Weekly Market Recap (04-08 September)

<p>Monday:</p><p>ECB’s Wunsch (hawk
– non voter) remains in favour of raising interest rates again:</p><ul type="disc"><li>Underlying inflation
remains persistent, may need more rate hikes.</li><li>I’m inclined to say
we maybe need to do a little bit more.</li><li>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.</li></ul><p>The Switzerland Q2 GDP
missed expectations as the monetary tightening is starting to bite more
heavily:</p><ul><li>GDP
Q2 0.0% vs. 0.1% expected and 0.3% prior. </li></ul><p>ECB’s Lagarde
(hawk – voter) is focused on the inflation expectations and keeping them in
check:</p><ul type="disc"><li>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.</li><li>It will be critical
for central banks to keep inflation expectations firmly anchored while
these relative price changes play out.</li></ul><p>Tuesday:</p><p>Chinese Caixin
Services PMI missed expectations by a big margin although remaining in
expansion:</p><ul><li>Services
PMI 51.8 vs. 53.6 expected and 54.1 prior.</li></ul><p>The RBA left the
cash rate unchanged as expected at 4.10%:</p><ul><li> Inflation in Australia has passed its peak.</li><li> But inflation is still too high and will
remain so for some time yet.</li><li>The Australian economy is experiencing a
period of below-trend growth.</li><li> Returning inflation to target within a
reasonable timeframe remains the priority.</li><li> There are significant uncertainties around
the outlook.</li><li>Services price inflation has been
surprisingly persistent overseas and the same could occur in Australia.</li><li>Some further tightening of monetary policy
may be required.</li><li>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.</li></ul><p>ECB’s Lane (dove –
voter) didn’t offer much in terms of forward guidance:</p><ul><li>August
inflation data is welcome, but we need to see that continue.</li><li>We do expect bumpiness in easing of energy, food inflation.</li><li>Easing
in services inflation helps limit narrative that tourism is keeping services
inflation high.</li></ul><p>The Eurozone July
PPI beat expectations, but the figures were still all negative:</p><ul type="disc"><li>PPI M/M -0.5% vs.
-0.6% expected and -0.4% prior.</li><li>PPI Y/Y -7.6% vs.
-7.6% expected and -3.4% prior. </li></ul><p>ECB’s Schnabel (hawk –
voter) touched on climate change and how it could bring downside tail risks:</p><ul type="disc"><li>Climate change is an
existential threat with large downside tail risks.</li><li>Climate-related and
environmental risks (C&amp;E risks) are now an important focal point for
supervisors.</li><li>Climate change
constitutes an existential threat, implying large downside tail risks.</li><li>Dealing with
financial risks is the core of prudential supervision. </li><li>Physical climate
risks tend to be correlated globally.</li><li>The economic
consequences of physical climate risks could be mitigated by closing the
large climate insurance protection gap.</li><li>In the EU, only a
quarter of losses caused by climate-related catastrophes are insured.</li></ul><p>Fed’s Waller (hawk –
voter) changed his stance and he’s now leaning towards a pause:</p><ul type="disc"><li>I would say the
risks to doing too much and too little are balanced.</li><li>The data last week
clearly showed the jobs market is starting to soften. </li><li>Unemployment is
about where it was a year ago, so change isn't that big.</li><li>Recessions are often
caused by shocks that come out of nowhere, but the data so far is pretty
good (for a soft landing).</li><li>I want to be very
careful to say that 'we've done the job'.</li><li>I want to see 'a
couple months' of data.</li><li>I don't think one
more hike would send the economy into a recession.</li><li>Data will drive
whether the Fed hikes again.</li><li>Recent data will
allow the Fed to proceed carefully.</li><li>We're starting to
see the economy slow down.</li><li>Treasury yields are
about where they should be.</li><li>The US economy is
'about 80% closed' so impacts from abroad will be smaller than for others.</li><li>We've been keeping a
very close eye on commercial real estate, will continue to roll over
during the next 2 years or so.</li><li>We're not sure about
what prices CRE will be trading at in two years.</li></ul><p>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. </p><p>Fed’s Mester (hawk – non
voter) maintained her hawkish stance as she sees the need to go a “little bit”
higher on rates:</p><ul type="disc"><li>The labour market
has come more into balance.</li><li>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.</li><li>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.</li><li>Gasoline prices are
rising again. We have to be very attentive to that.</li><li>The longer inflation
stays above 2%, the more likely it is that the risks will materialise.</li><li>If we end up raising
interest rates too much and the economy loses momentum more than
necessary, we can lower interest rates.</li><li>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%.</li><li>There are upside
risks to our inflation forecasts, in my view.</li></ul><p>Wednesday:</p><p>The Australian Q2 GDP
beat expectations:</p><ul type="disc"><li>GDP Q2 0.4% vs. 0.3%
expected and 0.4% prior.</li></ul><p>BoJ’s Takata sounded
optimistic on hitting the inflation target but remains wary of downside risks:</p><ul type="disc"><li>Japan is seeing
early signs of hitting 2% inflation.</li><li>Japan's economy is
recovering moderately.</li><li>He believes that the
Bank of Japan must patiently maintain easy monetary policy given the very
high uncertainty on the outlook.</li></ul><ul type="disc"><li>At the same time,
BOJ must respond nimbly to uncertainty with eye on economic, price
outlook.</li><li>There's a chance
Japan will see shift in public perception prices and wages won't rise much.</li><li>Japan seeing signs
of change in corporate wage, price-setting behaviour.</li><li>There is sign of
change in Japan's trend inflation as rising wages push up inflation
expectations.</li><li>Inflation is already
exceeding BOJ's 2% target but there is some distance to achieving it
stably and in sustainable fashion.</li><li>If overseas
economies slow sharply, that could weigh on Japan's economy.</li><li>Stronger than
expected US economy having an impact on currencies.</li><li>Overseas factors
having greater impact on currencies.</li><li>We need to stand
ready to flexibly respond to uncertainty.</li><li>Action in July was a
flexible response.</li></ul><p>ECB’s Villeroy (neutral –
voter) is leaning more towards keeping interest rates high for longer rather
than raising them more:</p><ul type="disc"><li>There is a slowdown
but no recession.</li><li>Had first successes
against inflation but need to persevere.</li><li>Must bring inflation
down to 2% level between now and 2025.</li><li>We are near or very
near the peak on interest rates.</li><li>Our options are open
at the next and upcoming rate meetings.</li><li>Maintaining rates
for a sufficiently long period now counts more than further rate hikes.</li></ul><p>ECB’s Knot (hawk – voter)
didn’t sound much confident on a September rate hike:</p><ul type="disc"><li>Markets may be
underestimating September rate hike chances.</li><li>Bringing inflation
to 2% by the end of 2025 is the bare minimum.</li><li>Rate hike is a
possibility, not a certainty.</li></ul><p>The Eurozone July Retail Sales
missed expectations on the M/M figure but beat on the Y/Y one:</p><ul><li>Retail Sales M/M -0.2%
vs. -0.1% expected and 0.2% prior (revised from -0.3%).</li><li>Retail Sales Y/Y -1.0%
vs. -1.2% expected and -1.0% prior (revised from -1.0%).</li></ul><p>ECB’s Kazimir (hawk –
voter) favours one last rate hike:</p><ul type="disc"><li>The preferable
option would be to hike rates by 25 bps next week.</li><li>One more, likely
last rate hike, still needed.</li><li>The alternative
option would be to hike in October or December.</li><li>Inflation remains
stubbornly high, price growth expectations too far above 2%.</li></ul><p>Fed’s Collins (neutral –
non voter) is leaning towards a high for longer stance rather than a higher for
longer one:</p><ul type="disc"><li>It's time for
monetary policy to be patient and deliberate.</li><li>Fed should 'allow
time' when making monetary policy choices.</li><li>Too soon to say
inflation sustainably moving back to target.</li><li>Fed must balance
lowering inflation against slowing economy too much.</li><li>Fed can likely
achieve goals without causing notable economic pain.</li><li>Still too much job
market demand.</li><li>Wage growth remains elevated.</li><li>Core services
inflation moderation has been modest.</li><li>Expects economy to
slow into end of year.</li></ul><p>BoE’s Bailey (neutral –
voter) is expecting a “marked” fall in inflation by year-end:</p><ul type="disc"><li>Wage bargaining has
surprised to the upside.</li><li>There has been a
very large terms of trade shock in this country.</li><li>Many indicators are
signalling a fall in inflation, which will be marked by the end of this
year.</li><li>Question is: As
headline inflation comes down, will we see inflation expectations continue
to come down and will that impact wage bargaining?</li><li>There is not group
think at the MPC at the moment.</li></ul><p>BoE’s Dhingra (dove –
voter) maintains her dovish stance as she expects the monetary policy lags to
start affecting the economy more heavily:</p><ul type="disc"><li>Labour market
continues to ease as MPC's hiking cycle takes effect with a lag.</li><li>Pass-through of
level changes to wages would not necessarily pose a risk to our target in
the medium term.</li><li>Not yet evidence to
suggest firms will seek to increase their margins.</li><li>Domestic factors are
likely to continue to ease the pressure on CPI inflation.</li></ul><p>The Bank of Canada kept
interest rates steady at 5.00% as expected:</p><ul><li>The Canadian economy has entered a period
of weaker growth.</li><li> The tightness in the labour market has
continued to ease gradually.</li><li> Recent CPI data indicate that inflationary
pressures remain broad-based.</li><li> With the recent increase in gasoline prices,
CPI inflation is expected to be higher in the near term before easing again.</li><li> 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%.</li><li>Governing Council remains concerned about
the persistence of underlying inflationary pressures, and is prepared to
increase the policy interest rate further if needed.</li><li> Growth prospects in China have diminished.</li><li> In the United States, growth was
stronger than expected.</li></ul><p>The US ISM Services PMI
beat expectations by a big margin coming at 54.5 vs. 52.5 expected and 52.7
prior:</p><ul type="disc"><li>employment index 54.7 vs. 50.7 prior.</li><li>new orders index
57.5 vs. 55.0 prior.</li><li>prices paid index
58.9 vs. 56.8 prior.</li><li>new export orders
62.1 vs. 61.1 prior.</li><li>imports 52.3 vs. 52.3 prior.</li><li>backlog of orders
41.8 vs. 52.1 prior.</li><li>inventories 57.7 vs. 50.4 prior.</li><li>supplier deliveries 48.5 vs. 48.1 prior.</li><li>inventory sentiment 61.5 vs. 56.6 prior.</li></ul><p>The Fed release the Beige
Book which provides recent anecdotal information on current economic
conditions:</p><ul><li> Most Districts indicated economic growth was
modest during July and August.</li><li> Consumer spending on tourism was stronger
than expected but other retail spending continued to slow, especially
non-essential.</li><li>Some Districts highlighted reports
suggesting consumers may have exhausted their savings and are relying more on
borrowing to support spending.</li><li> 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.</li><li> Manufacturing contacts in several Districts
also noted that supply chain delays improved.</li><li> New orders were stable or declined in most
Districts, and backlogs shortened.</li><li> Nearly all Districts reported the inventory
of homes for sale remained constrained.</li><li>Some Districts reported higher
delinquencies on consumer credit lines.</li><li>Job growth was subdued across the nation.</li><li> Nearly all Districts indicated businesses
renewed their previously unfulfilled expectations that wage growth will slow
broadly in the near term.</li><li>Most Districts reported price
growth slowed overall, decelerating faster in manufacturing and consumer-goods
sectors.</li></ul><p>Thursday:</p><p>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:</p><ul type="disc"><li>Appropriate to
maintain easy monetary policy for time being.</li><li>Signs of change seen
in Japan's corporate price, wage-setting behaviour.</li><li>Still not at stage
where we can say Japan has stably, sustainably achieved BOJ’s price target</li><li>Monetary easing
involves various side-effects.</li><li>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.</li><li>BOJ’s July decision
has heightened sustainability of its monetary easing framework.</li><li>Japan's capex,
consumption increasing moderately.</li><li>Japan's economy
likely to continue recovering moderately.</li><li>Our baseline
scenario is for consumer inflation to gradually re-accelerate after a
period of slowdown.</li></ul><ul type="disc"><li>There is chance
inflation could accelerate more than expected, though there is also chance
pass-through of costs could moderate.</li><li>Job market
tightening but outlook for wages also depends on corporate
earnings.</li><li>Price rises for
goods broadening, service prices also rising mainly for accommodation fees.</li><li>Must be vigilant to
risk of further slowdown in global growth.</li><li>Sees equal degree of
upside and downside risks to inflation.</li><li>Can exit NIRP when
economy is strong enough.</li><li>But there is no
preset idea on order or timing of that.</li><li>It depends on
financial developments at the time.</li><li>Does not want to
comment on FX levels.</li><li>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.</li><li>Want
to look at various factors beyond wages in deciding future policy changes.</li><li>Further YCC tweak
cannot be ruled out but is not an imminent issue now.</li></ul><p>The Chinese trade data
beat expectations but the readings remain very poor:</p><ul type="disc"><li>Exports Y/Y -8.8%
vs. -9.2% expected and -14.5% prior. </li><li>Imports Y/Y -7.3%
vs. -9.0% expected and -12.4% prior. </li></ul><p>RBA’s Lowe gave his final
speech as Governor as Deputy Governor Bullock will take over as the new head on
September 18:</p><ul type="disc"><li>My recent focus is
risk wages, profits run ahead of rates
consistent with return to inflation target.</li><li>If this risk
materialised and inflation became sticky, would require tighter monetary
policy.</li><li>Will be difficult to
return to the earlier world in which inflation tracked in a very narrow
range.</li><li>Inflation is likely
to be more variable around target.</li><li>Australia has been
well served by a flexible inflation target.</li><li>Possible that
Australia can sustain unemployment rates below what we have had over the
past 40 years.</li><li>Now in an
environment of stronger growth in nominal wages, which is positive.</li><li>The recent
productivity record isn’t encouraging; solution fundamentally a political
problem.</li><li>Interest rates
influence housing prices but are not reason Australia has some of the
highest prices in the world.</li><li>Issue that defined
my term more than any other was forward guidance on rates during the
pandemic.</li><li>Guidance was widely
interpreted as a commitment, rather than a conditional statement.</li><li>With the benefit of
hindsight, my view is that we did do too much during pandemic.</li></ul><p>The Switzerland August
seasonally adjusted Unemployment Rate remained steady at 2.1% vs. 2.1% expected
and 2.1% prior. </p><p>The Eurozone Q2 Final GDP
reading was 0.1% vs. 0.3% expected as the previous estimate was revised to
0.1%:</p><ul type="disc"><li>Household consumption flat.</li><li>Government expenditure 0.1%.</li><li>Gross fixed capital formation 0.1%.</li><li>External balance -0.4%.</li><li>Changes in inventories 0.4%.</li></ul><p>The US Jobless Claims
beat expectations by a big margin across the board:</p><ul><li> Initial Claims 216K vs. 234K expected and
228K prior.</li><li> Continuing Claims 1679K vs. 1715K expected
and 1725K prior. </li></ul><p>The BoC Governor Macklem
delivered a hawkish speech titled "staying the course”:</p><ul type="disc"><li>We are concerned
that progress in bringing down inflation has slowed.</li><li>We are prepared to
raise rates again but don't want to raise rates than we have to.</li><li>The longer we wait,
the harder it is likely to be to reduce inflation.</li><li>Monetary policy
might not be restrictive enough to restore price stability.</li><li>Bank is concerned
that larger-than-normal price increases for goods and services remain
broad based.</li><li>We are not trying to
kill economic growth.</li><li>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.</li><li>Today, about 60% of
CPI components are rising above 3% and about 45% are rising above 5%.</li><li>Looking ahead, we
want to see less-generalized price increases as well as a decline in the
average price increase.</li><li>The weakness in
second-quarter GDP largely reflected a broad-based slowing in consumer
spending and a decline in housing activity.</li><li>We will be watching
wage growth closely.</li><li>Maybe we don't need
to do more, maybe we do on interest rates.</li><li>We will take
decisions meeting by meeting.</li><li>Expecting growth of
'a little less than 1%' over the next few quarters.</li><li>You can expect
headline inflation is going to go up in the near term, before it eases.</li></ul><p>Fed’s Williams (neutral –
voter) just expressed the uncertainty policymakers are currently facing:</p><ul type="disc"><li>Labor market
balances are evening out.</li><li>There's still more
data to come before next FOMC meeting.</li><li>Inflation is far too
high but moving down.</li><li>Policy is in a good
place, is data dependent.</li><li>We are seeing
movement in the right direction for the economy.</li><li>It's an open
question if monetary policy is restrictive enough.</li><li>The latest consumer
spending data has been strong.</li><li>Expects unemployment
rate to rise to low 4% range.</li></ul><p>Fed’s Goolsbee (dove –
voter) maintains his stance as he prefers to keep rates high for longer rather
than higher for longer:</p><ul type="disc"><li>It's possible we can
get on 'golden path'.</li><li>Monetary policy is working.</li><li>Overall level of
inflation is above where we want it.</li><li>Clearly there are risks.</li><li>China, US government
shutdown are among possible risks.</li><li>We have also had
false dawns on inflation before.</li><li>Want to see progress
on core inflation, especially goods and housing.</li><li>Market's
expectations on inflation also have a major influence.</li><li>I'd pay less
attention to wage growth as an indicator of inflation.</li><li>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.</li><li>Collectively Fed
forecast is that rates will have to stay up for a relatively extended
period.</li><li>You can't change the
inflation target until you've hit your inflation target.</li><li>We have to get to
the 2% inflation target, retain credibility.</li><li>A possible UAW
strike could have an impact, it could be material to our decisions.</li></ul><p>Fed’s Logan (hawk –
voter) called for a skip at the upcoming September FOMC meeting:</p><ul type="disc"><li>'Could be
appropriate' to skip interest-rate increase in September.</li><li>There is 'work left
to do' to get to sufficiently restrictive policy.</li><li>Skipping does not
imply stopping rate hikes.</li><li>Not yet convinced
we've extinguished excess inflation.</li><li>Fed needs to
calibrate policy 'carefully,' must proceed gradually.</li><li>Significantly lower
inflation in recent months 'encouraging,' but too soon to confidently say
on path to 2% in timely way.</li><li>Job market strength
suggests we have not finished the job of restoring price stability.</li><li>If stronger economic
activity continues, could lead to a resurgence of inflation.</li></ul><p>Friday:</p><p>Japan July Average Cash
Earnings growth slowed down more, and the wages data is something the BoJ is
particularly focused on:</p><ul type="disc"><li>Average Cash
Earnings Y/Y 1.3% vs. 2.3% prior. </li><li>Real Wages Y/Y -2.5%.</li><li>Household spending
-5.00% vs. -4.2% prior.</li></ul><p>The Japanese Final Q2 GDP
missed expectations and the previous reading was revised downwards:</p><ul type="disc"><li>Japan Q2 GDP 1.2%
vs. 1.3% expected and 0.8% prior (revised from 1.5%).</li></ul><ul type="disc"><li>GDP Growth
Annualised 4.8% vs. 5.5% expected and 3.2% prior (revised from 6%).</li></ul><p>The Canadian Jobs report showed
another pick up in wage growth which is something the BoC is particularly focused
on:</p><ul type="disc"><li>Employment change
39.9K vs. 20.0K expected and -6.4K prior.</li></ul><ul type="disc"><li>Full time 32.2K vs. 1.7K
prior.</li></ul><ul type="disc"><li>Part time 7.8K vs.
-8.1K prior.</li></ul><ul type="disc"><li>Participation rate
65.5% vs. 65.6% expected and 65.6% prior.</li></ul><ul type="disc"><li>Average hourly wages
permanent employees 5.2% vs. 4.7% expected and 5.0% prior.</li></ul><ul type="disc"><li>Unemployment rate
5.5% vs. 5.6% expected and 5.5% prior.</li></ul><p>The
highlights for next week will be:</p><ul><li>Tuesday: UK Labour Market
report, German ZEW, US NFIB Small Business Optimism Index.</li><li>Wednesday: Japan PPI, UK
GDP, EZ Industrial Production, US CPI.</li><li>Thursday: Australia
Labour Market report, Japan Industrial Production, Switzerland PPI, ECB Policy
Decision, US Jobless Claims, US PPI, US Retail Sales.</li><li>Friday: NZ Manufacturing
PMI, China Industrial Production and Retail Sales, Eurozone Wages data, US
University of Michigan Consumer Sentiment. </li></ul><p>That’s all folks, have a
great weekend!</p>

This article was written by Giuseppe Dellamotta at www.forexlive.com.