Weekly Market Recap (21-25 August)

Monday:

The PBoC cut the
1-year LPR rate by less than expected and held the 5-year rate steady:

• LPR
  1-year 3.45% vs. 3.40% expected and 3.55% prior.
• LPR
  5-year 4.20% vs. 4.05% expected and 4.20% prior.

The German July
PPI missed expectations:

• PPI
  M/M -1.1% vs. -0.2% expected and -0.3% prior.
• PPI
  Y/Y -6.0% vs. -5.1% expected and 0.1% prior.

Tuesday:

Fed’s Barkin
(hawk- non voter) dismissed the moves in the bond market and left the door open
for a rate hike in September if the economy shows too much strength:

• If the US has a
  recession, it would likely be less severe one.
• Try not to focus too
  much on short-term market moves.
• Fed needs to achieve
  2% target to ensure its credibility.
• Accounting for
  implications of work-from-home still has a way to go.
• Credit card debt is
  basically on-trend from before the pandemic.
• Balance sheet
  normalization is a ‘background’ policy at this point.
• Consumer spending
  and economic strength make it possible US economy could re-accelerate
  before inflation cools.
• Won’t pre-judge the
  outcome of the September FOMC meeting.
• If inflation remains
  high and demand gives ‘no signal’ it is likely to drop, that would require
  tighter monetary policy.
• Recent moves in bond
  yields not a sign of ‘inappropriate’ market tightening, likely a response
  to strong economic data.

Wednesday:

The New Zealand Q2 Retail
Sales beat expectations although the figures were all negative:

• Retail Sales Q/Q -1.0%
  vs. -2.6% expected and -1.4% prior.
• Retail Sales Y/Y -3.5%
  vs. 3.1% expected and -4.1% prior.
• Retail Sales ex-autos
  -1.8% vs. -2.5% expected and -1.1% prior.

Wednesday was the
PMIs day where we got lots of misses notably on the Services side:

• Australia
  Manufacturing PMI 49.4 vs. 49.6 expected and 49.6 prior.
• Australia
  Services PMI 46.7 vs. 47.9 expected and 47.9 prior.
• Japan
  Manufacturing PMI 49.7 vs. 49.5 expected and 49.6 prior.
• Japan
  Services PMI 54.3 vs. 53.9 expected and 53.8 prior.
• France
  Manufacturing PMI 46.4 vs. 45.0 expected and 45.1 prior.
• France
  Services PMI 46.7 vs. 47.5 expected and 47.1 prior.
• Germany
  Manufacturing PMI 39.1 vs. 38.7 expected and 38.8 prior.
• Germany
  Services PMI 47.3 vs. 51.5 expected and 52.3 prior.
• Eurozone
  Manufacturing PMI 43.7 vs. 42.6 expected and 42.7 prior.
• Eurozone
  Services PMI 48.3 vs. 50.5 expected and 50.9 prior.
• UK
  Manufacturing PMI 42.5 vs. 45.0 expected and 45.3 prior.
• UK
  Services PMI 48.7 vs. 51.0 expected and 51.5 prior.
• US
  Manufacturing PMI 47.0 vs. 49.3 expected and 49.0 prior.
• US
  Services PMI 51.0 vs. 52.3 expected and 52.3 prior.

Nvidia, which is
the backbone of the AI-inspired rally, reported its quarterly earnings and it
just crushed the expectations with insane numbers. Nevertheless, the stock
erased the gains following the earnings report and the Nasdaq fell by more than
3% in a single day. Sign of a top?

Thursday:

The US Jobless
Claims beat expectations with no sign of a deteriorating labour market yet:

• Initial
  Claims 230K vs. 240K expected and 240K prior (revised from 239K).
• Continuing
  Claims 1702K vs. 1708K expected and 1711K prior (revised from 1716K).

Fed’s Harker
(neutral – voter) repeats that they probably have done enough on interest rates
and they can hold steady into the next year:

• We are seeing an uptick in labour
  productivity.
• The low income consumer is
  clearly slowing down.
• Consumer credit card
  delinquencies are starting to tick up.
• Repeats that they probably
  have done enough on interest rates, wants to see where demand settles out.
• Student loans won’t have
  a big economic effect but it will be a psychological effect.
• I want to see softening in
  the labour market, notably in the services sector.
• At this point, I see the
  Fed holding steady this year while next year is data driven.
• Need to see inflation falling before would be
  willing to cut rates.

ECB’s Centeno
(dove – voter) calls for caution at the next meeting as downside risks to the economy
have materialised:

• We have to be
  cautious at the next meeting.
• Transmission of
  policy is up and running.
• ECB has been data
  dependent on decisions.
• Plenty of data still
  to come ahead of September decision.
• Downside risks to
  the economy have materialized.

Fed’s Collins
(neutral – non voter) acknowledged that they may be near a place where they can
hold rates steady but added also that more rate hikes are possible:

• At this stage it’s
  appropriate to be patient.
• Doesn’t think it’s helpful
  to designate a pre-set path.
• We may be near a
  place where we can hold rates.
• It’s likely that we
  will need to hold for a substantial period of time.
• More Fed rate hikes
  are possible.
• Hasn’t seen as much
  progress as hoped in core-services ex-housing.
• Housing is a big
  challenge for the economy.
• Mindful about how an
  easing in inflation would affect the policy stance.

Friday:

ECB’s Nagel (hawk
– voter) remains very resolute on inflation fighting and suggests that it’s too
early to think about a pause:

• European labour
  market is strong.
• Much too early to
  think about a rate-hike pause.
• ECB must be stubborn
  on policy, more stubborn than inflation is.

The Tokyo CPI,
which is seen as a leading indicator for National CPI, missed expectations
although the core-core reading reached a new high:

• Tokyo
  CPI Y/Y 2.9% vs. 3.0% expected and 3.2% prior.
• Tokyo
  CPI ex-Fresh Food Y/Y 2.8% vs. 2.9% expected and 3.0% prior.
• Tokyo
  CPI ex- Food and Energy 2.6% vs. 2.5% prior.

ECB’s Vujcic (hawk
– voter) said that inflation has most likely peaked, and they need to see
whether rates are restrictive enough to bring it back to their 2% inflation
target:

• Eurozone economy is
  basically stagnating.
• Inflation has most
  likely peaked.
• Need to see whether
  rates are restrictive enough.

German August IFO
Business Climate Index missed expectations as the Europe’s largest economy
keeps on weakening:

• Business Climate Index
  85.7 vs. 86.7 expected and 87.4 prior (revised from 87.3).
• Current Conditions 89.0
  vs. 90.0 expected and 91.4 prior (revised from 91.3).
• Outlook 82.6 vs. 83.8
  expected and 83.6 prior (revised from 83.5).

The Final July University
of Michigan Consumer Sentiment was lower than the preliminary figures across
the board with inflation expectations ticking higher:

• Consumer Sentiment 69.5
  vs. 71.2 expected and 71.6 prior.
• Current Conditions 75.7
  vs. 77.4 expected and 76.6 prior.
• Expectations 65.5 vs.
  67.3 expected and 68.3 prior.
• 1 year Inflation
  Expectations 3.5% vs. 3.3% expected and 3.4% prior.
• 5–10 year Inflation
  Expectations 3.0% vs. 2.9% expected and 3.0% prior.

Fed Chair Powell (neutral
– voter) delivered his remarks at the Jackson Hole Symposium, and he basically repeated
the same old stuff i.e. the Fed is data dependent and all options are on the
table. There’s a particular focus on the labour market and to me it looks like
the Fed is no longer targeting inflation, but the labour market:

• We are prepared to raise
  rates further if appropriate, will proceed carefully.
• We will decide next move
  based on data.
• Fed will proceed ‘carefully’ when deciding to
  hike again or hold steady.
• Fed attentive to signs economy not cooling as
  expected.
• Economic uncertainty calls for ‘agile’
  monetary policy making.
• Inflation remains too high.
• Two months of good data are only the
  beginning of what we need to see to build confidence on inflation path.
• Policy is restrictive but Fed can’t be
  certain what neutral rate level is.
• Fed will not change 2% target.
• Lowering inflation also likely to require
  a softer labour markets.
• Signs job market not cooling could also
  warrant more Fed action.
• There is evidence that
  inflation has become more responsive to labour market tightness than was the
  case in recent decades. These changing dynamics may or may not persist, and this uncertainty
  underscores the need for agile policymaking.
• We will keep at it until the job is done.

Fed’s Harker (neutral –
voter) just repeated what he said previously:

• He doesn’t see the
  need for more hikes now.
• Hold rates steady
  and see how economy develops.
• If inflation retreat
  stalls, it could call for more hikes.
• Doubt rate cuts are
  on the table until next year at some point.

Fed’s Mester (hawk – non voter)
remains firmly hawkish as she doesn’t even see rate cuts for next year:

• We have to be very
  diligent about this.
• We don’t want to be
  satisfied because inflation remains too high.
• We’ve had stronger
  underlying momentum since June forecasts.
• We’ve made progress
  on inflation.
• Core inflation over
  4% is still too high.
• Notes she doesn’t
  have cuts built in for next year but will watch the data.
• It was ‘very good’
  to see the recent numbers on inflation but need to see more.
• It’s very likely
  that we will need below-trend growth to get inflation under control.
• Labor market is
  stronger than I would have anticipated given rates, but pandemic effects
  are working their way through.
• We probably still
  have more work to do.

The
highlights for next week will be:

• Monday: UK Bank Holiday,
  Australian Retail Sales.
• Tuesday: Japan
  Unemployment Rate, US Consumer Confidence, US Job Openings.
• Wednesday: US ADP.
• Thursday: Japan Retail
  Sales, Chinese PMIs, Eurozone CPI, Eurozone Unemployment Rate, US Jobless
  Claims, US Core PCE.
• Friday: Swiss CPI, US
  NFP, US ISM Manufacturing PMI.

That’s all folks, have a
great weekend!