Todays podcast

Overview Waiting for Godot

• Yields continue their surge ahead of Powell on Friday
• Equities stabilise with the S&P500 in the green (+0.3%)
• Markets price more aggressive hikes from ECB and BoE
• NY Fed research suggests 60% of inflation due to demand
• Coming up: NZ Retail Sales, IFO, ECB Minutes, Jackson Hole

“We wait. We are bored. No, don’t protest, we are bored to death, there’s no denying it”, Vladimir, Waiting for Godot, Samuel Beckett 1953

Another night devoid of top-tier data or news flow. The past week has been a bit like Waiting for Godot with markets apprehensive ahead of US Fed Chair Powell’s Jackson Hole speech on Friday. The irony in Godot of course is that he never came. It is unclear given the uncertainties how definitive Powell can be in this year’s address given how wrongfooted the Fed was this time last year. Market moves at least are consistent with the hawkish pushback seen by Fed officials over recent weeks. The expected peak in the fed funds rate is now 3.80% in March 2023 (from 3.62% a fortnight ago), while pricing for cuts in 2023 has been pared to 37bps from 51bps a fortnight ago. Yields rose strongly overnight with the US 2yr yields up 9.9bps to 3.40% (back to near mid-June highs) along with the 10yr yield up 6.3bps to 3.11%. Equities were resilient to the rise in yields with the S&P500 +0.3%.

Across the pond the energy situation in Europe looks dire with gas prices up another 10% on the Dutch TTF benchmark (1m fwd). Importantly that backdrop is slowly feeding through to the US given gas exports to Europe. The higher inflation backdrop in Europe sees markets price more in for the BoE and ECB. Indeed markets are now pricing more rate hikes from the BoE than from the US Fed with the peak in the BoE bank rate now expected to be 4.4% by May 2023 (compared to 3.80% for the US). That move has been reflected in yields with UK 2yr yield up 22bps to 2.90% overnight and over the past month they have risen by 122bps! A similar, but more measured story in the Eurozone with markets pricing a peak ECB rate of around 2% and the German 2yr rose 8bps overnight to 0.92% and over the past month has risen 64bps. Debate rages in regards to how monetary policy should respond with Stiglitz out overnight pushing back, stating higher rates would deter investment in supply chains.

On the debate around inflation and how central banks should respond, the NY Fed Liberty Street blog had a piece that suggested for the US, around 60% of the inflation is due to aggregate demand, and 40% due to supply (see NY Fed: How Much Did Supply Constraints Boost U.S. Inflation?). The post had a modelled inflation during the 2019-21 period (pre-Russia/Ukraine) and concluded “our work shows that inflation in the U.S. would have been 6 percent instead of 9 percent at the end of 2021 without supply bottlenecks” . It is clear then supply bottlenecks did cause some of the inflation seen, and some easing in supply chains could see inflation fall substantially in the near term. Importantly though with demand responsible for 60% of inflation, there is a clear role for monetary policy to dampen demand.

The Fed’s Kashkari who spoke around 10am AEST yesterday reinforced the need for the Fed to hike to stem inflation: “By many, many measures we are at maximum employment and we are at very high inflation. So this is a completely unbalanced situation, which means to me it’s very clear: We need to tighten monetary policy to bring things into balance” and “We definitely want to avoid allowing that situation to develop. So with inflation this high, for me, I’m in the mode of we need to err on making sure we’re getting inflation down, and only relax when we see compelling evidence that inflation is well on its way back down to 2%,” he said, referring to the Fed’s inflation target ”. It is due to hawkish pushback by Kashakri and others over recent weeks that markets are expecting a hawkish Powell.

Economic data was sparse and mixed. US Core Durable Goods beat at 0.3% m/m vs. 0.2% expected, as did Pending Home Sales at -1.0% m/m vs. -2.6% expected. However, the Atlanta Fed Q3 GDP Now tracker fell to 1.4% annualised from 1.6% annualised following the raft of housing data over the past week. If realised, that would suggest GDP had only bounced slightly after the negative growth of -1.6% in Q1 and -0.9% in Q2. Working the other way was upward revisions to labour market data with an additional 462k payrolls likely to be added in the year through to March 2023 due to routine annual revisions, meaning payrolls were on average were actually 39k more each month than initially reported (see WSJ: Job Market Stronger Than Previously Reported, Data Show).

In FX it is been relatively quiet with the USD little moved (DXY -0.0%). To the extent that higher European yields are being driven by higher inflation expectations, they are not providing any support for the EUR (-0.1%, still below parity at 0.9966) or GBP (-0.5%, still near Brexit lows at 1.1793). USD/Yen continues to struggle against a higher global rates backdrop, and USD/JPY is back up through 137. The AUD (-0.5%) and NZD (-0.6%) have given back their strength yesterday.

Coming up:

• NZ: Retail Sales Volumes: a pre-GDP partial which sees retail volumes up 1.7% q/q in Q2.
• EZ: German Ifo/ECB Minutes: The ECB also releases its Minutes from its July Meeting. German also has its Ifo Survey which is expected to fall to 86.8 from 88.6 and a second read on Q2 GDP with no change expected.
• US: Jackson Hole/Jobless Claims: The Jackson Hole Symposium begins, though will kick off in earnest on Friday when Chair Powell speaks. Jobless Claims will also be closely watched given the gradual trend higher recently amid mixed indicators for the economy – consensus sees 252k from 250k. Also out is a second read on Q2 GDP with an upward revision expected to -0.7% annualised from -0.9% expected.

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