Weekly Market Recap (31-04 August)

Monday:

Fed’s Kashkari (hawk – voter) kept the door open for a rate hike in September as the FOMC remains data dependent:

Not sure when the Fed will be done raising interest rates, making good progress.
Will let the data guide the Fed, may or may not raise rates in September.
US Economy has remained resilient amid various shocks, will continue to monitor any future shocks.
Right now, appears US will avoid a recession and hopes that remains true.
Overall, the inflation outlook is quite positive but can't prejudge it.
Would not surprise me to see unemployment tick up slightly.
We need to get inflation all the way back down to 2%.
We're making good progress, and we're staying on it. If we need to raise rates further from here, we will do so.
But we're going to let the data guide us and not prejudge the outcome.

ECB’s Lagarde (hawk – voter) kept the door open for a September hike and mentioned that they are following risks of wage-price spiral “very closely”:

I hear some people say that the final rate hike will take place in September. There could be a further hike of the policy rate or perhaps a pause.
Inflation is undoubtedly falling.
The second quarter GDP figures for France, Germany and Spain are quite encouraging.
They support our scenario of GDP growth of 0.9% in the euro area this year.
Regarding the wage-price spiral, we are following that very closely, because that would have a huge impact on the services sector. If you look at inflation expectations and the wage increases negotiated collectively and individually, there is no sign of a wage-price spiral emerging.

China official July Manufacturing PMI came at 49.3 vs. 49.2 expected and 49.0 prior and the Services PMI printed at 51.5 vs. 51.5 prior. The Composite PMI was at 51.1 vs. 52.5 prior.

The BoJ released its quarterly report on the outlook for the economy and prices:
Core inflation likely to gradually slow towards year-end.
Japan’s economy is likely to continue recovering moderately for the time being.
The rate of increase in CPI is likely to decelerate.
But it is projected to accelerate again moderately as the output gap improves and as medium to long-term inflation expectations and wage growth rise.
There are extremely high uncertainties for Japan's economic activity and prices.
The balance of risks to economic activity are skewed to the downside.
Risks to prices are skewed to the upside.

The Eurozone July Preliminary CPI Y/Y came at 5.3% vs. 5.3% expected and 5.5% prior, while the M/M reading printed at -0.1% vs. 0.3% expected and 0.3% prior. The Core CPI Y/Y came at 5.5% vs. 5.4% expected and 5.5% prior.

The Eurozone Q2 Preliminary GDP Q/Q printed at 0.3% vs. 0.2% expected and -0.1% prior. GDP Y/Y was 0.6% vs. 0.5% expected and 1.0% prior.

Fed’s Goolsbee (dove – voter) doesn’t want to speculate on the next move before the data and remains confident about bringing inflation down without jobs losses:

So far, we've been able to walk the golden path.
The bank problems “have been the dog that's not barking”.
We have been disproving people with a stable Phillips curve mindset.
This has been a strange business cycle, so normal trade-offs don't apply.
Asked about a rate hike, says he's “not a fan of tying our hands before the data”.
Notes openness to reading data ahead of September.
Getting inflation down without higher unemployment would be a triumph.
Last six months have shown we can bring down inflation without jobs losses.

Tuesday:

The RBA has left its cash rate unchanged at 4.10% for a second straight meeting. Below the key lines in the policy statement:

The decision to hold rates unchanged provides further time to assess the impact of the increase in interest rates to date and the economic outlook.
Inflation in Australia is declining but is still too high.
Household consumption growth is weak.
Conditions in the labour market remain very tight, although they have eased a little.
Returning inflation to target within a reasonable timeframe remains the priority.
Recent data are consistent with inflation returning to the 2–3% target range over the forecast horizon.
The outlook for household consumption is an ongoing source of uncertainty.
Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks.

They also added a slight hint that they may be done with rate hikes altogether as they put more emphasis on their discretionary assessment of risks rather than the data per se. In fact, in July, they noted that:

"Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve."

This time, they said that:

"Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks."

The Eurozone June Unemployment Rate printed at 6.4% vs. 6.5% expected and 6.4% prior (revised from 6.5%). The labour market remains strong for now.

The US ISM Manufacturing PMI came at 46.4 vs. 46.8 expected and 46.0 prior. Below you can see the sub-indexes:

Prices paid 42.6 vs 42.8 expected. Last month 41.8.
Employment 44.4 vs 48.0 expected. Last month 48.1.
New orders 47.3 vs 44.0 expected. Last month 45.6.

The US Job Openings for June were 9.528M vs. 9.610M expected and 9.616M prior (revised from 9.824M). The Quits Rate fell to 2.4% vs. 2.6% prior and the Hires Rate fell to 3.8% vs. 4.0% prior.

Fed’s Goolsbee (dove – voter) spoke again on Thursday remarking his optimism but dismissing rate cuts in the near future:

Markets fully expected Fed will bring inflation down.
JOLTS data looks consistent with strong labour market moving to a more balanced phase.
FOMC decisions are “close calls” for him as Fed tries to manage transition.
Need to see sustained, steady progress on inflation. I'm “closet optimistic”.
Any rate cut would be “far out in the future”.

Fed’s Bostic (dove – non voter) kept his dovish stance worrying about the risk of overtightening:

Baseline is no rate cuts until the second half of 2024 at earliest.
Inflation is unacceptably high but there has been significant progress.
Data consistent with “orderly slowdown”.
We are in a phase where there is some risk of overtightening.
Says he would have “grudgingly” voted for a rate hike in July.
If progress on inflation stalls, I would be comfortable contemplating a rate hike.

Fitch downgraded US long-term credit rating to AA+ from AAA:

The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years.
Cites repeated debt limit standoffs and last-minute resolutions.
In Fitch's view, there has been a steady deterioration in standards of governance over the last 20 years.
We expect the general government deficit to rise to 6.3% of GDP in 2023, from 3.7% in 2022.
Fitch forecasts a GG deficit of 6.6% of GDP in 2024 and a further widening to 6.9% of GDP in 2025.
The interest-to-revenue ratio is expected to reach 10% by 2025 (compared to 2.8% for the 'AA' median and 1% for the 'AAA' median).

Wednesday:

New Zealand Employment Change (Q2) came at 1.0% vs. 0.5% expected and 0.8% prior. The Unemployment Rate ticked higher to 3.6% vs. 3.5% expected and 3.4% prior while the Participation Rate also increased to 72.4% vs. 72.0% expected and 72.0% prior. The Labour Cost Index (Q2) Y/Y printed at 4.3% vs. 4.4% expected and 4.5% prior, while the Q/Q reading was 1.1% vs. 1.2% expected and 0.9% prior.

BoJ Deputy Governor Uchida remains cautious on the inflation outlook in Japan and downplays the implicit tweak to the YCC policy:

At present, risk of losing chance to hit price target with premature shift from easy policy is bigger than risk of being too late in tightening.
Japan is now at a phase where it's important to patiently maintain easy policy.
There is still quite a long distance before conditions fall in place to raise short-term rate target.
BOJ will maintain policy framework as we have yet to see inflation sustainably, stably hit price target.
Every policy has cost, there is no free lunch.
As we control interest rates, the impact on market function is unavoidable.
When inflation expectations heighten, the effect of monetary stimulus increases but so do the side-effects, so we need to adjust both factors.

BOJ will offer to buy unlimited amount of bonds at 1.0% in fixed-rate operation to contain interest rate rises.
When the 10-year bond yield is moving between 0.5% and 1.0%, we will adjust amount of bond buying, use various operation tools to curb excessive yield rise in accordance to level, pace of moves in long-term rates.
Unlike in December last year, there is no clear side-effect, distortion in shape of yield curve.
There is high uncertainty over economic, price outlook both upside and downside.
Inflation expectations showing signs of re-accelerating.
If inflation expectations continue to heighten, rigidly capping 10-year JGB yield at 0.5% would cause bond market distortion, affect market volatility including for exchange rates.
Last week's decision was a pre-emptive step aimed at continuing monetary easing without disruptions.
Timing for reviewing YCC would depend on conditions at the time, as responding after problems erupt would make it difficult to fix the problems.
BOJ’s decision to make YCC more flexible is aimed at maintaining easy policy, not something with eye on exit from easy policy.
BOJ must fine-tune YCC at times, make the framework flexible, to ensure it can patiently sustain easy policy.
Will scrutinise whether wages will rise sufficiently and underpin consumption, and whether wage hikes will become embedded in Japan's society next year and beyond.

We are seeing some signs of change in corporate wage, price-setting behaviour.
Even if inflation overshoots, chance of wages rising sharply and triggering further price rises is not big.

The Switzerland July Manufacturing PMI cratered to 38.5 vs. 44.0 expected and 44.9 prior. That’s a huge miss and along with other data should be enough for the SNB to pause as their inflation rate is back within the 0-2% target.

The US ADP July Employment came at 324K vs. 189K expected and 455K prior (revised from 497K). Details:

small (less than 50 employees) +237K vs +299K prior
medium firms (500 – 499) +138K vs +183K prior
large (greater than 499 employees) -67K vs -8K prior
Job stayers 6.2% vs 6.4%
Job changers 10.2% vs 11.2%

Thursday:

The Switzerland July CPI Y/Y came at 1.6% vs. 1.6% expected and 1.7% prior, while the M/M reading printed at -0.1% vs. -0.1% expected and 0.1% prior. The Core CPI Y/Y came at 1.7% vs. 1.8% expected and 1.8% prior. As a reminder, the SNB target band is 0-2%.

ECB’s Panetta (dove – voter) said that it’s “too early to commit now on what to do in September” as they remain data dependent.

The BoE has raised interest rates by 25 bps as expected bringing the Bank Rate to 5.25%. Key lines from the statement:

Bank rate vote 8-1 vs 7-2 expected (Dhingra dissented, Haskel and Mann voted for 50 bps)
Current monetary policy stance is restrictive.
Labour market remains tight but there are some indications that it is loosening.
CPI inflation remains well above the 2% target.
It is expected to fall significantly further, to around 5% by the end of the year.
Risks around the modal inflation forecast are skewed to the upside, albeit by less than in May.
Some key indicators, notably wage growth, suggest that some of the risks from more persistent inflationary pressures may have begun to crystallise.
If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.

The BoE has acknowledged monetary policy is now “restrictive”. In fact, they have made a subtle change to their forward guidance which leans more on the dovish side.

In June, they said that:

"The MPC will adjust Bank Rate as necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit."

This week, they said that:

"The MPC will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with its remit."

Moving on to the Press Conference, BoE’s Governor Bailey (hawk) reaffirmed their data dependency but stressed a bit too much that “there is more than one path for rates that may deliver inflation back to target”. Looks like he’s leaning more towards holding rates higher for longer than raising them further:

We expect food price inflation to fall gradually this year.
Food inflation appears to have peaked.
We expect inflation to fall to around 5% in October.
Services inflation brings "unwelcome news" since May though.
I will not judge what the path of rates will be.
There is more than one path for rates that may deliver inflation back to target.
We will judge what is most appropriate based on evidence.
We have to balance the risks; there are risks both ways.
Economic projections have weakened since May.
I do not agree that we have lost control of inflation.
There are two substantial base effects that will bring inflation down this year.
The economy has been much more resilient, that is good news.
We were sitting here in November saying it was going to be a long recession, and that has not transpired.
Unemployment has remained historically very low.
I don't think there was a case for a 50 bps rate hike today.
BoE is evidence-driven.
It is not the right time to declare that "we are done" with rate hikes.
If there is more evidence of persistent inflation, we will raise rates further.
But again, there is more than one path to deliver inflation target.

Fed’s Barkin (hawk – non voter) acknowledged that further economic weakness is expected:

Further economic slowing “is almost surely on the horizon”.
Inflation remains too high.
Fed's objective isn't to cause a recession but to reduce inflation.
Consumer spending, while weaker, is “far from weak”.
Efforts to address inflation have pushed several industries into “mini recessions”.

US Jobless Claims printed bang on expectations with Initial Claims coming at 227K vs. 227K expected and 221K prior and Continuing Claims coming at 1700K vs. 1700K expected and 1679K prior (revised from 1690K).

BoE’s Ramsden (hawk) said that they have not made a decision on the QT pace for September, but he personally sees the case for slightly increasing the pace of it. He added that they are seeing bond markets react to developments, including in the US, but he doesn’t think there's a structural change going on in the bond market.

Saudi Arabia announced an extension to the voluntary 1M bpd production cut through September warning that the cuts can be extended or deepened.

The US ISM Services PMI came at 52.7 vs. 53.0 expected and 53.9 prior. Details below:

employment index 50.7 versus 53.1 prior
new orders index 55.0 versus 55.5 prior
prices paid index 56.8 versus 54.1 prior

Friday:

The US NFP showed 187K jobs added vs. 200K expected and 185K prior (revised from 209K, and prior months were also revised lower). The Unemployment Rate ticked lower to 3.5% vs. 3.6% expected and 3.6% prior with the Participation Rate remaining unchanged at 62.6%. Average Hourly Earnings Y/Y printed at 4.4% vs. 4.2% expected and 4.4% prior, while the M/M reading showed 0.4% vs. 0.3% expected and 0.4% prior. Finally, the Average Weekly Hours ticked lower to 34.3 vs. 34.4 expected and 34.4 prior. This report has something for everyone, but the higher wages data is not good news for the Fed.

Canada July Employment Change came in at -6.4K vs. 21.1K expected and 59.9K prior. The Unemployment Rate printed at 5.5% vs. 5.5% expected and 5.4% prior, while the Participation Rate ticked lower to 65.6% vs. 65.7% prior. The Average Hourly Earnings Y/Y jumped to 5.0% vs. 4.2% prior (revised from 3.9%).

The highlights for next week will be:

Wednesday: China CPI.
Thursday: US CPI, US Jobless Claims.
Friday: US PPI, University of Michigan Consumer Sentiment.

That’s all folks, have a great weekend!