Well, here’s hoping this week lives up to its predecessor, because between Trump’s long list of boondoggles, a dovish Fed statement, and a “Gandalf” sighting, there was no shortage of excitement last week.
In case you missed Saturday evening’s Presidential Twitter tirade, it seems even more likely that Trump is ready to push the red button (not the one that brings him a Coke) on Kim:
So as we like to remind you every Sunday evening, there is no iron-clad guarantee that tomorrow will in fact materialize.
But assuming we’re not all reduced to a smoldering pile of ash, this week promises to bring plenty of excitement.
For one thing, we’ll get jobs. The Fed – and by extension markets – will be hoping for another “just right” print, where “just right” is good enough to keep the “recovery” meme alive but not good enough to suggest wage pressure is about to come calling “bigly” and put Yellen behind the curve.
It’s the same old “who you gonna believe?” story: the labor market or inflation? Here’s Goldman:
We have argued that the US economy is now at full employment and could soon move beyond it. If so, growth needs to slow to prevent the type of overheating that in the past has always foreshadowed a recession. Barring a spontaneous tightening of financial conditions or some other type of negative shock, this implies that the funds rate may need to rise by significantly more than currently discounted in the forwards.
But some of the recent data present a challenge to our view. Exhibit 1 shows that several measures of core inflation have decelerated significantly. Some of these measures—such as the ex-food and energy CPI and PCE—are sensitive to outliers such as the sharp drop in cell phone service prices in March. But others—such as the median or trimmed-mean CPI and PCE—ignore the impact of large moves in small sectors, and they have slowed meaningfully as well.
Wage growth has also surprised to the downside. Exhibit 2 shows our GS wage tracker, which summarizes the signals from four different data sets. Following an acceleration to 3% in the preliminary Q1 number, a combination of downward revisions in Q4/Q1 and weaker sequential data in Q2 has pushed our measure down to just 2.3%, with the Q2 employment cost index the latest disappointment.
Beyond the direct implications for Fed policy via the inflation side of its dual mandate, the weakness in the wage and price data also raises questions about the employment side of the mandate. After all, full employment is typically defined as the level of resource utilization that generates wage and price pressures consistent with the Fed’s target. So the shortfall could mean that current estimates of potential output and employment will prove overly pessimistic.
BofAML’s looking for 200k on the headline, unemployment holding steady at 4.3% and wages up 0.3% m/m, but down to 2.4% y/y growth, for whatever that’s worth. Barclays is at 175k. And here’s a bit of color from Deutsche on why the AHE number and how it relates to the ECI miss we saw on Friday:
The July employment report (Friday) headlines a busy week of data that will provide a preliminary snapshot of economic activity in the current quarter. We currently project a 200k gain on headline and private nonfarm payrolls, which should be sufficient to lower the unemployment rate a tenth to 4.3%. Hours worked should remain steady at 34.5. Importantly, we project a 0.3% gain in average hourly earnings (AHEs), which would have the effect of lowering the year-over-year growth rate a tenth to 2.4%. However, in our view, the risk is that it rounds up and remains at 2.5%. Whatever may be the case, as long as their is no material surprise in either direction, this month’s AHEs are not likely to impact policymakers’ intermediate-term inflation expectations all that much, especially in light of the Q2 employment cost index, which continued to point to more of the same in terms of muted wage inflation.
We’ll also get ISM and PCE inflation, both critical prints for obvious reasons. On the manufacturing side, BofAML sees 57, Goldman 56.8, and some other folks have some other estimates you don’t care about. Here’s a chart you don’t care about either:
As for PCE, BofAML reckons the June print will be 0.1%, which would leave the y/y rate unchanged at 1.4%. Barclays concurs. Here’s Deutsche:
Of greater importance is the core PCE deflator (+0.1% vs. +0.1%), which is the Fed’s preferred inflation metric. Our forecast implies that the year-over-year growth rate of the series remains at 1.4%. At minimum, the three- and sixmonth trends in core PCE inflation will need to accelerate for the Fed to raise rates again by yearend.
We’ll also get the RBA this week and that is interesting for all kinds of reasons.
The Aussie has been lots of fun to watch over the past couple of weeks as policymakers (here and here) and a weak CPI number (here) argued with ostensibly hawkish RBA minutes and rising commodity prices. Ultimately, it’s pretty clear “who’s” been winning:
“We believe the RBA can afford to be patient and any case for normalization of policy will take time to build, with recent AUD strength adding to the case for caution,” BofAML wrote on Friday, adding that “the RBA will be slower and more gradual than other central banks.” Basically, they’re just parroting this, from Lowe, who all but ruled out any surprises last week:
Some central banks are now starting to increase interest rates and others are considering when to withdraw some of the monetary stimulus that has been put in place, [but] this has no automatic implications for monetary policy in Australia.
“We see a broadly flat to mild downward trend in AUDUSD, after what we think is a level adjustment in response to reduced RBA easing risks,” Barclays opined on Sunday. “We also like AUD downside as a portfolio hedge.”
For their part, Goldman thinks the RBA will come out sounding a bit less like Lowe and Debelle and a little more like the minutes (which is of course amusing because we’re talking about the same damn people here). “While the RBA will likely leave the cash rate on hold, the balance of risks is skewed to a slight hawkish shift in the accompanying decision statement, in line with the June Board Minutes,” the Squid says.
We’ll also get inflation data out of Europe, which you should read in the context of the data out of Germany on Friday (data which caused bund yields to spike and accelerated the move higher in EURCHF).
And there’s European GDP data as well.
Here’s Goldman’s preview:
- Monday, July 31: Euro area, HICP (July, flash). Core: GS +1.1% yoy, consensus +1.1% yoy, last +1.1% yoy. We expect a Euro area annual headline inflation of +1.3% yoy in July, and core inflation of +1.1% yoy.
- Tuesday, August 1: Euro area, GDP (Q2, first). GS +0.5% qoq, consensus +0.6% qoq, last +0.6% qoq. After a long period characterised by a discrepancy between strong survey indicators and somewhat weaker hard data, last month posted a synchronised rise in May production across the Euro area countries. Our judgmental forecast expects growth to come in at +0.5% qoq.
Also, we’ll get the BoE. Obviously, the vote count is critical there. Here’s Barclays:
The BoE’s August Inflation Report (Thursday) should steer markets towards a more central scenario regarding future BoE policy. Amidst moderating growth and inflation data, our economists expect the BoE to vote for the status quo, in a 6-2 vote (Figure 1), whilst modestly revising their forecasts for growth and inflation lower, as widely expected. We expect Governor Carney to repeat that bank rates will rise sometime in the future, but not just yet.
Risks around the vote split appear asymmetric, in our view. Although this week’s meeting is likely too early for Haldane to vote for a hike, we think the dilemma the MPC faces, one between short-term output and long-term credibility, is complicated. Despite concerns by some MPC members that BoE rate hikes would be committing a policy error, others may be asserting that protecting the long-run value of GBP and BoE credibility by removing exigent policies may merit a temporary loss of output. With positioning in short-end rates slightly long, a surprise vote for a rate hike by Haldane may result in sharply higher short-term interest rates and GBP strength.
Goldman has it 5-3.
And then there’s China.
Yes, China. Who’s bureau of statistics will tell us what they want us to think about their fake PMI.
Got all of that? If not, that’s ok, because here’s a fun calendar from BofAML: