Can the Fed afford to ease off the brake?
The end of last week was a bit of a reality check for investors that were maybe getting a little carried away with the supposed “dovish pivot” from the Fed and turning a blind eye to the data and what central bank policymakers were saying.
Perhaps the experience of the last 12 months can explain the latter but there’s no ignoring the data that we saw on Friday. The US economy is certainly not behaving like it’s in a recession; rather the labour market is so hot that the Fed may not be able to slow down as hoped.
While the UK is preparing for a long period of stagflation, the US is desperately trying to avoid a hard landing. The inflation data next week may shed further light on whether the Fed can afford to ease off the brake in September or possibly even be forced to slam on harder.
It is all about inflation this week. Now that some Fed members have pushed back on the idea of a Fed pivot, investors will want to see if inflation continues to show signs that inflation has peaked. The US economy might be slowing down and that will lead to some demand destruction for goods.
The July inflation report is expected to show a much slower pace of price pressure, but if it ends up being a hot report, expectations for the September FOMC meeting could swing further to a 75 basis point rate increase. The month-over-month reading is expected to show a 0.2% increase, down from the 1.3% pace in the prior month. The headline year-over-year reading is expected to ease from 9.1% to 8.8%.
The other important data set for the week is the preliminary University of Michigan consumer sentiment report, which is expected to stabilize.
Traders will also pay close attention to a few Fed appearances during the week from Evans, Kashkari, and Daly. Leading up to the September policy decision, traders will want to know how many Fed members are positioning themselves for a slower pace of tightening policy.
Election season continues with US primary elections in Connecticut, Minnesota, Vermont, and Wisconsin.
Next week is looking a little quiet on the European front, with final inflation data the only notable release. Of course, it will attract plenty of attention considering the level of central bank activity at the moment but revisions do tend to be less impactful.
GDP data on Friday is the standout next week, especially in light of the bleak BoE forecasts on Thursday. The country may not be in a recession yet but the central bank thinks it will very soon and the slump will be long and painful. If the GDP data on Friday is unexpectedly negative, it will compound the misery facing the country over the next couple of years.
Inflation and GDP data is released next week with the former seen falling to 15.3%, allowing for further rate cuts from the CBR as it seeks to address the strength of the rouble and support the economy.
Only tier three data releases next week, with manufacturing, mining and gold production among them.
A selection of economic data is due next week from unemployment to industrial production and the current account. Inflation jumped to 79.6% last month, further highlighting the failure of the monetary policy experiment. We could get more evidence next week but ultimately, it won’t make a difference.
Inflation hit 3.4% last month, further increasing the odds of a 50 basis point hike from the SNB next month. The central bank does like to surprise markets so an inter-meeting move is possible. Next up is unemployment data on Monday.
China releases its trade balance data over the weekend, but it should have little market impact on Monday. China CPI will be released on Wednesday with inflation expectations universally benign at 2.50% YoY. The risk is that the inflation story starts to catch up with China, where growth is muted.
The Pelosi/Taiwan visit is not expected to have a long-lasting impact on local markets, which were already pricing it out on Friday. Developments in China’s property developer sector, real estate bad loans, and covid zero continue to present the main headline risk to China.
The RBI hiked by 0.50% on Friday, higher than expected, with a hawkish tone to the statement. The INR did not respond positively, nor has it to lower oil prices. A strong jobs report hasn’t helped and a higher inflation number from the US next week could see it test record lows against the US dollar above 80.00. That could also restart foreign investor outflows from the Sensex once again, which has recovered over the past two weeks.
AUD/USD remains at the mercy of international investor flows as a global sentiment gauge. AUD has staged a major technical breakout higher but gains have been limited by AUD/JPY due to the USD/JPY collapse.
Consumer and business sentiment on Monday are the only releases of note this week. Australian equities continue to track the Nasdaq and S&P 500.
NZD/USD remains at the mercy of international investor flows as a global sentiment gauge. NZD has staged a major technical breakout higher but gains have been limited by NZD/JPY due to the USD/JPY collapse.
NZ electronic card spending on Tuesday, and business PMI and food inflation on Friday, are closely watched data points for NZ. Higher spending and food inflation will reinforce the view that more aggressive RBNZ tightening is on the way. Could be a short-term negative for local equities and a short-term positive for the currency.
The USD/JPY collapse extended to 130.50, just shy of 130.00. It is attempting to form a base at these levels but its direction remains entirely dependent on the US/Japan interest rate differential. Hawkish comments from FOMC members over the past week have lifted USD/JPY back to 132.00 while the jobs report gave it another kick higher.
Japan has a heavy week of data releases, but all are tier-2 and unlikely to have a big impact on the markets. The Nikkei continues to closely track the Nasdaq.
Singapore retail sales were soft this past week, easing MAS tightening fears in October. That should take the edge off Singapore’s GDP this Thursday and if that data is soft, SGD weakness could well resume. A hawkish MAS has meant SGD has outperformed in the Asia FX space.
Singapore earnings have been firm for Q2 supporting equity prices.
Saturday, Aug. 6
US Secretary of State Blinken visits the Philippines
Berkshire Hathaway Inc. quarterly earnings are released
Sunday, Aug. 7
China trade, forex reserves
US Secretary of State Blinken travels to Africa
Monday, Aug. 8
Australia foreign reserves
Singapore foreign reserves
New Zealand 2-yr inflation expectation
Iran Nuclear Deal talks to continue in Vienna
Tuesday, Aug. 9
US NFIB small business optimism, nonfarm productivity
US primary elections are held in Connecticut, Minnesota, Vermont and Wisconsin
Australia NAB business confidence, household spending
China aggregate financing, money supply, new yuan loans
Japan M2 money stock, machine tool orders
Mexico CPI, international reserves
New Zealand heavy traffic index, card spending
Philippines GDP, trade, unemployment
Thailand consumer confidence
Parties are vying to fill the 1st District seat left vacant by the death of Republican Representative Jim Hagedorn
Wednesday, Aug. 10
US July CPI M/M: 0.2%e v 1.3% prior; Y/Y: 8.8%e v 9.1% prior, wholesale inventories
Australia consumer confidence
Thailand rate decision
Chicago Fed President Evans talks about the economy and monetary policy
Minneapolis Fed President Kashkari speaks on stagflation
Chinese Ambassador to Australia Xiao Qian speaks at Australia’s National Press Club
EIA crude oil inventory report
Thursday, Aug. 11
US PPI, initial jobless claims
Australia consumer inflation expectations
Mexico (Banxico) rate decision: Expected to raise Overnight Rate by 75bps to 8.50%
Mexico industrial production
New Zealand home sales, net migration
Peru rate decision
South Africa manufacturing production
South Korea money supply
Thailand foreign reserves
Turkey current account
San Francisco Fed President Daly is interviewed on Bloomberg TV
UK Tory Party leadership holds hustings in Cheltenham
Denmark’s government holds Ukraine conference
Friday, Aug. 12
US University of Michigan consumer sentiment
China medium-term lending
Eurozone industrial production
France unemployment, CPI
India industrial production, trade
New Zealand food prices, PMI
Turkey industrial production
UK GDP industrial production
EasyJet Plc pilots are set to strike in Spain
Sovereign Rating Updates
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