Weekly Market Recap (07-11 August)

Monday:

Fed’s Bowman (hawk – voter) delivered hawkish comments over the weekend as she leans towards more rate hikes:

We should remain willing to raise rates at a future meeting if data show inflation progress has stalled.
In considering further rate hikes and how long to keep rates restrictive, consistent drops in inflation will be looked for.
Additional U.S. interest-rate increases will be needed.
Monetary policy is not on a preset course.
Slowing consumer spending and loosening in labour market conditions will be watched for.
Recent decline in core inflation is a 'positive' sign, but inflation remains well above target.
Demand for workers exceeds supply, adding upward pressure on prices.
No signs of sharp credit contraction from March banking turmoil.
Will be looking for evidence that inflation is on a “consistent and meaningful” downward path in making decisions.
Inflation still significantly above 2% target.

The BoJ released its latest Summary of Opinions from the last monetary policy meeting on July 27^th/28^th:

One member said BOJ needs to patiently continue with monetary easing toward achieving the price stability target.
One member said there is still a significantly long way to go before revising the negative interest rate policy, and the framework of yield curve control needs to be maintained.
One member said strictly capping 10-year Japanese Government Bond (JGB) yields at the 0.5 percent level could affect the functioning of bond markets and the volatility in other financial markets.
One member said given that there are increasingly significant upside and downside risks to the outlook for prices, it is appropriate for the bank to conduct yield curve control with greater flexibility in order to respond to these risks.
One member said the bank should conduct yield curve control with greater flexibility and thereby make preparations, so that it can successfully continue with monetary easing while nimbly responding to both upside and downside risks.
One member said until the likelihood of achieving the price stability target rises sufficiently, the bank needs to maintain yield curve control while conducting it with greater flexibility.
One member said to ensure monetary easing can be continued smoothly for as long as needed, it is desirable to increase flexibility of yield curve control to a certain extent in advance while it is able to do so without turmoil.
One member said achievement of 2% inflation in a sustainable and stable manner seems to have clearly come in sight.
One member said while conducting yield curve control with greater flexibility as a preventive measure against future risks, the bank should maintain its basic stance that it will continue with monetary easing.
One member said allowing to some extent a rise in long-term interest rates in response to the price environment will make real interest rates stable and enable BOJ to contain side-effects.
One member said it is appropriate for BOJ to conduct monetary policy that is designed to give consideration to market functioning while maintaining accommodative financial conditions.
One member said in conducting yield curve control with greater flexibility, it is important to let rates be determined by markets as much as possible, prevent sharp fluctuations in rates.
MOF rep said govt considers that the proposals made at this MPM are aimed at enhancing the sustainability of monetary easing.
MOF rep said govt expects BOJ to conduct appropriate monetary policy toward achieving price stability target in a sustainable and stable manner while closely cooperating with govt.
Cabinet Office rep said BOJ must carefully explain to the public its intention regarding changes proposed at this meeting.
One member said as signs of change have been seen in firms' wage- and price-setting behaviour, close monitoring is warranted on their effects on prices.
One member said determining whether wage hikes will continue next year will be a key issue.
One member said prices could deviate upward from BOJ's baseline scenario as firms' moves to pass on cost increases become widespread.

Fed’s Collins (neutral – non voter) said that her read of the data so far says that they are near or perhaps at a sufficiently restrictive level of monetary policy to hold for some time.

The Switzerland July seasonally adjusted unemployment rate printed at 2.1% vs. 2.0% expected and 2.0% prior.

Fed’s Williams (neutral – voter) deviated from the Fed’s “higher for longer” stance hinting to cuts in early 2024 IF the data supports such a move:

Inflation is coming down as hoped.
Expects unemployment to rise slightly as the economy cools, personally sees unemployment rate rising above 4% next year.
Does not rule out possibility of lowering rates in early 2024.
It all depends on the economic data.

BoE’s Pill (hawk – voter) just mentioned that there are risks on both sides for UK inflation:

Risk inflation may fall below target in years.
There are also risks the UK hasn't raised rates enough.
There are risks on both sides of UK inflation.
Food inflation is longer-lasting than past spikes.
Food price inflation will fall to 10% this year.

Tuesday:

Japan overall labour cash earnings for June printed at 2.3% vs. 2.9% prior, while overtime pay showed an increase of 2.3% vs. 0.5% last month. The yen weakened following the release as the BoJ placed a great emphasis on wage growth in determining their monetary policy.

Moody's announced a number of regional bank downgrades which coupled with the Chinese data later may have weighed on risk sentiment for most of the day.

Chinese Exports and Imports data missed expectations by a big margin causing some risk off sentiment across the board:

Exports Y/Y fell -14.5% vs. -12.5% expected (previous -12.4%).
Imports Y/Y fell -12.4% vs. -5.0% expected (previous -6.8%).

Fed’s Harker (neutral – voter) said that he believes the Fed is at a point where they can hold rates steady barring “alarming” new data before September:

Barring “alarming” new data by mid-Sept, I believe we may be at the where we can be patient and hold rates steady.
Should we be at the point of holding rates steady, “we will need to be there for a while”.
Does not foresee any consequences for an immediate easing of the policy rate.
Latest PCE report showed continued disinflation.
Sees core PCE falling just below 4% by year end and below 3% in 2024 and at target in 2025.
Expects unemployment to “tick up slightly”.
Expects only a modest slowdown.
I do see us on the flight path to a soft landing we've all been hoping for.
Focused on the Oct 1 resumption of Federal student loan repayments.
We're going back to a more-normal circumstance.
Fiscal stimulus is burning off.
Supply chain issues are starting to heal.
Our forecast is not that inflation might spike back up.
We will probably start cutting rates sometime next year.
We don't want to overdo it on rates.

Fed’s Barkin (hawk – non voter) didn’t signal any preference for a pause:

Inflation remains too high.
GDP remains solid and labour market is “remarkably resilient”.

Wednesday:

China July CPI Y/Y fell into deflation for the first time since February 2021:

CPY Y/Y printed at -0.3% vs. -0.4% expected and 0.0% prior.
CPI M/M was 0.2% vs. -0.1% expected and -0.2% prior.
PPI Y/Y remained in negative territory at -4.4% vs. -4.1% expected and -5.4% prior.

As a reminder, the PBoC said that it expects inflation to pick up in the second half of the year.

Thursday:

Japan PPI Y/Y rose the least since March 2021 and it also market the 7^th straight month of slowdown in producer inflation:

PPI Y/Y 3.6% vs. 3.5% expected and 4.3% prior (revised from 4.1%).
PPI M/M 0.1% vs. 0.2% expected and -0.1% prior (revised from -0.2%).

The US CPI report showed further disinflation with the Core readings looking good:

CPI Y/Y 3.2% vs. 3.3% expected and 3.0% prior.
CPI M/M 0.2% vs. 0.2% expected and 0.2% prior.
Core CPI Y/Y 4.7% vs. 4.8% expected and 4.8% prior.
Core M/M 0.2% (0.16% unrounded) vs. 0.2% expected and 0.2% prior.

The market is pricing just a 10% chance of a hike in September and 27% in November. It’s worth reminding though that the Fed will see another NFP and CPI report before the September meeting.

The US Initial Claims jumped to 248K vs. 230K expected and 227K prior, while Continuing Claims, which lag Initial Claims by a week, printed at 1684K vs. 1710K expected and 1692K prior (revised from 1700K).

Fed’s Daly (neutral – non voter) acknowledged the good inflation data, but remained wary of the risks:

CPI data was as expected, it's good news for families and businesses.
We are committed to getting core inflation down.
There's a lot more info coming in before September.
I see slowing in the economy but we're not there yet.
It's still hard to find workers, the economy isn't yet in balance.
Whether we need to hike rates or hold them steady for a longer period, it's premature to project, there is a lot of data left.
We've been watching the data and asking “does anything we're seeing change the outlook”.
Today's inflation data is a “good data point”.
If core services ex housing doesn't come down and stalls, that's something I'm watching.
I'm going to hold myself to data dependence.
I would need to really gain confidence that the path of inflation is completely downward. That's not food or energy prices, it's goods price inflation, which is coming down.
If you look at new leases and new rents, that's pulling things down.
We're going to be watching supercore carefully, that's a big component of spending and it hasn't made much progress so far, we need to see it come back to pre-pandemic levels.
If demand slips below supply, that would be a good indication we could cut rates.
We are a long way from a conversation about rate cuts.

Fed’s Bostic (dove – non voter) just reaffirmed the Fed’s work about bringing down inflation:

Fed has been working hard to reduce too-high inflation.
I don't know how persistent pandemic labour market changes will be.

Friday:

New Zealand Manufacturing PMI fell further into contraction:

46.3 vs. 47.5 prior.

This is the 5^th straight month of contraction.

RBA’s Lowe spoke before the House of Representatives and his remarks sound like he’s comfortable holding rates steady:

It is too early to declare victory on inflation, but things are moving in the right direction.
The board is mindful that interest rates have been increased by a large amount in a short period of time and that there are lags in the operation of policy.
The board remains resolute in its determination to return inflation to the 2-3 per cent target range.
Monetary policy is in restrictive territory, and it is working to establish a better balance between supply and demand.
Our central forecast is for CPI inflation to be around 3,25 per cent by the end of next year and to be back within the 2-3 per cent target range by late 2025.
It is possible that some further tightening of monetary policy will be required to ensure that inflation returns to target within a reasonable timeframe.
Recent data indicate that there has been some easing in the labour market.
Whether or not this is the case will depend upon the data and the board's evolving assessment of the outlook and risks.
We expect employment to continue to grow, but below the rate of growth in the labour force.
It's encouraging that the recent data are consistent with inflation returning to target over the next couple of years.
The Australian economy is currently experiencing a period of below-trend growth, and this is expected to continue for a while yet.
Data are also consistent with the Australian economy continuing to travel along that narrow path that I have spoken about.
The bank’s central scenario is that economic growth remains subdued for the rest of this year before gradually picking up to around 2,25 per cent by end 2025.
Dwelling investment is expected to increase again next year, after the recent difficulties in that sector.
Monetary policy is in restrictive territory.
Possible that some further tightening of monetary policy will be required.
Board is seeking to establish a credible path back to the inflation target over the next couple of years.
Board wants to have reasonable confidence that inflation will return to target over the current forecast period.
It is a complicated picture and there are scenarios in which consumption is weaker than our central case and others in which it is stronger.
Risk that services price inflation may stay high, prolonging the period of inflation being above target.
Board is seeking to establish a credible path back to the inflation target over the next couple of years to avoid a damaging shift in inflation expectations.
Worst is over for inflation.
To get inflation to target in 2024 would require substantially higher rates and not be in the national interest.
Understandable that community thinks peak for rates is now or close at hand.

UK Q2 Preliminary GDP beat expectations:

Q/Q reading 0.2% vs. 0.0% expected and 0.1% prior.
Y/Y reading 0.4% vs. 0.2% expected and 0.2% prior.

The US PPI beat expectations across the board:

PPI Y/Y 0.8% vs. 0.7% expected and 0.2% prior (revised from 0.1%).
PPI M/M 0.3% vs. 0.2% expected and 0.0% prior (revised from 0.1%).
Core PPI Y/Y 2.4% vs. 2.3% expected and 2.4% prior.
Core PPI M/M 0.3% vs. 0.2% expected and -0.1% prior (revised from 0.1%).

The University of Michigan Consumer Sentiment Index beat slightly forecasts with inflation expectations ticking lower:

Consumer Sentiment 71.2 vs. 71.0 expected and 71.6 prior.
Current conditions 77.4 vs 76.9 expected and 76.6 prior.
Expectations 67.3 vs 68.1 expected and 68.3 prior.
1-year inflation 3.3% vs 3.4% prior.
5-10 year inflation 2.9% vs 3.0% prior.

The highlights for next week will be:

Tuesday: Australia Wage Price Index, China Industrial Production, UK Jobs Report, German ZEW, US Retail Sales, Canada CPI, NAHB Housing Market Index.
Wednesday: RBNZ Policy Decision, UK CPI, FOMC Meeting Minutes.
Thursday: Australia Jobs Report, US Jobless Claims.
Friday: Japan CPI, UK Retail Sales.

That’s all folks, have a great weekend!