All eyes will be on Europe in the week ahead as Mario Draghi attempts to appease market expectations for easing and Boris Johnson stumbles towards nobody knows where in his quest to deliver Brexit come hell or high Tory revolt.
But that doesn’t mean there’s not plenty to focus on stateside, where a raft of key US data will presumably help investors decide which is correct between a still buoyant services economy and a manufacturing sector that’s now in contraction.
The August jobs report was inconclusive when it comes to settling the ongoing debate about whether or not the US is headed for a downturn.
Jerome Powell delivered a largely (and purposefully) nebulous set of remarks in Zurich on Friday in an effort to avoid shaking up expectations for the September meeting ahead of this week’s blackout period.
“One oft-cited pattern is that the Fed has cut fairly sharply following a sub-50 ISM manufacturing reading; by our calculation, since 1997 there has been a 90bp average policy rate reduction over the subsequent 6 months in periods where the policy rate was above the ZLB”, Goldman observed, in a Friday note. That said, the bank went on to point out that if you “condition additionally on stronger non-manufacturing surveys”, you come away with “a less aggressive easing outcome, about 68bp of easing on average over the same time frame”.
(Goldman)
While we won’t hear from any Fed officials, the market will almost assuredly hear from Trump on monetary policy and whatever he says will be juxtaposed with NFIB, CPI, retail sales and the preliminary read on University of Michigan sentiment.
Retail sales will be watched especially closely. The consumer was still holding up very well at the beginning of the third quarter, but August’s University of Michigan sentiment print and other poll data suggests Americans are beginning to fret about the trade war. Paradoxically, the Fed cut appears to have spooked voters. However CPI comes in, it won’t affect the September Fed decision, but it may alter expectations for what comes after this month’s assumed 25bp cut.
“Inflation and retail sales data will take prominence this week ahead of the September 18 FOMC meeting, as the market remains focused on any possible spillover from the weak manufacturing/trade sectors to the still resilient services/consumption side of the economy, and to the extent of potential Fed support”, Barclays said Sunday. Retail sales have risen for five consecutive months. The July print (0.7%) was well ahead of consensus.
“We estimate that core retail sales were flat in August MoM, reflecting mean reversion in the non-store category following a record Amazon Prime Day in July [and] we also estimate a flat reading in the headline measure”, Goldman says. The bank also expects further deterioration in consumer confidence (to 89.5 in the preliminary September reading), thanks to “recent economic misses”, which the bank thinks will likely “weigh on sentiment”.
Last week, exogenous factors helped the dollar come off recent highs despite a steep Thursday selloff in bonds. “The USD was under pressure as a relief rally in risky assets, driven in part by the scheduling of a new round of talks with China and declining risks of no-deal Brexit, weighed on safe havens”, Barclays recounts, noting that while “strong US services data drove yields higher as the market reassessed its excessive expectation of Fed cuts, it failed to boost the USD as repricing elsewhere, particularly in European rates ahead of the ECB meeting, supported other currencies”.
When it comes to bonds, it’ll be interesting to see how a confluence of factors from dour China export data out over the weekend to the deluge of US data on the docket to the ECB meeting, affects yields after last Thursday’s rout.
“Following the sharp rally in duration through August, we have suggested yields are likely to consolidate into a new range [and] the bond sell-off late last week is a first step in this direction, in our view”, Goldman said Friday. The bank’s year-end forecast for 10-year US yields is well above some others on the street.
If all of this is too much for you to parse on your own, that’s ok, because you can look forward to real-time analysis from the presidential Twitter feed, which, increasingly, features shoutouts to Jim Cramer.
I agree with @jimcramer, the Fed should lower rates. They were WAY too early to raise, and Way too late to cut – and big dose quantitative tightening didn’t exactly help either. Where did I find this guy Jerome? Oh well, you can’t win them all!
— Donald J. Trump (@realDonaldTrump) September 6, 2019
The next time the market hears from “this guy Jerome” will presumably be at the post-FOMC presser later this month, where the embattled Fed chair will pass out shots of his patented “plain English”.
Bring a chaser. You’ll need it.
