Weekly Market Recap (04-08 September)

Monday:

ECB’s Wunsch (hawk
– non voter) remains in favour of raising interest rates again:

• Underlying inflation
  remains persistent, may need more rate hikes.
• I’m inclined to say
  we maybe need to do a little bit more.
• The idea that we’ll
  have to come to a pause at a certain point can’t be excluded, but it’s too
  early to talk about stopping hiking completely.

The Switzerland Q2 GDP
missed expectations as the monetary tightening is starting to bite more
heavily:

• GDP
  Q2 0.0% vs. 0.1% expected and 0.3% prior.

ECB’s Lagarde
(hawk – voter) is focused on the inflation expectations and keeping them in
check:

• It is exactly when
  people are paying most attention that central banks should deliver their
  key communication to ensure that those expectations remain firmly anchored.
• It will be critical
  for central banks to keep inflation expectations firmly anchored while
  these relative price changes play out.

Tuesday:

Chinese Caixin
Services PMI missed expectations by a big margin although remaining in
expansion:

• Services
  PMI 51.8 vs. 53.6 expected and 54.1 prior.

The RBA left the
cash rate unchanged as expected at 4.10%:

• Inflation in Australia has passed its peak.
• But inflation is still too high and will
  remain so for some time yet.
• The Australian economy is experiencing a
  period of below-trend growth.
• Returning inflation to target within a
  reasonable timeframe remains the priority.
• There are significant uncertainties around
  the outlook.
• Services price inflation has been
  surprisingly persistent overseas and the same could occur in Australia.
• Some further tightening of monetary policy
  may be required.
• Will
  continue to pay close attention to developments in the global economy, trends
  in household spending, and the outlook for inflation and the labour market.

ECB’s Lane (dove –
voter) didn’t offer much in terms of forward guidance:

• August
  inflation data is welcome, but we need to see that continue.
• We do expect bumpiness in easing of energy, food inflation.
• Easing
  in services inflation helps limit narrative that tourism is keeping services
  inflation high.

The Eurozone July
PPI beat expectations, but the figures were still all negative:

• PPI M/M -0.5% vs.
  -0.6% expected and -0.4% prior.
• PPI Y/Y -7.6% vs.
  -7.6% expected and -3.4% prior.

ECB’s Schnabel (hawk –
voter) touched on climate change and how it could bring downside tail risks:

• Climate change is an
  existential threat with large downside tail risks.
• Climate-related and
  environmental risks (C&E risks) are now an important focal point for
  supervisors.
• Climate change
  constitutes an existential threat, implying large downside tail risks.
• Dealing with
  financial risks is the core of prudential supervision.
• Physical climate
  risks tend to be correlated globally.
• The economic
  consequences of physical climate risks could be mitigated by closing the
  large climate insurance protection gap.
• In the EU, only a
  quarter of losses caused by climate-related catastrophes are insured.

Fed’s Waller (hawk –
voter) changed his stance and he’s now leaning towards a pause:

• I would say the
  risks to doing too much and too little are balanced.
• The data last week
  clearly showed the jobs market is starting to soften.
• Unemployment is
  about where it was a year ago, so change isn’t that big.
• Recessions are often
  caused by shocks that come out of nowhere, but the data so far is pretty
  good (for a soft landing).
• I want to be very
  careful to say that ‘we’ve done the job’.
• I want to see ‘a
  couple months’ of data.
• I don’t think one
  more hike would send the economy into a recession.
• Data will drive
  whether the Fed hikes again.
• Recent data will
  allow the Fed to proceed carefully.
• We’re starting to
  see the economy slow down.
• Treasury yields are
  about where they should be.
• The US economy is
  ‘about 80% closed’ so impacts from abroad will be smaller than for others.
• We’ve been keeping a
  very close eye on commercial real estate, will continue to roll over
  during the next 2 years or so.
• We’re not sure about
  what prices CRE will be trading at in two years.

Saudi Arabia announced
that it would extend the voluntary 1 million barrels per day output cut through
December and Russia quickly followed by saying it was cutting exports by 300k
bpd through year end. Both added that caveat that the decision would be
reviewed monthly.

Fed’s Mester (hawk – non
voter) maintained her hawkish stance as she sees the need to go a “little bit”
higher on rates:

• The labour market
  has come more into balance.
• From what I see so
  far, we might have to go a bit higher, we might have to raise the policy
  rate a bit more.
• There is still a lot
  of time before our next decision in September and we will get a lot of
  data and information by then.
• Gasoline prices are
  rising again. We have to be very attentive to that.
• The longer inflation
  stays above 2%, the more likely it is that the risks will materialise.
• If we end up raising
  interest rates too much and the economy loses momentum more than
  necessary, we can lower interest rates.
• We will certainly
  not continue to raise interest rates until inflation has already fallen to
  2%. Nor will we wait to lower interest rates until inflation is at 2%.
• There are upside
  risks to our inflation forecasts, in my view.

Wednesday:

The Australian Q2 GDP
beat expectations:

• GDP Q2 0.4% vs. 0.3%
  expected and 0.4% prior.

BoJ’s Takata sounded
optimistic on hitting the inflation target but remains wary of downside risks:

• Japan is seeing
  early signs of hitting 2% inflation.
• Japan’s economy is
  recovering moderately.
• He believes that the
  Bank of Japan must patiently maintain easy monetary policy given the very
  high uncertainty on the outlook.

• At the same time,
  BOJ must respond nimbly to uncertainty with eye on economic, price
  outlook.
• There’s a chance
  Japan will see shift in public perception prices and wages won’t rise much.
• Japan seeing signs
  of change in corporate wage, price-setting behaviour.
• There is sign of
  change in Japan’s trend inflation as rising wages push up inflation
  expectations.
• Inflation is already
  exceeding BOJ’s 2% target but there is some distance to achieving it
  stably and in sustainable fashion.
• If overseas
  economies slow sharply, that could weigh on Japan’s economy.
• Stronger than
  expected US economy having an impact on currencies.
• Overseas factors
  having greater impact on currencies.
• We need to stand
  ready to flexibly respond to uncertainty.
• Action in July was a
  flexible response.

ECB’s Villeroy (neutral –
voter) is leaning more towards keeping interest rates high for longer rather
than raising them more:

• There is a slowdown
  but no recession.
• Had first successes
  against inflation but need to persevere.
• Must bring inflation
  down to 2% level between now and 2025.
• We are near or very
  near the peak on interest rates.
• Our options are open
  at the next and upcoming rate meetings.
• Maintaining rates
  for a sufficiently long period now counts more than further rate hikes.

ECB’s Knot (hawk – voter)
didn’t sound much confident on a September rate hike:

• Markets may be
  underestimating September rate hike chances.
• Bringing inflation
  to 2% by the end of 2025 is the bare minimum.
• Rate hike is a
  possibility, not a certainty.

The Eurozone July Retail Sales
missed expectations on the M/M figure but beat on the Y/Y one:

• Retail Sales M/M -0.2%
  vs. -0.1% expected and 0.2% prior (revised from -0.3%).
• Retail Sales Y/Y -1.0%
  vs. -1.2% expected and -1.0% prior (revised from -1.0%).

ECB’s Kazimir (hawk –
voter) favours one last rate hike:

• The preferable
  option would be to hike rates by 25 bps next week.
• One more, likely
  last rate hike, still needed.
• The alternative
  option would be to hike in October or December.
• Inflation remains
  stubbornly high, price growth expectations too far above 2%.

Fed’s Collins (neutral –
non voter) is leaning towards a high for longer stance rather than a higher for
longer one:

• It’s time for
  monetary policy to be patient and deliberate.
• Fed should ‘allow
  time’ when making monetary policy choices.
• Too soon to say
  inflation sustainably moving back to target.
• Fed must balance
  lowering inflation against slowing economy too much.
• Fed can likely
  achieve goals without causing notable economic pain.
• Still too much job
  market demand.
• Wage growth remains elevated.
• Core services
  inflation moderation has been modest.
• Expects economy to
  slow into end of year.

BoE’s Bailey (neutral –
voter) is expecting a “marked” fall in inflation by year-end:

• Wage bargaining has
  surprised to the upside.
• There has been a
  very large terms of trade shock in this country.
• Many indicators are
  signalling a fall in inflation, which will be marked by the end of this
  year.
• Question is: As
  headline inflation comes down, will we see inflation expectations continue
  to come down and will that impact wage bargaining?
• There is not group
  think at the MPC at the moment.

BoE’s Dhingra (dove –
voter) maintains her dovish stance as she expects the monetary policy lags to
start affecting the economy more heavily:

• Labour market
  continues to ease as MPC’s hiking cycle takes effect with a lag.
• Pass-through of
  level changes to wages would not necessarily pose a risk to our target in
  the medium term.
• Not yet evidence to
  suggest firms will seek to increase their margins.
• Domestic factors are
  likely to continue to ease the pressure on CPI inflation.

The Bank of Canada kept
interest rates steady at 5.00% as expected:

• The Canadian economy has entered a period
  of weaker growth.
• The tightness in the labour market has
  continued to ease gradually.
• Recent CPI data indicate that inflationary
  pressures remain broad-based.
• With the recent increase in gasoline prices,
  CPI inflation is expected to be higher in the near term before easing again.
• With recent evidence that excess demand in
  the economy is easing, and given the lagged effects of monetary policy,
  Governing Council decided to hold the policy interest rate at 5%.
• Governing Council remains concerned about
  the persistence of underlying inflationary pressures, and is prepared to
  increase the policy interest rate further if needed.
• Growth prospects in China have diminished.
• In the United States, growth was
  stronger than expected.

The US ISM Services PMI
beat expectations by a big margin coming at 54.5 vs. 52.5 expected and 52.7
prior:

• employment index 54.7 vs. 50.7 prior.
• new orders index
  57.5 vs. 55.0 prior.
• prices paid index
  58.9 vs. 56.8 prior.
• new export orders
  62.1 vs. 61.1 prior.
• imports 52.3 vs. 52.3 prior.
• backlog of orders
  41.8 vs. 52.1 prior.
• inventories 57.7 vs. 50.4 prior.
• supplier deliveries 48.5 vs. 48.1 prior.
• inventory sentiment 61.5 vs. 56.6 prior.

The Fed release the Beige
Book which provides recent anecdotal information on current economic
conditions:

• Most Districts indicated economic growth was
  modest during July and August.
• Consumer spending on tourism was stronger
  than expected but other retail spending continued to slow, especially
  non-essential.
• Some Districts highlighted reports
  suggesting consumers may have exhausted their savings and are relying more on
  borrowing to support spending.
• New auto sales did expand in many Districts,
  but contacts noted this had more to do with better availability of inventory
  rather than increased consumer demand.
• Manufacturing contacts in several Districts
  also noted that supply chain delays improved.
• New orders were stable or declined in most
  Districts, and backlogs shortened.
• Nearly all Districts reported the inventory
  of homes for sale remained constrained.
• Some Districts reported higher
  delinquencies on consumer credit lines.
• Job growth was subdued across the nation.
• Nearly all Districts indicated businesses
  renewed their previously unfulfilled expectations that wage growth will slow
  broadly in the near term.
• Most Districts reported price
  growth slowed overall, decelerating faster in manufacturing and consumer-goods
  sectors.

Thursday:

BoJ Nakagawa thinks that
it’s appropriate to maintain easy monetary policy for now but there are signs
that inflation is on path to achieve their target and the risk that it could
even accelerate more than expected:

• Appropriate to
  maintain easy monetary policy for time being.
• Signs of change seen
  in Japan’s corporate price, wage-setting behaviour.
• Still not at stage
  where we can say Japan has stably, sustainably achieved BOJ’s price target
• Monetary easing
  involves various side-effects.
• BOJ will conduct
  flexible market operation when 10-year JGB yield moves in range of
  0.5-1.0% range with eye on interest rate levels and speed of moves.
• BOJ’s July decision
  has heightened sustainability of its monetary easing framework.
• Japan’s capex,
  consumption increasing moderately.
• Japan’s economy
  likely to continue recovering moderately.
• Our baseline
  scenario is for consumer inflation to gradually re-accelerate after a
  period of slowdown.

• There is chance
  inflation could accelerate more than expected, though there is also chance
  pass-through of costs could moderate.
• Job market
  tightening but outlook for wages also depends on corporate
  earnings.
• Price rises for
  goods broadening, service prices also rising mainly for accommodation fees.
• Must be vigilant to
  risk of further slowdown in global growth.
• Sees equal degree of
  upside and downside risks to inflation.
• Can exit NIRP when
  economy is strong enough.
• But there is no
  preset idea on order or timing of that.
• It depends on
  financial developments at the time.
• Does not want to
  comment on FX levels.
• Strong outcome in next year’s wage talks would be a necessary condition,
  though not a sufficient one to contemplate pursuing end of negative rates.
• Want
  to look at various factors beyond wages in deciding future policy changes.
• Further YCC tweak
  cannot be ruled out but is not an imminent issue now.

The Chinese trade data
beat expectations but the readings remain very poor:

• Exports Y/Y -8.8%
  vs. -9.2% expected and -14.5% prior.
• Imports Y/Y -7.3%
  vs. -9.0% expected and -12.4% prior.

RBA’s Lowe gave his final
speech as Governor as Deputy Governor Bullock will take over as the new head on
September 18:

• My recent focus is
  risk wages, profits run ahead of rates
  consistent with return to inflation target.
• If this risk
  materialised and inflation became sticky, would require tighter monetary
  policy.
• Will be difficult to
  return to the earlier world in which inflation tracked in a very narrow
  range.
• Inflation is likely
  to be more variable around target.
• Australia has been
  well served by a flexible inflation target.
• Possible that
  Australia can sustain unemployment rates below what we have had over the
  past 40 years.
• Now in an
  environment of stronger growth in nominal wages, which is positive.
• The recent
  productivity record isn’t encouraging; solution fundamentally a political
  problem.
• Interest rates
  influence housing prices but are not reason Australia has some of the
  highest prices in the world.
• Issue that defined
  my term more than any other was forward guidance on rates during the
  pandemic.
• Guidance was widely
  interpreted as a commitment, rather than a conditional statement.
• With the benefit of
  hindsight, my view is that we did do too much during pandemic.

The Switzerland August
seasonally adjusted Unemployment Rate remained steady at 2.1% vs. 2.1% expected
and 2.1% prior.

The Eurozone Q2 Final GDP
reading was 0.1% vs. 0.3% expected as the previous estimate was revised to
0.1%:

• Household consumption flat.
• Government expenditure 0.1%.
• Gross fixed capital formation 0.1%.
• External balance -0.4%.
• Changes in inventories 0.4%.

The US Jobless Claims
beat expectations by a big margin across the board:

• Initial Claims 216K vs. 234K expected and
  228K prior.
• Continuing Claims 1679K vs. 1715K expected
  and 1725K prior.

The BoC Governor Macklem
delivered a hawkish speech titled “staying the course”:

• We are concerned
  that progress in bringing down inflation has slowed.
• We are prepared to
  raise rates again but don’t want to raise rates than we have to.
• The longer we wait,
  the harder it is likely to be to reduce inflation.
• Monetary policy
  might not be restrictive enough to restore price stability.
• Bank is concerned
  that larger-than-normal price increases for goods and services remain
  broad based.
• We are not trying to
  kill economic growth.
• The biggest
  contribution to the slowing in inflation since the peak last year has been
  from energy, which accounts for two-thirds of the slowdown.
• Today, about 60% of
  CPI components are rising above 3% and about 45% are rising above 5%.
• Looking ahead, we
  want to see less-generalized price increases as well as a decline in the
  average price increase.
• The weakness in
  second-quarter GDP largely reflected a broad-based slowing in consumer
  spending and a decline in housing activity.
• We will be watching
  wage growth closely.
• Maybe we don’t need
  to do more, maybe we do on interest rates.
• We will take
  decisions meeting by meeting.
• Expecting growth of
  ‘a little less than 1%’ over the next few quarters.
• You can expect
  headline inflation is going to go up in the near term, before it eases.

Fed’s Williams (neutral –
voter) just expressed the uncertainty policymakers are currently facing:

• Labor market
  balances are evening out.
• There’s still more
  data to come before next FOMC meeting.
• Inflation is far too
  high but moving down.
• Policy is in a good
  place, is data dependent.
• We are seeing
  movement in the right direction for the economy.
• It’s an open
  question if monetary policy is restrictive enough.
• The latest consumer
  spending data has been strong.
• Expects unemployment
  rate to rise to low 4% range.

Fed’s Goolsbee (dove –
voter) maintains his stance as he prefers to keep rates high for longer rather
than higher for longer:

• It’s possible we can
  get on ‘golden path’.
• Monetary policy is working.
• Overall level of
  inflation is above where we want it.
• Clearly there are risks.
• China, US government
  shutdown are among possible risks.
• We have also had
  false dawns on inflation before.
• Want to see progress
  on core inflation, especially goods and housing.
• Market’s
  expectations on inflation also have a major influence.
• I’d pay less
  attention to wage growth as an indicator of inflation.
• We are very rapidly
  approaching time when are argument is not about how high should rates go,
  but rather how long rates have to stay high.
• Collectively Fed
  forecast is that rates will have to stay up for a relatively extended
  period.
• You can’t change the
  inflation target until you’ve hit your inflation target.
• We have to get to
  the 2% inflation target, retain credibility.
• A possible UAW
  strike could have an impact, it could be material to our decisions.

Fed’s Logan (hawk –
voter) called for a skip at the upcoming September FOMC meeting:

• ‘Could be
  appropriate’ to skip interest-rate increase in September.
• There is ‘work left
  to do’ to get to sufficiently restrictive policy.
• Skipping does not
  imply stopping rate hikes.
• Not yet convinced
  we’ve extinguished excess inflation.
• Fed needs to
  calibrate policy ‘carefully,’ must proceed gradually.
• Significantly lower
  inflation in recent months ‘encouraging,’ but too soon to confidently say
  on path to 2% in timely way.
• Job market strength
  suggests we have not finished the job of restoring price stability.
• If stronger economic
  activity continues, could lead to a resurgence of inflation.

Friday:

Japan July Average Cash
Earnings growth slowed down more, and the wages data is something the BoJ is
particularly focused on:

• Average Cash
  Earnings Y/Y 1.3% vs. 2.3% prior.
• Real Wages Y/Y -2.5%.
• Household spending
  -5.00% vs. -4.2% prior.

The Japanese Final Q2 GDP
missed expectations and the previous reading was revised downwards:

• Japan Q2 GDP 1.2%
  vs. 1.3% expected and 0.8% prior (revised from 1.5%).

• GDP Growth
  Annualised 4.8% vs. 5.5% expected and 3.2% prior (revised from 6%).

The Canadian Jobs report showed
another pick up in wage growth which is something the BoC is particularly focused
on:

• Employment change
  39.9K vs. 20.0K expected and -6.4K prior.

• Full time 32.2K vs. 1.7K
  prior.

• Part time 7.8K vs.
  -8.1K prior.

• Participation rate
  65.5% vs. 65.6% expected and 65.6% prior.

• Average hourly wages
  permanent employees 5.2% vs. 4.7% expected and 5.0% prior.

• Unemployment rate
  5.5% vs. 5.6% expected and 5.5% prior.

The
highlights for next week will be:

• Tuesday: UK Labour Market
  report, German ZEW, US NFIB Small Business Optimism Index.
• Wednesday: Japan PPI, UK
  GDP, EZ Industrial Production, US CPI.
• Thursday: Australia
  Labour Market report, Japan Industrial Production, Switzerland PPI, ECB Policy
  Decision, US Jobless Claims, US PPI, US Retail Sales.
• Friday: NZ Manufacturing
  PMI, China Industrial Production and Retail Sales, Eurozone Wages data, US
  University of Michigan Consumer Sentiment.

That’s all folks, have a
great weekend!