Weekly Market Recap (25-29 September)

<p>Monday:</p><p>ECB’s Villeroy
(hawk – voter) spoke over the weekend and on Monday and although he
acknowledged that rates might have peaked, he added that they will be kept at
elevated levels for a long time:</p><ul type="disc"><li>In the euro area, I
believe we will soon reach the high point of interest rates.</li><li>But when I say high
point, this isn't a peak, rather it will be a high plateau, on which we
will have to remain for a sufficiently long time to fully transmit all the
effects of monetary policy.</li><li>If we can reach our
inflation target with a soft landing rather than a hard one, it’s much
better.</li><li>In my judgement,
these risks are now at least symmetric, we always can do more if needed.</li><li>The risk of doing
too much on rates needs to be balanced against the risk of not doing
enough.</li><li>In the risk of doing
too much, with a recession and sharp fall of inflation, we would have to
rapidly reverse course.</li><li>'Testing until it
breaks' is not a sensible way to calibrate monetary policy.</li><li>Maintaining the
current level of interest rates will bring down inflation.</li><li>Have to monitor
current oil price rebound for possible effects on inflation expectations,
wages.</li><li>If markets fully
incorporate our strategy, they shouldn’t expect cuts before a sufficiently
long time.</li><li>What we see now is
slowdown but still with positive growth.</li><li>Positive growth is
expected for 2024-25.</li><li>Interest rates
should remain at this level for a sufficiently long period of time.</li><li>I have less fear
about the economy than I did a year ago.</li><li>Inflation should
come back towards 2% target by 2025 while avoiding recession for the
economy.</li></ul><p>BoJ Governor Ueda
basically repeated the message at the last BoJ press conference, that is
maintaining monetary easing until a sustainable achievement of the 2% inflation
target is clearly in sight:</p><ul type="disc"><li>Japan's economy is recovering
moderately.</li><li>Our basic stance is
that we must patiently maintain monetary easing.</li><li>Current policy
framework has big stimulative effect on economy, but at times could cause
big side-effects.</li><li>BOJ's July move
helped heighten sustainability of our monetary easing framework.</li><li>Our baseline
scenario is for key driver of inflation to gradually switch, strengthen
virtuous wage-inflation cycle.</li><li>Effect of rising
import prices likely to gradually dissipate.</li><li>Uncertainty
surrounding our baseline scenario is very high, not sure at this stage
whether this will materialize.</li><li>There is good chance
wage growth will accelerate as competition for talent intensify.</li><li>Changes in corporate
behaviour could speed up more than expected.</li></ul><ul type="disc"><li>On the other hand,
wages, prices may struggle to rise if Japan's economy is hit by negative
external or internal shocks.</li><li>Many firms still
have not decided whether to hike wages significantly, so we must
scrutinise whether changes in corporate wage-setting behaviour could be
sustained.</li></ul><ul type="disc"><li>Stable, sustainable
achievement of 2% inflation not yet in sight.</li><li>Japan's economy is
at critical stage on whether it can achieve a positive wage-inflation
cycle.</li></ul><ul type="disc"><li>Must continue to be
vigilant to chance past sharp US rate hikes could affect economy,
financial system with a lag.</li><li>Chinese economy's
slow pace of pick-up is also worrying.</li></ul><ul type="disc"><li>It is true inflation
is exceeding 2% for prolonged period, but that alone cannot lead us to
conclude that Japan is close to stably, sustainably achieving our target.</li><li>Key to whether Japan
is close to achieving our target is whether wage growth leads to moderate
rise in inflation.</li><li>Japan firms are
changing prices more frequently than in past, which is important sign
suggesting wages and inflation could move in tandem.</li><li>May end YCC when stable
and sustainable achievement of 2% inflation target is foreseen.</li><li>Don't have a clear
image in mind yet on how to tweak YCC.</li><li>Don't expect a
positive wage cycle to emerge when consumption, capex are sluggish.</li></ul><p>BoJ’s Uchida reaffirmed
Ueda’s comments as he doesn’t yet see a sustainable achievement of the 2%
inflation target in Japan:</p><ul type="disc"><li>The Bank needs to
patiently continue monetary easing.</li><li>Uncertainty is high
regarding Japan's economy.</li><li>The Bank's decision
in July to make the JGB 10 year yield target flexible is aimed at
flexibility in responding to upside and downside risks.</li><li>We are not in a
situation where achievement of the BOJ's 2% inflation target is in sight.</li></ul><p>ECB’s Kazaks (hawk –
voter) is calling for a pause in October, which is already fully expected:</p><ul><li>The hike from the ECB in September may allow a pause
in October.</li></ul><p>ECB’s de Cos (dove – non
voter) reaffirmed the ECB’s stance of keeping rates higher for longer now:</p><ul type="disc"><li>The European Central
Bank must avoid both insufficient and excessive tightening.</li><li>If rates are kept at
4% long enough, we should reach our 2% goal.</li></ul><ul type="disc"><li>Governments must
roll back their energy support measures – and if new measures on energy
are needed, they should be targeted.</li><li>We need structural
reforms to strengthen the supply side.</li></ul><ul type="disc"><li>Fiscal policy for
2024 should tend toward restrictive.</li></ul><p>The German September IFO
Business Climate Index beat expectations although the index edged lower than
the previous reading following an upwardly revised August figure:</p><ul type="disc"><li>IFO 85.7 vs. 85.2
expected and 85.8 prior (revised from 85.7).</li><li>85.7 is one of the
weakest IFO index readings of the last five years.</li></ul><ul type="disc"><li>Current Assessment
88.7 vs. 88.0 expected and 88.0 prior.</li><li>Expectations 82.9
vs. 82.8 expected and 82.6 prior. </li></ul><p>Fed’s Goolsbee (dove –
voter) reaffirmed his stance of keeping rate higher for longer now instead of
delivering additional rate hikes:</p><ul type="disc"><li>I think we're
getting close to questions about how long we will hold, rather than how
high.</li><li>It feels like we're
going to hold longer than markets were expecting.</li><li>The risk of
inflation staying higher is the bigger risk.</li><li>The employment side
of the economy is going very well.</li><li>External shocks have
derailed the Fed from achieving a soft landing in the past, so that's
keeping me up at night.</li><li>Inverted yield curve
is a mentality of looking at the past and applying it to future but covid
has made a lot of predictions look 'goofy'.</li></ul><p>ECB’s Lagarde (neutral –
voter) acknowledged the expected weakness in the Eurozone in the next quarter:</p><ul type="disc"><li>Recent indicators
point to further weakness in the third quarter.</li><li>Job creation in the
services sector is moderating and overall momentum is slowing.</li><li>Inflation continues
to decline but is still expected to remain too high for too long.</li><li>We aim to conclude
review of ECB framework by spring 2024.</li></ul><p>ECB’s Schnabel (hawk –
voter) echoed Lagarde’s worries about the slowdown in the Eurozone:</p><ul type="disc"><li>Activity in the
eurozone is clearly moderating.</li><li>There is not yet an
all-clear for the inflation problem.</li><li>Unusual contraction
in monetary aggregates is unlikely to foreshadow a deep recession but
rather reflects a significant rebalancing of portfolios.</li></ul><p>Fed’s Kashkari (hawk –
voter) is starting to get more neutral as he’s not absolutely sure on another
rate hike and acknowledges that the Fed may need to cut rates if inflation
falls more than expected raising real rates too much:</p><ul type="disc"><li>Still more work to
do on services inflation.</li><li>Fed can definitely
get back to 2% inflation.</li><li>May need to cut
rates if real rates are tightening.</li><li>US rates probably
have to go a little bit higher, be held there for longer, to cool things
off.</li><li>Falling inflation
next year might justify backing off the federal funds rate to stop it from
getting tighter.</li><li>I am one of the FOMC
policymakers who sees one more rate hike this year.</li><li>In case of a
government shut down that means we don't have access to the usual data, we
will supplement with the best private data that we have.</li><li>You always have to
do your best with the best data available, I'm confident we'll be able to
make decisions.</li><li>That the yield curve
is un-inverting is not necessarily bad news and it could be good news.</li></ul><p>Kashkari has also published an essay on Tuesday where
he said that he sees a 60% chance of a soft landing and a 40% chance of
significantly higher interest rates. </p><p>Tuesday:</p><p>ECB’s Muller (hawk –
voter) is joining the “higher for longer” camp as he doesn’t expect any more
rate hikes as things stand. </p><p>The US Consumer
Confidence for September missed expectations although the present situation
index is still pointing to a resilient labour market:</p><ul type="disc"><li>Consumer confidence
103.0 vs. 105.5 expected and 106.1 prior.</li><li>Present situation
index 147.1 vs. 146.7 prior (revised from 144.8).</li><li>Expectations index
73.7 vs. 83.3 prior (revised from 80.2).</li><li>1 year inflation
expectations 5.8% vs. 5.8% prior.</li><li>Jobs hard-to-get
13.6 vs. 14.1 prior.</li></ul><p>ECB’s Holzmann
(hawk – voter) feels uneasy with keeping rates at these levels for longer with
such a high underlying inflation:</p><ul type="disc"><li>It is unclear
whether we're at peak rates yet.</li><li>Cannot exclude
further rate hikes.</li><li>Upside inflation
risks are still out there.</li><li>Afraid to stay high
with the economy strong.</li><li>Economy could yet
surprise on the upside.</li><li>Persistence of
underlying inflation very high.</li><li>Monetary policy is working.</li><li>Hopefully we can
discuss PEPP soon, ECB should consider reducing.</li></ul><p>Wednesday:</p><p>The BoJ published
the minutes of its September monetary policy meeting (it’s all about wages):</p><ul type="disc"><li>Members agreed it
was important to check whether wage hikes will continue next year and
onward.</li><li>A few members said
chance of firms continuing to raise wages next year was high</li><li>one member said
there was strong chance corporate wage, price-setting behaviour will be
sustained.</li><li>One member said must
check whether wage rises will broaden as 60% of Japan's small,
medium-sized firms run red ink and have weak profit standings.</li><li>One member said
inflation could overshoot expectations as change in corporate behaviour
broadens.</li><li>One member said
wages, sales prices could rise at pace unseen in past.</li><li>One member said many
small, medium-sized firms say they have trouble passing on rising costs,
which could mean wage growth could lose momentum.</li><li>Members agreed the
BoJ must maintain current monetary easing to stably, sustainably hit price
target.</li><li>Many members said
Japan has stable, sustained achievement of price target, accompanied by
wage growth, was not yet in sight.</li><li>One member said
there was still big distance before tweaking negative rate policy.</li><li>One member said the
BoJ must sustain YCC framework in line with commitment it has made in its
statement.</li><li>One member said now
is time to wait for trend inflation to heighten.</li><li>One member said the
BoJ could gain clarity in Jan-March next year to determine whether
Japan can sustainably hit price target.</li></ul><p>The PBoC promised
to accelerate its macro policy adjustments:</p><ul type="disc"><li>Will step up macro
policy adjustments.</li><li>To focus on
expanding domestic demand, boosting confidence.</li><li>To implement
monetary policy precisely and forcefully.</li><li>Will keep yuan
exchange rate basically stable.</li></ul><p>The Australian
Monthly CPI for August came in line with forecasts with the Core measure
continuing its downtrend and the Trimmed Mean remaining sticky:</p><ul type="disc"><li>CPI Y/Y 5.2% vs.
5.2% expected and 4.9% prior.</li><li>CPI M/M 0.6% vs. 0.3% prior.</li><li>Core CPI Y/Y 5.5%
vs. 5.8% prior. </li><li>Trimmed Mean CPI Y/Y
5.6% vs. 5.6% prior. </li></ul><p>ECB’s Elderson (hawk –
voter) keeps the door open for further rate hikes as he says that “interest
rates have not necessarily peaked”, but the majority of the Governing Council
is on the higher for longer camp at the moment anyway.</p><p>Fed’s Kashkari (hawk –
voter) spoke again on CNBC but didn’t add anything new to his previous
comments:</p><ul type="disc"><li>We're committed to 2% inflation.</li><li>There is a risk that
rates might have to go higher but hard to know.</li><li>Fed is not trying to
create a recession.</li><li>Economic data
suggests Fed not as restrictive as it appears.</li><li>We are allowing the
data to drive Fed decisions.</li><li>Fed has made a lot
of progress on inflation.</li><li>Data will tell the
Fed if more hikes are needed.</li><li>We want to see
workers get better wages.</li><li>Fed is watching
strikes for economic impact.</li></ul><p>Thursday:</p><p>The Australian Retail
Sales for August missed expectations:</p><ul><li>Retail Sales M/M 0.2% vs.
0.3% expected and 0.5% prior.</li><li>Retail Sales Y/Y 1.5% vs.
2.1% prior.</li></ul><p>The US Q2 Final GDP came
in line with expectations but the downward revision in consumer spending caught
the eye:</p><ul type="disc"><li>Q2 Final GDP 2.1%
vs. 2.1% expected.</li><li>Consumer spending 0.8% vs. 1.7% preliminary.</li><li>GDP final sales 2.1%
vs. 2.2% preliminary.</li><li>GDP deflator 1.7% vs. 2.0% preliminary.</li><li>Core PCE 3.7% vs. 3.7% preliminary.</li><li>Exports -9.3% vs. -10.6% preliminary.</li><li>Imports -7.6% vs. -7.0% preliminary.</li><li>Business investment 5.2% vs. 3.9% preliminary.</li><li>Corporate profits 6.9% vs. -10.6% preliminary.</li></ul><p>The US Jobless Claims
crushed expectations once again:</p><ul><li>Initial Claims 204K vs. 214K expected and 202K prior (revised from 201K).</li><li>Continuing Claims 1670K vs. 1675K expected and 1658K prior (revised from
1662K).</li></ul><p>Fed’s Goolsbee (dove –
voter) keeps his usual stance with the higher for longer mantra:</p><ul type="disc"><li>Holding to
'inevitability’ that job losses are needed to slow inflation risks a
'near-term policy error.’</li><li>Some analysis shows
inflation reaching target soon, 'without further policy tightening’ and
only a modest slowdown in growth.</li><li>Fed needs to be
'extra careful' of tying policy to historical relationships that may not
hold up in the current economy.</li><li>Recent data, with
inflation slowing without job losses, have run against past U.S. patterns.</li><li>Fed will return
inflation to target but has a chance to do something rare by accomplishing
that without recession.</li><li>Evidence points to
the outbreak of inflation in 2021 as largely supply-related; ignoring
supply improvements is a recipe for overshooting.</li><li>Long-run inflation
expectations are 'well-anchored,' can help lower inflation with 'less
economic pain' than previously.</li><li>Importance of
expectations and Fed credibility makes proposals to raise the inflation
target from 2% 'quite risky.'</li><li>Risks to the outlook
include oil prices, slowdown in China, possibility of a protracted U.S.
auto strike, or a disruptive government shutdown.</li><li>Housing will be key
to continued inflation progress in the next few quarters, with the risk
that rising home prices could also boost market rents.</li><li>Better productivity
could mean long-run potential is not as low as some have feared, allowing
more growth without inflation.</li><li>Wages typically lag
prices, so short-term movements should not be used to predict inflation.</li><li>If Fed sees lack of
progress on the price side, it will have to raise restraint.</li><li>Trying not to put
much weight on conventional measures of overheating.</li><li>Have not decided
what to do at the next meeting.</li><li>Recent inflation was
mostly supply, though there was a demand component.</li><li>The Fed will have a
legitimate debate about how the current framework worked in this period of
inflation.</li><li>Inflation targets do
risk giving a false sense of precision around a variable that is noisy.</li><li>It will matter a lot
how long auto strike lasts in terms of its GDP impact.</li><li>Auto strikes have
not had a historical large impact on inflation. However current capacity and inventory situation is different.</li><li>Fed is trying to get
a handle on whether an extended strike might lead to different price
outcomes.</li><li>Have not been a big
fan of an explicit Fed target.</li><li>Once Fed is back to
2% target or on a clear path to it, then it would be perfectly appropriate
to discuss the target itself.</li><li>If the long end
continues to increase, Fed will have to take account of that as a form of
tightening.</li></ul><p>Fed’s Barkin (neutral –
non voter) didn’t offer much in terms of forward guidance as he just emphasised
data dependency, especially on the labour market side:</p><ul type="disc"><li>It will be hard to
figure out in the economy without data.</li><li>Credit card data is
a good alternative data set.</li><li>I try to talk to
businesses and workers what's happening in the economy.</li><li>Growth still seems
'solid' in the economy.</li><li>It makes sense that
lower and middle-income spending is adjusting to a slower pace.</li><li>Growth will moderate
from earlier this year.</li><li>The data on consumer
spending in the past few months has been 'extraordinary' but he expects it
to slow.</li><li>I've heard that the
middle-income consumer is starting to 're-prioritize' spending.</li><li>I'm expecting the
next quarter to be 'solid' no 'robust'.</li><li>Pace of growth in
Q1/Q2 is unlikely to continue.</li><li>I think we will see
demand softening.</li><li>It's very difficult
to imagine inflation settling with growth above trend.</li><li>We've unleashed
people's ability to use price as a lever.</li><li>We're still seeing
wage pressure in the skilled trades.</li><li>The last five months
of inflation data have been encouraging.</li><li>Fed holding steady
at the September FOMC meeting was appropriate.</li><li>Fed has time to see
data before deciding what’s next for rates.</li><li>The path forward
depends on what happens with inflation.</li><li>Will be watching the
job market closely for clues.</li><li>Cautions against
reading too much into Federal Reserve forecasts.</li><li>Says the job market
has remained very healthy.</li><li>Is not sure how the
economy will perform over coming months.</li><li>There is still a lot
of uncertainty how the Fed's balance sheet influences the economy.</li><li>Unclear how far Fed
will have to take balance sheet wind down.</li><li>Surprised economy
has been so strong despite aggressive Fed action.</li><li>Fed tightening still
working its way through economy.</li><li>Future job market
gains depend on lowering inflation.</li><li>Some slow down
needed to lower inflation.</li><li>Effort to lower
inflation will have smaller job market impact this time.</li><li>Expects some amount
of unemployment rise.</li><li>Decline in Fed
reverse repo take up isn't a surprise.</li></ul><p>The Tokyo CPI, which is
seen as a leading indicator for National CPI, came in lower than the previous
figures:</p><ul><li>Tokyo CPI Y/Y 2.8% vs.
2.9% prior.</li><li>Tokyo CPI ex Food and Energy Y/Y 2.4% vs. 2.6%.</li><li>Tokyo CPI ex Food Y/Y
2.5% vs. 2.6% expected and 2.8% prior.</li></ul><p>The Japanese Unemployment
Rate remained unchanged at 2.7% vs. 2.6% expected.</p><p>The UK Q2 Final GDP came
in line with expectations at 0.2% vs. 0.2% expected.</p><p>The Eurozone CPI missed
expectations across the board which gives the ECB a sigh of relief:</p><ul type="disc"><li>CPI Y/Y 4.3% vs. 4.5%
and 5.2% prior.</li><li>CPI M/M 0.3% vs. 0.5% prior.</li><li>Core CPI 4.5% vs.
4.8% expected and 5.3% prior.</li><li>Core CPI M/M 0.2% vs. 0.3% prior. </li></ul><p>ECB’s Vasle (hawk –
voter) said that the “ECB is probably done with rate hikes” as the central bank
switched now to a higher for longer stance. </p><p>The US PCE data came basically
in line with expectations:</p><ul><li>PCE Y/Y 3.5% vs. 3.5%
expected and 3.4% prior (revised from 3.3%).</li><li>PCE M/M 0.4% vs. 0.5%
expected and 0.2% prior.</li><li>Core PCE Y/Y 3.9% vs. 3.9% expected and 4.3% prior (revised from 4.2%).</li><li>Core PCE M/M 0.1% vs. 0.2% expected and 0.2% prior. </li></ul><p>The Canadian Monthly GDP
for July missed expectations with the preliminary August reading pointing to a
slight gain:</p><ul><li>July GDP 0.0% vs. 0.1%
expected and -0.2% prior (revised from 0.1%).</li><li>August Preliminary GDP
0.1%.</li></ul><p>The
highlights for next week will be:</p><ul><li>Monday: BoJ Summary of Opinions, Swiss Retail Sales, Eurozone Unemployment
Rate, US ISM Manufacturing PMI.</li><li>Tuesday: RBA Policy Decision, Swiss CPI, US Job Openings.</li><li>Wednesday: RBNZ Policy Decision, Eurozone Retail Sales, Eurozone PPI, US
ADP, US ISM Services PMI.</li><li>Thursday: US Challenger Job Cuts, US Jobless Claims.</li><li>Friday: Japan Wage data, Swiss Unemployment Rate, US NFP, Canada Jobs
report. </li></ul><p>That’s all folks, have a
great weekend!</p>

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