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!