Weekly Market Recap (04-08 September)

Monday:

ECB’s Wunsch (hawk – non voter) remains in favour of raising interest rates again:

• Underlying inflation remains persistent, may need more rate hikes.
• I’m inclined to say we maybe need to do a little bit more.
• The idea that we’ll have to come to a pause at a certain point can’t be excluded, but it’s too early to talk about stopping hiking completely.

The Switzerland Q2 GDP missed expectations as the monetary tightening is starting to bite more heavily:

• GDP Q2 0.0% vs. 0.1% expected and 0.3% prior.

ECB’s Lagarde (hawk – voter) is focused on the inflation expectations and keeping them in check:

• It is exactly when people are paying most attention that central banks should deliver their key communication to ensure that those expectations remain firmly anchored.
• It will be critical for central banks to keep inflation expectations firmly anchored while these relative price changes play out.

Tuesday:

Chinese Caixin Services PMI missed expectations by a big margin although remaining in expansion:

• Services PMI 51.8 vs. 53.6 expected and 54.1 prior.

The RBA left the cash rate unchanged as expected at 4.10%:

• Inflation in Australia has passed its peak.
• But inflation is still too high and will remain so for some time yet.
• The Australian economy is experiencing a period of below-trend growth.
• Returning inflation to target within a reasonable timeframe remains the priority.
• There are significant uncertainties around the outlook.
• Services price inflation has been surprisingly persistent overseas and the same could occur in Australia.
• Some further tightening of monetary policy may be required.
• Will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.

ECB’s Lane (dove – voter) didn’t offer much in terms of forward guidance:

• August inflation data is welcome, but we need to see that continue.
• We do expect bumpiness in easing of energy, food inflation.
• Easing in services inflation helps limit narrative that tourism is keeping services inflation high.

The Eurozone July PPI beat expectations, but the figures were still all negative:

• PPI M/M -0.5% vs. -0.6% expected and -0.4% prior.
• PPI Y/Y -7.6% vs. -7.6% expected and -3.4% prior.

ECB’s Schnabel (hawk – voter) touched on climate change and how it could bring downside tail risks:

• Climate change is an existential threat with large downside tail risks.
• Climate-related and environmental risks (C&E risks) are now an important focal point for supervisors.
• Climate change constitutes an existential threat, implying large downside tail risks.
• Dealing with financial risks is the core of prudential supervision.
• Physical climate risks tend to be correlated globally.
• The economic consequences of physical climate risks could be mitigated by closing the large climate insurance protection gap.
• In the EU, only a quarter of losses caused by climate-related catastrophes are insured.

Fed’s Waller (hawk – voter) changed his stance and he’s now leaning towards a pause:

• I would say the risks to doing too much and too little are balanced.
• The data last week clearly showed the jobs market is starting to soften.
• Unemployment is about where it was a year ago, so change isn't that big.
• Recessions are often caused by shocks that come out of nowhere, but the data so far is pretty good (for a soft landing).
• I want to be very careful to say that 'we've done the job'.
• I want to see 'a couple months' of data.
• I don't think one more hike would send the economy into a recession.
• Data will drive whether the Fed hikes again.
• Recent data will allow the Fed to proceed carefully.
• We're starting to see the economy slow down.
• Treasury yields are about where they should be.
• The US economy is 'about 80% closed' so impacts from abroad will be smaller than for others.
• We've been keeping a very close eye on commercial real estate, will continue to roll over during the next 2 years or so.
• We're not sure about what prices CRE will be trading at in two years.

Saudi Arabia announced that it would extend the voluntary 1 million barrels per day output cut through December and Russia quickly followed by saying it was cutting exports by 300k bpd through year end. Both added that caveat that the decision would be reviewed monthly.

Fed’s Mester (hawk – non voter) maintained her hawkish stance as she sees the need to go a “little bit” higher on rates:

• The labour market has come more into balance.
• From what I see so far, we might have to go a bit higher, we might have to raise the policy rate a bit more.
• There is still a lot of time before our next decision in September and we will get a lot of data and information by then.
• Gasoline prices are rising again. We have to be very attentive to that.
• The longer inflation stays above 2%, the more likely it is that the risks will materialise.
• If we end up raising interest rates too much and the economy loses momentum more than necessary, we can lower interest rates.
• We will certainly not continue to raise interest rates until inflation has already fallen to 2%. Nor will we wait to lower interest rates until inflation is at 2%.
• There are upside risks to our inflation forecasts, in my view.

Wednesday:

The Australian Q2 GDP beat expectations:

• GDP Q2 0.4% vs. 0.3% expected and 0.4% prior.

BoJ’s Takata sounded optimistic on hitting the inflation target but remains wary of downside risks:

• Japan is seeing early signs of hitting 2% inflation.
• Japan's economy is recovering moderately.
• He believes that the Bank of Japan must patiently maintain easy monetary policy given the very high uncertainty on the outlook.

• At the same time, BOJ must respond nimbly to uncertainty with eye on economic, price outlook.
• There's a chance Japan will see shift in public perception prices and wages won't rise much.
• Japan seeing signs of change in corporate wage, price-setting behaviour.
• There is sign of change in Japan's trend inflation as rising wages push up inflation expectations.
• Inflation is already exceeding BOJ's 2% target but there is some distance to achieving it stably and in sustainable fashion.
• If overseas economies slow sharply, that could weigh on Japan's economy.
• Stronger than expected US economy having an impact on currencies.
• Overseas factors having greater impact on currencies.
• We need to stand ready to flexibly respond to uncertainty.
• Action in July was a flexible response.

ECB’s Villeroy (neutral – voter) is leaning more towards keeping interest rates high for longer rather than raising them more:

• There is a slowdown but no recession.
• Had first successes against inflation but need to persevere.
• Must bring inflation down to 2% level between now and 2025.
• We are near or very near the peak on interest rates.
• Our options are open at the next and upcoming rate meetings.
• Maintaining rates for a sufficiently long period now counts more than further rate hikes.

ECB’s Knot (hawk – voter) didn’t sound much confident on a September rate hike:

• Markets may be underestimating September rate hike chances.
• Bringing inflation to 2% by the end of 2025 is the bare minimum.
• Rate hike is a possibility, not a certainty.

The Eurozone July Retail Sales missed expectations on the M/M figure but beat on the Y/Y one:

• Retail Sales M/M -0.2% vs. -0.1% expected and 0.2% prior (revised from -0.3%).
• Retail Sales Y/Y -1.0% vs. -1.2% expected and -1.0% prior (revised from -1.0%).

ECB’s Kazimir (hawk – voter) favours one last rate hike:

• The preferable option would be to hike rates by 25 bps next week.
• One more, likely last rate hike, still needed.
• The alternative option would be to hike in October or December.
• Inflation remains stubbornly high, price growth expectations too far above 2%.

Fed’s Collins (neutral – non voter) is leaning towards a high for longer stance rather than a higher for longer one:

• It's time for monetary policy to be patient and deliberate.
• Fed should 'allow time' when making monetary policy choices.
• Too soon to say inflation sustainably moving back to target.
• Fed must balance lowering inflation against slowing economy too much.
• Fed can likely achieve goals without causing notable economic pain.
• Still too much job market demand.
• Wage growth remains elevated.
• Core services inflation moderation has been modest.
• Expects economy to slow into end of year.

BoE’s Bailey (neutral – voter) is expecting a “marked” fall in inflation by year-end:

• Wage bargaining has surprised to the upside.
• There has been a very large terms of trade shock in this country.
• Many indicators are signalling a fall in inflation, which will be marked by the end of this year.
• Question is: As headline inflation comes down, will we see inflation expectations continue to come down and will that impact wage bargaining?
• There is not group think at the MPC at the moment.

BoE’s Dhingra (dove – voter) maintains her dovish stance as she expects the monetary policy lags to start affecting the economy more heavily:

• Labour market continues to ease as MPC's hiking cycle takes effect with a lag.
• Pass-through of level changes to wages would not necessarily pose a risk to our target in the medium term.
• Not yet evidence to suggest firms will seek to increase their margins.
• Domestic factors are likely to continue to ease the pressure on CPI inflation.

The Bank of Canada kept interest rates steady at 5.00% as expected:

• The Canadian economy has entered a period of weaker growth.
• The tightness in the labour market has continued to ease gradually.
• Recent CPI data indicate that inflationary pressures remain broad-based.
• With the recent increase in gasoline prices, CPI inflation is expected to be higher in the near term before easing again.
• With recent evidence that excess demand in the economy is easing, and given the lagged effects of monetary policy, Governing Council decided to hold the policy interest rate at 5%.
• Governing Council remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed.
• Growth prospects in China have diminished.
• In the United States, growth was stronger than expected.

The US ISM Services PMI beat expectations by a big margin coming at 54.5 vs. 52.5 expected and 52.7 prior:

• employment index 54.7 vs. 50.7 prior.
• new orders index 57.5 vs. 55.0 prior.
• prices paid index 58.9 vs. 56.8 prior.
• new export orders 62.1 vs. 61.1 prior.
• imports 52.3 vs. 52.3 prior.
• backlog of orders 41.8 vs. 52.1 prior.
• inventories 57.7 vs. 50.4 prior.
• supplier deliveries 48.5 vs. 48.1 prior.
• inventory sentiment 61.5 vs. 56.6 prior.

The Fed release the Beige Book which provides recent anecdotal information on current economic conditions:

• Most Districts indicated economic growth was modest during July and August.
• Consumer spending on tourism was stronger than expected but other retail spending continued to slow, especially non-essential.
• Some Districts highlighted reports suggesting consumers may have exhausted their savings and are relying more on borrowing to support spending.
• New auto sales did expand in many Districts, but contacts noted this had more to do with better availability of inventory rather than increased consumer demand.
• Manufacturing contacts in several Districts also noted that supply chain delays improved.
• New orders were stable or declined in most Districts, and backlogs shortened.
• Nearly all Districts reported the inventory of homes for sale remained constrained.
• Some Districts reported higher delinquencies on consumer credit lines.
• Job growth was subdued across the nation.
• Nearly all Districts indicated businesses renewed their previously unfulfilled expectations that wage growth will slow broadly in the near term.
• Most Districts reported price growth slowed overall, decelerating faster in manufacturing and consumer-goods sectors.

Thursday:

BoJ Nakagawa thinks that it’s appropriate to maintain easy monetary policy for now but there are signs that inflation is on path to achieve their target and the risk that it could even accelerate more than expected:

• Appropriate to maintain easy monetary policy for time being.
• Signs of change seen in Japan's corporate price, wage-setting behaviour.
• Still not at stage where we can say Japan has stably, sustainably achieved BOJ’s price target
• Monetary easing involves various side-effects.
• BOJ will conduct flexible market operation when 10-year JGB yield moves in range of 0.5-1.0% range with eye on interest rate levels and speed of moves.
• BOJ’s July decision has heightened sustainability of its monetary easing framework.
• Japan's capex, consumption increasing moderately.
• Japan's economy likely to continue recovering moderately.
• Our baseline scenario is for consumer inflation to gradually re-accelerate after a period of slowdown.

• There is chance inflation could accelerate more than expected, though there is also chance pass-through of costs could moderate.
• Job market tightening but outlook for wages also depends on corporate earnings.
• Price rises for goods broadening, service prices also rising mainly for accommodation fees.
• Must be vigilant to risk of further slowdown in global growth.
• Sees equal degree of upside and downside risks to inflation.
• Can exit NIRP when economy is strong enough.
• But there is no preset idea on order or timing of that.
• It depends on financial developments at the time.
• Does not want to comment on FX levels.
• Strong outcome in next year's wage talks would be a necessary condition, though not a sufficient one to contemplate pursuing end of negative rates.
• Want to look at various factors beyond wages in deciding future policy changes.
• Further YCC tweak cannot be ruled out but is not an imminent issue now.

The Chinese trade data beat expectations but the readings remain very poor:

• Exports Y/Y -8.8% vs. -9.2% expected and -14.5% prior.
• Imports Y/Y -7.3% vs. -9.0% expected and -12.4% prior.

RBA’s Lowe gave his final speech as Governor as Deputy Governor Bullock will take over as the new head on September 18:

• My recent focus is risk wages, profits run ahead of rates consistent with return to inflation target.
• If this risk materialised and inflation became sticky, would require tighter monetary policy.
• Will be difficult to return to the earlier world in which inflation tracked in a very narrow range.
• Inflation is likely to be more variable around target.
• Australia has been well served by a flexible inflation target.
• Possible that Australia can sustain unemployment rates below what we have had over the past 40 years.
• Now in an environment of stronger growth in nominal wages, which is positive.
• The recent productivity record isn’t encouraging; solution fundamentally a political problem.
• Interest rates influence housing prices but are not reason Australia has some of the highest prices in the world.
• Issue that defined my term more than any other was forward guidance on rates during the pandemic.
• Guidance was widely interpreted as a commitment, rather than a conditional statement.
• With the benefit of hindsight, my view is that we did do too much during pandemic.

The Switzerland August seasonally adjusted Unemployment Rate remained steady at 2.1% vs. 2.1% expected and 2.1% prior.

The Eurozone Q2 Final GDP reading was 0.1% vs. 0.3% expected as the previous estimate was revised to 0.1%:

• Household consumption flat.
• Government expenditure 0.1%.
• Gross fixed capital formation 0.1%.
• External balance -0.4%.
• Changes in inventories 0.4%.

The US Jobless Claims beat expectations by a big margin across the board:

• Initial Claims 216K vs. 234K expected and 228K prior.
• Continuing Claims 1679K vs. 1715K expected and 1725K prior.

The BoC Governor Macklem delivered a hawkish speech titled "staying the course”:

• We are concerned that progress in bringing down inflation has slowed.
• We are prepared to raise rates again but don't want to raise rates than we have to.
• The longer we wait, the harder it is likely to be to reduce inflation.
• Monetary policy might not be restrictive enough to restore price stability.
• Bank is concerned that larger-than-normal price increases for goods and services remain broad based.
• We are not trying to kill economic growth.
• The biggest contribution to the slowing in inflation since the peak last year has been from energy, which accounts for two-thirds of the slowdown.
• Today, about 60% of CPI components are rising above 3% and about 45% are rising above 5%.
• Looking ahead, we want to see less-generalized price increases as well as a decline in the average price increase.
• The weakness in second-quarter GDP largely reflected a broad-based slowing in consumer spending and a decline in housing activity.
• We will be watching wage growth closely.
• Maybe we don't need to do more, maybe we do on interest rates.
• We will take decisions meeting by meeting.
• Expecting growth of 'a little less than 1%' over the next few quarters.
• You can expect headline inflation is going to go up in the near term, before it eases.

Fed’s Williams (neutral – voter) just expressed the uncertainty policymakers are currently facing:

• Labor market balances are evening out.
• There's still more data to come before next FOMC meeting.
• Inflation is far too high but moving down.
• Policy is in a good place, is data dependent.
• We are seeing movement in the right direction for the economy.
• It's an open question if monetary policy is restrictive enough.
• The latest consumer spending data has been strong.
• Expects unemployment rate to rise to low 4% range.

Fed’s Goolsbee (dove – voter) maintains his stance as he prefers to keep rates high for longer rather than higher for longer:

• It's possible we can get on 'golden path'.
• Monetary policy is working.
• Overall level of inflation is above where we want it.
• Clearly there are risks.
• China, US government shutdown are among possible risks.
• We have also had false dawns on inflation before.
• Want to see progress on core inflation, especially goods and housing.
• Market's expectations on inflation also have a major influence.
• I'd pay less attention to wage growth as an indicator of inflation.
• We are very rapidly approaching time when are argument is not about how high should rates go, but rather how long rates have to stay high.
• Collectively Fed forecast is that rates will have to stay up for a relatively extended period.
• You can't change the inflation target until you've hit your inflation target.
• We have to get to the 2% inflation target, retain credibility.
• A possible UAW strike could have an impact, it could be material to our decisions.

Fed’s Logan (hawk – voter) called for a skip at the upcoming September FOMC meeting:

• 'Could be appropriate' to skip interest-rate increase in September.
• There is 'work left to do' to get to sufficiently restrictive policy.
• Skipping does not imply stopping rate hikes.
• Not yet convinced we've extinguished excess inflation.
• Fed needs to calibrate policy 'carefully,' must proceed gradually.
• Significantly lower inflation in recent months 'encouraging,' but too soon to confidently say on path to 2% in timely way.
• Job market strength suggests we have not finished the job of restoring price stability.
• If stronger economic activity continues, could lead to a resurgence of inflation.

Friday:

Japan July Average Cash Earnings growth slowed down more, and the wages data is something the BoJ is particularly focused on:

• Average Cash Earnings Y/Y 1.3% vs. 2.3% prior.
• Real Wages Y/Y -2.5%.
• Household spending -5.00% vs. -4.2% prior.

The Japanese Final Q2 GDP missed expectations and the previous reading was revised downwards:

• Japan Q2 GDP 1.2% vs. 1.3% expected and 0.8% prior (revised from 1.5%).

• GDP Growth Annualised 4.8% vs. 5.5% expected and 3.2% prior (revised from 6%).

The Canadian Jobs report showed another pick up in wage growth which is something the BoC is particularly focused on:

• Employment change 39.9K vs. 20.0K expected and -6.4K prior.

• Full time 32.2K vs. 1.7K prior.

• Part time 7.8K vs. -8.1K prior.

• Participation rate 65.5% vs. 65.6% expected and 65.6% prior.

• Average hourly wages permanent employees 5.2% vs. 4.7% expected and 5.0% prior.

• Unemployment rate 5.5% vs. 5.6% expected and 5.5% prior.

The highlights for next week will be:

• Tuesday: UK Labour Market report, German ZEW, US NFIB Small Business Optimism Index.
• Wednesday: Japan PPI, UK GDP, EZ Industrial Production, US CPI.
• Thursday: Australia Labour Market report, Japan Industrial Production, Switzerland PPI, ECB Policy Decision, US Jobless Claims, US PPI, US Retail Sales.
• Friday: NZ Manufacturing PMI, China Industrial Production and Retail Sales, Eurozone Wages data, US University of Michigan Consumer Sentiment.

That’s all folks, have a great weekend!