Below trend growth to continue
Following yesterday’s FOMC Minutes overnight we’ve heard from FOMC members wanting the Funds Rate up to 3.75-4.0% this year and questioning why you’d want to drag rate rises out into next year.
Outside of FX where the USD is smartly higher, market have been struggling for direction, US equities flitting in and out of positive territory to end slightly higher while US Treasury yields have ranged for the most part just below Wednesday’s highs This is amid some mixed signals out of the US data (Philly Fed, Exiting Home Sales) while multiple Fed speakers, though all making clear the Fed still has work to do raising rates, have offered an effective 3-4% spread on where the Funds rate should be by the end of the year. Oil has rebounded on a more positive EIA outlook.
US equities have just closed with the S&P500 and NASDAQ both up 0.2% and the Dow virtually unchanged. The S&P breakdown shows only small changes for all sub-sectors with the exception of Energy, up 2.5% in conjunction with oil prices being +/- 3% up on the day. In the first four days of the week, the S&P500 is virtually unchanged, ranging just beneath its 200-day moving average and allowing for a slight unwound of its prior overbought condition – the 14-day RSI back just beneath the 70 level.
US economic data has been a case of ‘compare and contrast’. After the inexplicable plunge in the Empire (NY State) manufacturing index earlier in the week, the Philadelphia Fed Business Outlook rose to 6.2 from -12.3, much stronger than the -5.0 expected. The improvement was across the board, but most pronounced in new orders, up 19.7 points. The literal read through to the Manufacturing ISM due at the start of September is for a small rise from its 52.5 July reading.
The latest (dire) news on the US housing market comes from Existing Home Sales, down 5.9% and a little weaker than the -5.1% expected. This marks a sixth consecutive monthly fall, to be 26% below their January peak. Finally, weekly jobless claim s came in a little softer than expected at 250k (consensus 264k) with the prior week revised down to 252k from 262k. So the trend looks to have settled at about 250k from around 230k a couple of months back – numbers that are a long way from indicating a current or impending recession.
Following yesterday’s FOMC Minutes which contained their usual ‘something for everyone’, overnight we’ve heard from FOMC members Bullard, George, Kashkari and Daly. St Louis Fed President Bullard is still singing from the same song sheet, wanting the Funds Rate up to 3.75-4.0% this year and questioning why you’d want to drag rate rises out into next year. He accordingly favours a 75bps September rate rise, and also says, as have others before him, that speculation of rate cuts in 2023 is ‘definitely premature’.
Minneapolis Fed President Neal Kashkari said, “we know we have more work to do in raising rates to bring own inflation” and that “I don’t know” if it’s possible to bring down inafltion without triggering a recession (read: unlikely). Erstwhile Kansas Fed hawk Esther George says the Fed will continue to debate the question of how fast to hike rates but notes that falling productivity makes the Fed’s job on inflation harder. The San Fran Fed’s Mary Daly, in contrast to Bullard, said that it was too early to declare victory on inflation and favours the Fed Funds rate rising to a little above 3% by year-end and a little bit higher next year. So all up, from the four overnight speakers we have an effective 3-4% spread on where the Funds rate should be at year end (versus the current 2.25-2.50%).
In FX, AUD monetary dipped below 0.69 overnight (low of 0.6899) but is finishing in New York around 0.6920, down just over 1/10% on the day. NZD is a little weaker (-1/3%) to see AUD/NZD back above 1.1050. Much bigger moves are evident in EUR/USD (-0.9% to be below 1.01) and GBP/USD (-0.9% and so comfortably back below $1.20 for the first time this month (low of $1.1923). It’s hard to pin European currency weakness on specific news, albeit the case for more weakness on relative (global) economic grounds has been blindingly obvious for weeks.
Not really relevant to the EUR on the day, but the German government has announced a cut to the VAT rate on gas from 19% to 7%, which while providing a little bit of relief for stretched household budgets (providing consumers can get any gas at all) does nothing to alleviate supply shortages. The CPI impact of the cut will be very small (household gas consumption makes up just 1.35% of the German inflation basket).
Wholesale gas price meanwhile are up another 6% Thursday, albeit still off their intra-week highs, while oil prices have rebounded after the US Energy Information Administration (EIA) said that “the fundamentals may not be as negative for crude as thought just a week ago”. WTI crude is currently $2.33 up on the day to be back above $90 and Brent $2.87 higher. CAD is correspondingly the best performing G10 currency on the crosses, albeit still slightly weaker against the overall stronger USD.
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