policy and that it won't increase interest rates until it sees inflation near its 2% target and it appears likely to remain there. Since then, the account of the meeting showed that negotiations over the new forward guidance were quite contentious. The debate this week is likely to be equally contentious, as higher inflation prints have emboldened the ECB hawks to become more vocal. We think it would be bad optics to pare back the accelerated pace of purchases at the meeting right after the ECB just pledged to extend easy monetary policy under its new framework. 


Many of the hawks point to still-favorable financing conditions as justification to slow the pace of PEPP.  On the other hand, the doves are pushing back with the notion that the jump in inflation is temporary. Of course, the divide is a north-south one, with Germany, Austria, and the Netherlands all lining up on the hawkish side. The ECB meeting will be lively but we think the doves led by Lagarde remain in control. Eurozone yields have been climbing since early August, as the Italian 10-year yield is currently around 0.71% vs. 0.51% August 5. Similarly, Spanish and German yields have climbed to 0.34% and -0.36% from 0.20% and -0.52% on August 5, respectively. This move is part of a global phenomenon, as the U.S. 10-year yield has risen to 1.32% from 1.13% August 4. However, we believe the U.S. economy is better positioned for the impact of higher rates than the eurozone.


New macro forecasts will be unveiled at this meeting. The June macro forecasts saw inflation at 1.5% in 2022 and 1.4% in 2023, which is the end of its current forecast horizon. Given the ongoing prolonged spike in inflation, we expect these forecasts could be nudged up modestly. However, that shouldn’t change the basic message under the new criteria that a hike is highly unlikely before 2024 and perhaps even 2025. 2024 will be added to the forecast horizon at the December 16 meeting and this will be another element of the new forward guidance. 

 
The euro is a mixed bag on ECB decision days. It has weakened the past three but prior to that, it had strengthened three straight decision days. As the hawkish ECB chorus has risen, so too has the euro. We think a strong euro is the last thing policymakers want or need right now and so Madame Lagarde may serve a little warning to the markets at her press conference. 

Germany has a busy week. It reports July factory orders Monday, which are expected to fall -0.7% m/m vs. a 4.1% gain in June. IP will be reported Tuesday and is expected to rise 0.9% m/m vs. -1.3% in June. September ZEW survey will be reported Wednesday. Current situation is expected at 34.0 vs. 29.3 in August, while expectations are expected at 30.5 vs. 40.4 in August. Trade and current account data will be reported Thursday, with exports expected to rise 0.1% m/m vs. 1.3% in June and imports expected to rise 0.1%m/m vs. 0.6% in June.

U.K. has its monthly data dump Friday. July GDP, IP, construction output, services, and trade will all be reported then. GDP is expected to rise 0.5% m/m vs. 1.0% in June, IP is expected to rise 0.4% m/m vs. -0.7% in June, construction is expected to rise 0.5% m/m vs. -1.3% in June, and services are expected to rise 0.6% m/m vs. 1.5% in June. The trade deficit is expected at -GBP1.6 bln vs. -GBP2.5 bln in June.

Next Bank of England decision is due September 23. At the last decision August 6, all policy settings were unchanged but the vote to main QE was 7-1, with Saunders dissenting in favor of reducing QE from GBP875 bln to GBP830 bln. Some were looking for two dissents. The bank warned that inflation could reach as much as 4% but would then return close to the 2% target. It added that some modest tightening over the forecast period will likely become necessary. The forecast period ends in 2023 and so a hike before that is not exactly earth-shattering since the short sterling strip already has had the first hike priced in for H1 2022 for months now. 

Updated BOE forecasts won’t be made until the next decision November 4. The August inflation forecasts were 4.0% (2.5% in May) in 2021, 2.5% (2.0%) in 2022, and 2.0% (2.0%) in 2023, while the GDP growth forecasts were 7.25% (7.25% in May) in 2021, 6.0% (5.75%) in 2022, and 1.5% (1.25%) in 2023. These inflation forecasts suggest no hurry to hike and no need to hike aggressively. 2024 will be added to the forecast horizon in November and will be very important components of the bank’s forward guidance.

 

ASIA


The political outlook for Japan has been upended by Suga’s surprise resignation last week. This marks the end of a difficult and tumultuous year for Suga, who took over for Abe in the middle of the pandemic. Several names have been mentioned as possible successors to Suga for the LDP leadership, with a vote scheduled for the end of this month. We suspect that when the dust settles, the new leader will push another fiscal package in October. Suga likely would have pushed one through in September if he were running but now fiscal stimulus will be delayed. When all is said and done, however, markets are still pricing in an LDP victory in the fall general elections, which in turn suggests little change in economic policies for the time being. 

 
Japan has a busy data week. July real cash earnings and household spending will be reported Tuesday. Final GDP data will be reported Wednesday, with the economy expected to grow 0.4% q/q vs. 0.3% preliminary. August machine tool orders will be reported Thursday. So far in Q3, the economy has held up better than expected but the state of emergency may stretch into Q4 if the virus numbers don’t improve soon.


July current account data Wednesday will be closely watched. An adjusted surplus of JPYXX is expected vs. JPY1.78 trln in June but the investment flows will be of more interest. June data showed that Japan investors were net buyers of US bonds to the tune of JPY1.5 trln. However, investors were net sellers of Australian (-JPY285 bln), Canadian (-JPY117 bln), and Italian (-JPY257 bln) bonds for the second straight month.

Reserve Bank of Australia meets Tuesday and is expected to commence tapering. Some analysts are calling for a delay but we do not believe one is needed right now. Despite concerns about growth this quarter, Q2 GDP data last week showed the economy had stronger than expected momentum (0.7% q/q vs. 0.4 expected) as it entered the lockdowns in Q3. The macro forecasts were just updated at the last meeting August 4 and new ones won’t come until the November 3 meeting, when the RBA is set to review its QE tapering process. Much will depend on how the virus numbers look then but we suspect the RBA will continue the tapering process in a measured manner.
 

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