Weekly Market Recap (24-28 July)

Monday:

• Monday was the PMI day for many advanced economies. Below you can see the data:

• Australia Manufacturing PMI printed at 49.6 vs. 48.0 prior while the Services PMI came at 48 vs. 50.3 prior. The Composite PMI was 48.3 vs. 50.1 prior.

• Japan Manufacturing PMI printed at 49.4 vs. 49.8 prior while the Services PMI came at 53.9 vs. 54.0 prior. The Composite PMI was 52.1 vs. 52.1 prior.

• France Manufacturing PMI printed at 44.5 vs. 46.0 prior while the Services PMI came at 47.4 vs. 48.0 prior. The Composite PMI was 46.6 vs. 47.2 prior.

• Germany Manufacturing PMI printed at 38.8 vs. 40.6 prior while the Services PMI came at 52.0 vs. 54.1 prior. The Composite PMI was 48.8 vs. 50.6 prior.

• Eurozone Manufacturing PMI printed at 42.7 vs. 43.4 prior while the Services PMI came at 51.1 vs. 51.5 prior. The Composite PMI was 48.9 vs. 49.9 prior.

• UK Manufacturing PMI printed at 45.0 vs. 46.5 prior while the Services PMI came at 51.5 vs. 53.7 prior. The Composite PMI was 50.7 vs. 52.8 prior.

• US Manufacturing PMI printed at 49.0 vs. 46.2 prior while the Services PMI came at 52.4 vs. 54.4 prior. The Composite PMI was 52.0 vs. 53.2 prior.

China pledged to step up policy support for its ailing economy. In fact, China's official Xinhua News Agency said the ruling Communist Party’s 24-member Politburo met, and promised counter-cyclical policy that includes actively expanding domestic demand, resolving debt risks and it left out the slogan of “housing is for living, not for speculation”, which might be a sign that it is considering easing restrictions on the property sector. Later, the State-sponsored finance media China Securities Journal said that there were rate cuts, tax cuts and fee reductions expected.

Tuesday:

The German IFO Business Climate Index came at 87.3 vs. 88.0 expected and 88.6 (revised from 88.5). The Expectations Index printed at 83.5 vs 83.4 expected and 83.8 prior (revised from 83.6), while the Current Conditions Index printed at 91.3 vs 93.0 expected and 93.7 prior.

The US Consumer Confidence report surprised again with a huge beat across the board coming at 117.0 vs. 111.8 expected and 109.7 prior. The Present Situation Index, which correlates with labour market strength, printed at 160.0 vs. 155.3 prior, while the Expectations Index printed at 88.3 vs. 79.3 prior. The 1-year inflation expectations index was 5.7% vs. 6.0% prior, and jobs hard-to-get was at 9.7 vs. 12.4 prior.

Wednesday:

The Australian Q2 Headline CPI Q/Q came at 0.8% vs. 1.0% expected and 1.4% prior, while the Y/Y reading printed at 6.0% vs. 6.2% and 7.0% prior. The RBA Trimmed Mean CPI Q/Q printed at 1.0% vs. 1.1% expected and 1.2% prior, while the Y/Y figure was 5.9% vs. 6.0% and 6.6% prior. Overall, this report may be enough to keep the RBA on hold at the next meeting.

The Bank of Canada released its minutes from the July meeting with the key lines below:

• Consensus among BOC members was that the cost of delaying action was greater than the benefit of waiting for more data.
• Agreed they were prepared to hike further if needed but “did not want to do more than they had to”.
• Concerned that progress towards price stability could stall and inflation could rise again if upside surprises materialize.
• Felt the data clearly indicated that excess demand and core inflation were proving to be more persistent than expected.
• Core inflation measures suggest the return to 2% inflation will take longer than anticipated.
• Agreed that household consumption should moderate as higher rates take effect.
• Felt it was too early to tell whether wage growth was easing.

The Fed hiked interest rates by 25 bps bringing the FFR to 5.25-5.50% as expected. The statement was almost identical to the last one with just the line saying “economic activity has been expanding at a modest pace” changed to “at a moderate pace”. Moving on to the press conference, Fed Chair Powell in the opening statement said that the full effect of their tightening has yet to be felt and that without price stability, the economy doesn’t work for anyone. He highlighted the strong pace of jobs growth, and that labour demand still “substantially” exceeds supply. He concluded that they are strongly committed to getting inflation back to target and that the process of reaching the 2% target “still has a long way to go”. Below you can read the main comments from the Q&A session:

• Inter-meeting data was broadly in line with our expectations.
• CPI was a bit better than expectations.
• We haven't made any decisions about future meetings.
• We're looking for moderate growth, we're looking for a better balance in supply and demand, particularly in labour market.
• We get 2 more jobs and CPI reports before the Sept meeting.
• It is certainly possible that we would hike in September, also possible we would hold.
• June CPI is just one reading.
• We will be looking at everything in deciding on what to do next, growth and inflation very closely, but inflation in particular.
• How do you balance the risks of doing too much or too little? I would say "we're coming to a place" where there are challenges on both sides.
• We need to see inflation is durably down.
• We think core inflation is a better signal of where inflation is going.
• We want to see core inflation coming down.
• There are reasons to see core coming down but it's still quite elevated.
• The historical record suggests softening in labour market conditions, so that's still the likely outcome.
• The worst outcome for everyone would be to not deal with inflation and not get it done.
• Whatever the short-term costs of getting inflation down, they outweigh the longer-term costs of not getting the job done.
• Monetary policy is restrictive, more so today.
• Inflation has proved, repeatedly, stronger than we and other forecasters expected.
• We'll move rates when we move rates, but it won't be this year, I don't think.
• Rate cuts next year will be about our certainty that inflation has come down.
• The economy is weathering banking turmoil well, still watching.

The TL;DR of the meeting is that the Fed is data dependent and that they don’t know if they will hike or skip the September meeting yet. They will see two more NFP and CPI reports before the next meeting and the focus is on the labour market and core inflation, so you can ignore headline CPI. I think that if the data starts to really come in hot, Fed Chair Powell will have the chance of delivering a “verbal” hike at the Jackson Hole Symposium scheduled for 24-26 August.

Thursday:

The ECB raised rates by 25 bps as expected bringing the deposit rate to 3.75%. Below you can see the key lines from the statement:

· Inflation continues to decline but is still expected to remain too high for too long.

· Expectation is that inflation will drop further over the remainder of the year, but it will stay above target for an extended period.

· ECB decides to set the remuneration of minimum reserves at 0%. This is to preserve the effectiveness of monetary policy transmission.

· ECB stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to its 2% target over the medium term.

· To follow a data-dependent approach to determining the appropriate level of interest rates.

There was a subtle change to a passage that weighed on the Euro. In fact, in June they said "The Governing Council’s future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary." In July it was changed to "The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to the 2% medium-term target."

Moving on to the press conference, President Lagarde in her opening statement said:

• Near-term economic outlook for the eurozone has deteriorated owing largely to weaker domestic demand.
• We will continue to follow a data-dependent path.
• Momentum is slowing in the service sector, though it remains a sign of strength.
• Housing and business investment are showing signs of weakness.
• Over time, improving supply conditions and falling inflation should support recovery.
• Many new jobs are being created, especially in services sector.
• Jobs may turn negative for manufacturing.
• As energy crisis fades, governments should roll back supports.
• Domestic price pressures, including from wages and profit margins, are becoming an increasing source of inflation.
• The outlook for economic growth and inflation remains highly uncertain.
• Upside risks to inflation include possible pressures on energy and food.
• Demand for mortgages has fallen for a fifth quarter in a row.
• We stand ready to adjust all instruments.

In the Q&A Session, President Lagarde emphasised that the slight change of the verb “be brought” to “be set” in the statement was not random or irrelevant. She said that the decision was unanimous, and they are deliberately data dependent as they may hike, or they may hold. She continued saying that they are not in the domain of forward guidance, but they are strongly rooted in their desire to break the back of inflation. She highlighted that they would see two more inflation readings before the September meeting, so they keep an open mind. She added that they know that they are getting closer to the end, but the options of continuing to hike or hold are available. Finally, she concluded by saying that the only thing they know is that they won’t cut rates.

In the final few minutes of the press conference Lagarde interrupted the moderator who was going to the next question and said: “Oh no, I wanted to add for Tom: You asked, do we have more ground to cover? At this point in time, I wouldn’t say so, because as I said, the data that we just discussed and the assessment of data will actually tell us whether and how much ground we have to cover, in September and at subsequent meetings. And as I said in the early part of this press conference, it may vary from one month to the other”. The phrase highlighted in bold weighed on the Euro as it seemed like Lagarde slipped and signalled the end of the hiking cycle. But as Adam highlighted here it may have been just a mistaken turn of phrase and what Lagarde actually meant with the “wouldn’t say so” was just a “couldn’t say so”.

The US Q2 Advance GDP came at 2.4% vs. 1.8% expected:

· Consumer spending +1.6% vs +4.2% prior

· GDP final sales +2.3% vs +1.4% expected

· GDP deflator +2.2% vs +3.0% expected

· Core PCE +3.8% vs +4.0% expected (4.9% prior)

· Exports -10.8%

· Imports -7.8%

· Business investment +4.9%

The US Jobless Claims beat again expectations by a big margin across the board with Initial Claims coming at 221K vs. 235K expected and 228K prior, and Continuing Claims printing at 1690K vs. 1750K expected and 1749K prior (revised from 1754K).

A Nikkei report stating that the BoJ was going to discuss tweaking YCC policy triggered a huge rally in the JPY and some risk off flows in other markets as well. The key lines in the report were:

· Will discuss letting long-term rates rise above 0.50% limit "by a certain degree".

· Under the more flexible policy being considered, the BOJ would permit gradual increases above the 0.5% threshold, but still clamp down on any sudden spike.

· The proposed change would keep the rate ceiling, but allow for moderate rises beyond that level.

· The report highlights positive effects on inflation from a stronger yen.

Friday:

The Tokyo July CPI Y/Y came at 2.9% vs. 2.8% expected and 3.1% prior, while the CPI ex-Food Y/Y printed at 3.0% vs. 2.9% expected and 3.2% prior. The Core CPI ex-Food and Energy rose to 4.0% vs. 3.8% prior. The Tokyo area inflation is regarded as a leading indicator of nationwide inflation.

The BoJ left its monetary policy unchanged with interest rates at -0.1%, the 10-year JGB yield target around 0% and the YCC band at -/+ 0.5%. The BoJ also raised its inflation forecast for this year to 3.2% vs. 2.5% in April, while keeping the 2024 and 2025 forecasts unchanged at 1.7% and 1.8% respectively. There was indeed a tweak to the YCC policy though. In fact, the BoJ said that it will operate the yield curve control more flexibly to respond nimbly to upside and downside risks. Moreover, it will keep offering fixed-rate operations for 10-year JGB yield at 1.0%. So, they implicitly widened the band to have a hard cap at 1.0% while maintaining a soft cap at 0.5%. Below you can see their slide.

Moving on to the press conference, BoJ’s Governor Ueda delivered his remarks on the latest policy decision below:

• The uncertainty remains very high on the economy and prices.
• Will not hesitate to ease policy further if needed.
• Decision today is aimed at making YCC more sustainable.
• Long-term rates could move beyond 0.50% cap.
• BOJ will step in if rates exceed 1% mark.
• There is still a distance to achieving 2% inflation target.
• We aim to rely on markets to determine long-term rates but there are limits.
• The 0.50% to 1.00% frame is to respond to future risks.
• Now, we have added room to deal with upward moves in interest rates.
• Policy decision not biased towards tightening.
• The 1.00% mark is defined as a "just in case" cap.
• It is appropriate to maintain strong monetary easing.

As the blackout period ended, the ECB speakers are out in force. Below a slate of comments from different members:

ECB’s Simkus (hawk):

• Choice in September is between 25 bps rate hike and no change.

ECB’s Stournaras (dove):

• September rate hike is "unlikely" but if it were to be the case, it would be the last for this year.

ECB’s Kazimir (hawk):

• We should take a firm step further on our way to the top.
• Even if we do take a break in September, it would be premature to automatically consider it the end of the cycle.
• There is still risk of inflation coming in higher than expected.
• We are looking for the right place to stay for a large part of next year.

ECB’s Villeroy (hawk):

• Need to be pragmatic and keep an open mind.
• Perseverance is now key given the time needed for full transmission of policy.
• French inflation is falling even without a recession.
• Our growing confidence in inflation moving towards the 2% target is based on good transmission of policy.
• Upcoming meeting decisions will be entirely data driven.

The US June Core PCE Y/Y came at 4.1% vs. 4.2% expected and 4.6% prior, while the Core M/M reading printed at 0.2% vs. 0.2% expected and 0.3% prior. Headline PCE was 3.0% vs. 3.0% expected and 3.8% prior, while the M/M reading was 0.2% vs. 0.2% expected and 0.1% prior.

The US Employment Cost Index (Q2) printed at 1.0% vs. 1.1% expected and 1.2% prior.

The highlights for next week will be:

• Monday: China PMIs, EZ CPI.
• Tuesday: RBA Policy Decision, EZ Unemployment Rate, ISM Manufacturing PMI, US Job Openings.
• Wednesday: NZ Jobs Report, US ADP.
• Thursday: Swiss CPI, BoE Policy Decision, US Jobless Claims, ISM Services PMI.
• Friday: US NFP, Canada Jobs Report.

That's all folks. Have a great weekend!