Weekly Market Recap (18-22 September)

Monday:

The New Zealand
Services PMI fell further into contraction:

BNZ Senior Economist Doug
Steel commented:

• “The latest PCI readings
  suggest any bounce through the Q2 GDP figures will be short lived and are
  consistent with economic contraction returning. In this sense, the PMI and
  PSI results are more consistent with the RBNZ forecast of a return to
  recession than the Treasury’s latest forecasts of moderate growth ahead”.

ECB’s Kazimir
(hawk – voter) maintains his hawkish views although they are toned down following
September hike:

• I wish that
  September rate hike was the last one.
• But cannot rule out
  further moves.
• Only via the March
  forecast next year can we confirm the path towards inflation goal.
• End of rate hikes is
  to open debate on how to adjust PEPP and APP.
• Once it is clear
  that no more rate hikes are needed, debate should be on how to speed up QT.

The US NAHB Housing
Market Index missed expectations as higher rates are weighing again on the
housing market:

• NAHB 45 vs. 50
  expected and 50 prior.
• Current
  single-family home sales 51 vs. 57 prior.
• Sales over next six
  months 49 vs. 55 prior.
• Prospective buyers 30 vs. 35 prior.

Tuesday:

The RBA released the
Meeting Minutes of its September meeting:

• Considered raising
  rates by 25 bps or holding steady at the September meeting.
• Some further
  tightening may be required should inflation prove more persistent than expected.
• Case to hold was
  stronger, recent data did not materially alter the economic outlook.
• Economy still
  appears to be on a narrow path by which inflation returns to target,
  employment grows.
• Members recognize
  the value of allowing more time to see full effects from past tightening
  on the economy.
• Policy moves will be
  guided by incoming data and assessment of risks.
• Concerned about
  productivity growth not picking up as anticipated, services inflation
  remaining sticky.
• Fuel prices rose
  sharply in August, could boost headline inflation in Q3.
• Members noted that
  the labour market remains tight but could be at a turning point.
• Scheduled mortgage
  payments rose to a historical high of 9.7% of household income in July,
  set to increase further.

ECB’s Villeroy (hawk –
voter) basically confirmed that the ECB is done hiking:

• We will maintain
  interest rates at 4% for a sufficiently long time.
• The medicine is
  beginning to work.
• Current ECB rates
  are at a good level, better to be patient now.
• Once inflation is back
  to around 2%, rates can fall again.

The Canadian inflation
measures beat expectations across the board with the market now seeing a 50/50
chance of another rate hike from the BoC:

• CPI Y/Y 4.0% vs.
  3.8% expected and 3.3% prior.
• CPI M/M 0.4% vs. 0.2%
  expected and 0.6% prior.
• BOC Core Y/Y 3.3% vs.
  3.2% prior.
• BOC Core M/M 0.1% vs. 0.5% prior.
• CPI Median 4.1% vs.
  3.7% expected and 3.9% prior (revised from 3.7%).
• CPI Trimmed 3.9% vs.
  3.5% expected and 3.6% prior.
• CPI Common 4.8% vs.
  4.8% expected and 4.8% prior.

The US Housing Starts
data missed expectations while Building Permits beat forecasts:

• Housing Starts
  1.238M vs. 1.440M expected and 1.447M prior (revised from 1.452M).
• That’s the lowest
  level since June 2020 during the pandemic.
• Building permits
  1.543M vs 1.443M expected and 1.442M prior.

BoC’s Kozicki commented
on the CPI report and noted that the increase was mainly due to higher energy
prices. Their focus is on the underlying measures but even those beat expectations
for 3 months in a row already:

• One of the big
  drivers in August CPI inflation was energy and gasoline prices. They can
  be pretty volatile.
• It will take a lot
  of time to sort through the inflation data, given what’s going on
  underneath.
• Energy prices on
  their own, if it’s temporary, is something that gets much less weight
  because we are concerned about the underlying inflation.

Wednesday:

The PBoC left the LPR
rates unchanged as expected:

• LPR 1 year 3.45%.
• LPR 5 year 4.20%.

The UK CPI missed
expectations across the board with market now seeing the BoE done with rate
hikes:

• CPI Y/Y 6.7% vs. 7.0%
  expected and 6.8% prior.
• CPI M/M 0.3% vs.
  0.7% expected and -0.4% prior.
• Core CPI Y/Y 6.2%
  vs. 6.8% expected and 6.9% prior.
• Core CPI M/M 0.1%
  vs. 0.6% expected and 0.3% prior.

ECB’s de Cos (dove
– non voter) said that the risks to the inflation outlook are now balanced,
which is another way to say that they are done.

ECB’s Makhlouf (neutral
– non voter) didn’t want to pre-commit on the next rate decision but he’s of
the idea that they have reached the top:

• I do think we are
  there, or thereabouts, at top of the ladder on rates.
• My view at the
  moment is that March 2024 is probably too early for 1st rate cut.
• Not saying at our
  next meeting that we are going to hold, but we are near the top.
• We will have a
  better sense of 2024 rate profile one we have the next set of projections
  in December.

The BoC released the
minutes of its September meeting:

• The Bank of Canada’s
  Governing Council did not want to set expectations for a rate reduction in
  the near future, as per the September 6th announcement minutes.
• The Council’s
  discussions revolved around either maintaining the current rates or
  increasing them.
• Given the uncertain
  trajectory of core inflation, maintaining a stricter policy should be
  considered.
• The lack of
  improvement in underlying inflation is a major worry.
• The Council
  deliberated if high core inflation might continue even as signs show that
  restrictive monetary policy is dampening demand.
• Many core inflation
  metrics appear to be persistent, with little change observed since the
  July rate announcement.
• There’s concern over
  the proportion of items in the CPI basket that are increasing at an
  annualized rate exceeding both 3% and 5%.
• The Council
  anticipates that rising oil and gasoline prices will push inflation up in
  the coming months.
• The balance between
  economic supply and demand will play a pivotal role in determining future
  core and total inflation.
• The large drop in
  commodity prices will soon be excluded from inflation calculations.
• Governing Council
  observed that the impact of base-year effects will diminish.

The Fed kept interest
rates unchanged at 5.25-5.50% as expected with a hawkish outlook as they kept
the terminal rate for 2023 at 5.6% and revised higher the 2024 forecast from
4.6% to 5.1%. Growth was revised higher, unemployment was revised lower and
inflation basically unchanged:

• 2023 end of year
  target rate: 5.6%, unchanged from June.
• 2024 end of year
  target rate: 5.10% from 4.6% in June.
• Economic activity
  has been growing steadily.
• Job gains have
  decelerated but remain robust; unemployment is low.
• Inflation is currently high.
• The U.S. banking
  system is stable and robust.
• Stricter credit
  conditions may impact economic activity, employment, and inflation.
• The exact impact of
  these conditions is still uncertain.
• The Committee is
  highly focused on inflation risks.
• The Committee’s
  goals are maximum employment and a 2% inflation rate over the long term.
• The Committee will
  evaluate further information and its implications for monetary policy.
• Factors considered
  for policy adjustments include the overall tightening of monetary policy,
  its delayed effects on the economy, and other economic and financial
  events.
• The Committee plans
  to reduce its holdings of Treasury securities and other agency debts and
  securities.
• The primary aim is
  to bring inflation back to the 2% target.
• The Committee will
  keep assessing the economic outlook based on incoming data.
• If risks arise that
  could hinder the Committee’s objectives, they are ready to modify the
  monetary policy stance.
• Their evaluations
  will consider various data, including labour market stats, inflation
  trends, financial, and global events.

Moving on to the Fed
Chair Powell’s press conference opening remarks:

• Fed is squarely
  focused on dual mandate.
• Fed has covered a
  lot of ground, full of facts have yet to be felt.
• We can proceed carefully.
• Our decisions will
  be based on assessments of data and risks.
• Growths in real GDP
  has come in above expectations.
• Consumer spending particularly robust.
• Activity and housing
  have picked up.
• Higher rates
  weighing on business investment.
• Labor market remains tight.
• Labor supply and
  demand continue to converge to better balance.
• Labor demand still
  exceeds supply.
• Expects labor market
  rebalancing to continue, easing upward pressure on inflation.
• Inflation remains
  well above our long-run goal of 2%.
• Getting inflation
  down to 2% has a long way to go.
• Longer term
  inflation expectations appear to be well anchored.
• Strongly committed
  to return inflation to 2%.
• Current stance of
  policy is restrictive, putting downward pressure on economic activity,
  employment and inflation.
• We are committed to
  achieving and sustaining sufficiently restrictive policy to bring
  inflation down to 2% over time.
• Federal Reserve will
  make decisions meeting by meeting. Federal Reserve is mindful of the
  uncertainties.
• The Fed is prepared
  to raise rates further if appropriate.
• Will keep rates
  restrictive until confident inflation moving down to 2%.
• Reducing inflation
  is likely to require a period of below trend growth, some softening of
  labor conditions.
• We will do
  everything we can to achieve goals.
• Restoring price
  stability is essential in reaching maximum growth potential.

Q&A:

• The fact that we
  decide to keep policy rates where it is does not mean we have decided we
  have or have not reached the stance of policy we are seeking.
• Fed wants to see
  convincing evidence that we have reached the appropriate level.
• Real interest rates
  are meaningfully positive.
• Recent labor market
  report was a good example of what we want to see.
• People want to be
  careful not to jump to a conclusion one way or the other.
• We are fairly close
  we think to where we want to get.
• I would attribute
  huge importance to one hike.
• Stronger economic
  activity is the main reason for needing to do more with rates.
• It may be that the
  neutral rate has risen.
• It is plausible that
  the neutral rate is higher than the longer-run rate.
• I still think there
  will need to be some softening in labor market.
• In the median
  forecast don’t see a big increase in unemployment, but that is not
  guaranteed.
• Would not call soft
  landing a baseline expectation.
• It is also possible
  the path to soft landing has widened, it may be decided by factors outside
  our control.
• The fact we’ve come
  this far lets us proceed carefully.
• You know
  sufficiently restrictive only when you see it. It is not something you can
  arrive at with confidence in a model.
• For now, the
  question is to try to find a level where we can stay there. We haven’t
  gotten to the point of confidence yet.
• The time will come
  at some point that it’s appropriate to cut, but not saying when.
• Part of the decision
  to cut may be that real rates are rising because inflation is coming down.
• Strikes, government
  shutdowns, resumption of the student loan payments, and higher long-term
  rates are among risks.
• On UAW strike, it
  could affect output, hiring, and inflation depending on length of strike.
• Government shutdowns
  don’t traditionally have much of a macro effect.
• Energy prices being
  higher is a significant thing. Higher energy prices sustained can
  affect inflation and spending.
• The economy appears
  to have significant momentum.
• A soft landing is a
  primary objective.
• The worst thing we
  can do is fail to restore price stability.
• We have the ability
  to move carefully, and that’s what we are planning to do.
• Forecasts are highly uncertain.
• Growth has come in
  stronger than expected, requiring higher rates.
• The last three
  readings of inflation have been very good, well aware we need more than
  three good readings.
• The risk of
  overtightening and under tightening is becoming more equal, need to find
  our way to the right level of restriction.
• A possible
  government shutdown could curtail some of the data we get, we would have
  to deal with that.
• It looks like we’ve
  had a bit of a turn of inflation in June.
• Energy prices don’t
  have that much of a signal about where economy is going.
• If energy prices
  increase and stay high, it will affect spending, may affect inflation
  expectations.
• We tend to look
  through short-term moods and energy prices.
• Rising long-term
  yields is mostly not about inflation, more about growth supply of
  treasuries.
• Any decision about
  future rate cuts will be about what the economy needs.
• We are not looking
  for a decrease in consumer spending.
• It is a good thing
  the economy is holding up under rate hikes.
• If economy comes in
  stronger than expected, it means we will have to do more to bring down
  inflation.
• Concern number one
  is restoring price stability.

Thursday:

The New Zealand Q2 GDP
came in much better than expected:

• GDP Q2 Y/Y 1.8% vs. 1.2%
  expected and 2.2% prior.
• GDP Q2 Q/Q 0.9% vs. 0.5%
  expected and 0% prior (revised from 0.1%).

The SNB left interest
rates unchanged at 1.75% vs. 2.00% expected (the market was pricing a 60% chance of a hold):

• Significant tightening of
  policy in recent quarters is countering remaining inflationary pressure.
• It cannot be ruled out
  that further tightening may become necessary.
• SNB will monitor
  inflation developments closely in the coming months.
• Will remain active in the
  foreign exchange market as necessary.
• Sees 2023 inflation at
  2.2% (unchanged).
• Sees 2024 inflation at
  2.2% (unchanged).
• Sees 2025 inflation at 1.9%.

SNB’s Chairman Jordan is
comfortable with the level of inflation in Switzerland but wary of future
risks:

• Inflation battle is
  not over.
• Given
  “comfortable” level of Swiss inflation, the best solution is to
  wait and see.
• Have to see what
  happens over the next 3 months.
• Clear focus is on
  price stability.
• We are not reacting
  to weakening in the economy, but to lower inflation.

ECB’s Kazaks (hawk –
voter) didn’t call for higher rates as the ECB is now expected to just keep
rates higher for longer:

• Rise in energy
  prices does create upside risk to inflation.
• Recent energy price
  rise is structural, not a short-term transitory rise.
• Given current
  outlook, rate cut expectations around middle of 2024 are too early.
• Rates will need to
  remain restrictive for quite a while.

ECB’s Nagel (hawk –
voter) is another member leaning on the higher for longer stance as he said
that “rates must stay sufficiently high for sufficiently long”.

The BoE left the bank
rate unchanged at 5.25% vs. 5.50% expected, although the market’s pricing was a
50% chance for both the outcomes:

• Bank rate vote 4-5 vs 8-1 expected (Bailey,
  Broadbent, Dhingra, Pill, Ramsden voted to hold).
• Underlying growth in the 2H 2023 is likely to
  be weaker than expected.
• Labour market remains tight by historical
  standards.
• CPI inflation is expected to fall
  significantly further in the near-term.
• Monetary policy will need to be
  sufficiently restrictive for sufficiently long to return inflation to the 2%
  target sustainably in the medium-term.
• Further tightening in monetary
  policy would be required if there were evidence of more persistent inflationary
  pressures.

BoE’s Governor Bailey left
a door open for further tightening but the preferred strategy now is to keep
rates higher for longer:

• Inflation is falling
  and we expect it to fall further this year.
• That is welcome news.
• Previous rate hikes
  are working but inflation is still not where it needs to be.
• There is absolutely
  no room for complacency.
• Will be watching
  closely to see if further rate hikes will be needed.
• Will need to keep
  rates high enough and long enough to get the job done.
• Will do whatever is
  needed to get inflation back to normal.
• The job is not done
  yet.
• Not predicting what
  next bank rate move will be.
• We have got a big
  job to do yet.
• There is no
  premature celebration here on inflation falling.
• MPC has not had any
  discussion about cutting bank rate.
• There are strong
  views on MPC about inflation outlook.

The US Jobless Claims
beat expectations once again by a big margin:

• Initial Claims 201K vs. 225K expected and
  221K prior (revised from 220K).
• Continuing claims 1662K vs. 1695K expected
  and 1683K prior (revised from 1688K).

This report coincides with the
NFP survey period.

ECB’s Vujcic (hawk
– non voter) is comfortable with the current level of rates:

• As prices ease, the
  4% rate will be more restrictive.
• If outlook holds
  won’t need any more rate hikes.
• Latest hike puts us
  in a better position.

ECB’s Wunsch (hawk
– voter) is also leaning towards keeping rates higher for longer:

• Whether we need to
  do more or not is a very difficult question.
• Have greater
  confidence that projections can be used as an anchor.
• May have reached a
  peak in wages, but that’s still uncertain.
• Can’t conclude yet
  that we’ve reached terminal rate.
• I’m fine with
  reaching inflation target only in 2025.
• Can’t exclude a
  recession, but not the base case.
• Does not see APP
  sales for now.
• PEPP reinvestments
  could and earlier than end of 2024.
• There aren’t
  arguments to keep PEPP reinvestments until end of 2024.
• Would be cautious
  about raising mandatory reserve requirements.

ECB’s Knot (hawk –
voter) joins the other hawks in calling the current level of rates sufficient:

• Does not expect a
  rate hike at next policy meeting.
• Comfortable with
  current interest rates.
• ECB will stay alert
  to signals indicating inflation remains too high.

The US LEI Index
declined by 0.4% in August following a 0.3% decline in July. The Leading
Economic Index has now fallen for 17 straight months.

Friday:

ECB’s Lane (dove –
voter) sees the monetary policy transmission firmly taking hold and expects rates to be held at 4% for sufficiently long:

• Sees staggered reset
  of prices and wages across the economy, a process which is ongoing.
• Dynamics of wages
  and profits in the coming quarters still an open question.
• The transmission of
  our monetary policy to broader financing conditions and the real economy
  is firmly taking hold.
• Central banks try to
  hit inflation in the medium term.
• Inflation over 2% is
  costly for the economy.
• Says won’t be
  speculating on future European Central Bank policy moves.
• The most efficient
  wat to tighten monetary policy is via interest rates.

• 4% rate will do quite a
  bit to bring inflation to 2%.

• ECB is still very data
  dependent.

• Expect rates to held
  sufficiently long at 4%.

• Key wage data will not
  be available until sometime in the 2024.

• Not seeing a toxic mix
  that will trigger a recession.

The Australian
Manufacturing PMI fell further into contraction while the Services PMI jumped
back into expansion:

• Manufacturing
  PMI 48.2 vs. 49.6 prior.
• Services
  PMI 50.5 vs. 47.8 prior.

The Japanese CPI
data matched the prior readings with inflation remaining at cycle highs:

• Japan
  CPI Y/Y 3.2% vs. 3.3% prior.
• Japan
  Core CPI Y/Y 3.1% vs. 3.0% expected and 3.1% prior.
• Japan
  Core-core CPI Y/Y 4.3% vs. 4.3% prior.

The Japanese
Manufacturing PMI fell further into contraction with the Services PMI remaining
in expansion:

• Manufacturing
  PMI 48.6 vs. 49.6 prior.
• Services
  PMI 53.3 vs. 54.3 prior.

The BoJ kept its
monetary policy unchanged as expected with the interest rate at -0.10%:

• Maintains 10-year
  JGB yield target around 0%.
• Maintains band
  around its 10-year JGB yield target at up and down 0.5% each.
• Maintains offer to
  buy 10-year JGB at 1.0% daily through fixed-rate market operations.

• Makes no change to
  forward guidance.
• Japan’s economy recovering moderately.
• Japan’s economy
  likely to continue moderate recovery.
• Inflation
  expectations showing renewed signs of accelerating.
• Must watch financial
  and forex market moves and impact on Japan’s economic activity, prices.

Moving on to the
press conference, BoJ Governor Ueda repeated that they are ready to ease more
if necessary and that they are not yet sure that inflation can reach the 2%
target sustainably:

• Will not hesitate to take additional easing measures if necessary.
• We are yet to foresee inflation reaching 2% in a stable manner.
• Japan economy is recovering moderately.
• Wages and price setting behaviour has been more
  positive recently.
• (Clarified
  on the recent interview where he mentioned a “quiet exit” from monetary easing)
  I said that we need to patiently continue easy policy.

• We could consider
  ending yield curve control and modify negative interest rate policy.
• But only when we
  judge that achievement of 2% inflation is in sight.
• We are not in a
  situation now to decide on the order of change in policy tools.
• One
  of the most important factors to judge prices is strength of wage growth.

The UK August
Retail Sales missed expectations with some minor positive revisions to the
prior readings:

• Retail
  Sales Y/Y -1.4% vs. -1.2% expected and -3.1% prior (revised from -3.2%).
• Retail
  Sales M/M 0.4% vs. 0.5% and -1.1% prior (revised from -1.2%).
• Core
  Retail Sales Y/Y -1.4% vs. -1.3% and -3.3% prior (revised from -3.4%).
• Core
  Retail Sales M/M 0.6% vs. 0.6% expected and -1.4% prior.

French PMIs missed
expectations by a big margin falling deeper into contraction:

• Manufacturing
  PMI 43.6 vs. 46.0 expected and 46.0 prior.
• Services
  PMI 43.9 vs. 46.0 expected and 46.0 prior.

German
PMIs beat expectations across the board:

• Manufacturing
  PMI 39.8 vs. 39.5 expected and 39.1 prior.
• Services
  PMI 49.8 vs. 47.2 expected and 47.3 prior.

The Eurozone Manufacturing
PMI missed expectations while the Services PMI beat forecasts although they
both remain in contraction:

• Manufacturing
  PMI 43.4 vs. 44.0 expected and 43.5 prior.
• Services
  PMI 48.4 vs. 47.7 expected and 47.9 prior.

The UK Services
PMI fell further into contraction while the Manufacturing PMI saw a small
bounce:

• Manufacturing
  PMI 44.2 vs. 43.0 expected and 43.0 prior.
• Services
  PMI 47.2 vs. 49.2 expected and 49.5 prior.

The Canadian July Retail
Sales missed forecasts although the core reading was much better than expected:

• Retail Sales Y/Y 2.0% vs.
  -0.6% prior.
• Retail Sales M/M 0.3% vs.
  0.4% expected and 0.1% prior.
• Core Retail Sales M/M
  1.0% vs. 0.5% expected and -0.7% prior (revised from -0.8%).
• August advanced estimate
  -0.3%.

ECB’s de Cos (dove
– non voter) joins the others in the higher for longer camp:

• Underlying inflation
  is now easing.
• Inflation seems to
  be turning a corner.
• Current interest
  rate level – if maintained for sufficiently long – is broadly consistent
  with achieving the target.
• Too early to talk
  about rate cuts.
• Would be cautious
  about discontinuing PEPP reinvestment.
• Selling bonds is not
  something the ECB is currently considering in the future.

The S&P Global
US Manufacturing PMI beat expectations while the Services PMI missed:

• Manufacturing PMI
  48.9 vs. 48.0 expected and 47.9 prior.
• Services PMI 50.2 vs.
  50.6 expected and 50.5 prior.

Fed’s Collins
(neutral – non voter) leans on the higher for longer stance acknowledging the current
resilience in the economy:

• Optimistic inflation
  can fall with only a “modest” rise in unemployment, see a widened
  pathway to that outcome.
• Current policymaking
  requires “considerable” patience to get the right signal from
  data.
• Despite
  “encouraging” recent data, inflation remains too high.
• Key elements of
  inflation, such as core services excluding shelter, haven’t demonstrated
  “sustained” improvement.
• Supports vigilance
  regarding inflation risks; believes it’s “too soon to be
  confident” that inflation is under control given the continued
  above-trend economic activity.
• Cash levels are
  reverting to “pre-pandemic norms”; anticipates household and
  business spending to be more influenced by high interest rates.
• Some inflation
  readings have been encouraging.
• Economic activity
  continues to be above trend.

Fed’s Bowman (hawk
– voter) expects further interest rates increases as the economy remains too
strong for a timely achievement of their inflation goal:

• Further interest
  rate increases likely appropriate with inflation “still too high”.
• Fed policy will need
  to be held at a restrictive level “for some time” to return
  inflation to 2% “in a timely way.”
• Continued risk of
  further increase in energy prices could reverse some of the recent
  progress on lowering inflation.
• Economy still
  growing at a “solid pace,” with robust consumer spending and
  solid job gains.
• Bank lending
  standards have tightened but no sign of a “sharp contraction” of
  credit that would significantly slow the economy.
• Expect progress on
  inflation is “likely to be slow” under current conditions,
  suggesting the need for even tighter policy.
• It’s imperative that
  bankers provide feedback on recent plans to toughen bank rules.

The
highlights for next week will be:

• Monday:
  German IFO.
• Tuesday:
  US Consumer Confidence.
• Wednesday:
  BoJ Meeting Minutes, Australia Monthly CPI, US Durable Goods Orders.
• Thursday:
  Australia Retail Sales, US Q2 Final GDP, US Jobless Claims.
• Friday:
  Japan Tokyo CPI, Japan Unemployment Rate, Japan Retail Sales, UK Q2 Final GDP,
  Eurozone CPI, Canada GDP, US Core PCE.

That’s all folks,
have a great weekend!