Poring, Pouring And Poor-ing

Appropriately, the pre-Labor Day trade in the US will be all about the US labor market. Also in focus in the new week: Europe’s ongoing energy crisis and the fallout from Jerome Powell’s successful attempt to deliver an overtly hawkish message in Jackson Hole.

As if market participants didn’t hear enough from central bankers last week, Fed speakers are lined up around the corner. Traders will hear from Lael Brainard, Tom Barkin, John Williams, Loretta Mester and Raphael Bostic (twice) in the days ahead. And that’s just who’s on the schedule.

Between data on job openings, the inauguration of a revamped ADP report and August payrolls, it’ll be “jobs, jobs, jobs,” but there’s a bevy of additional data on offer for those who prefer to spend the last week of August poring over “the macro” instead of pouring Gran Patron Platinum over two fast-melting ice cubes on a beach somewhere. Of course, 8% (or 9% or 10% or 80%, depending on where you are) inflation means that untold scores of citizens across the (formerly) developed world, to say nothing of emerging markets, are “poor-ing” it this summer. For those folks, it’s “staycations” only.

ISM manufacturing is due, and just like everything else, it’ll be contextualized via the Fed’s efforts to cool the economy without tipping the US into recession (and do note that the two-quarter definition of recession is relegated to the dustbin of history now — almost no one insists that Q2 definitively marked the onset of a downturn in the world’s largest economy). Consensus is looking for 52 from the headline (so, still in expansion territory), but the price gauges will be eyed especially closely after last month’s big drop (red in the figure, below).

Markets want evidence of “peak inflation.” PMI price gauges are a good place to look, even if they won’t tip any scales at the Fed.

Jeremy Siegel, who, if we’re being honest, was probably the only big name to actually nail the inflation call (if you word search the transcript of the June 2020 interview found here for “inflation,” you’ll be taken aback at how accurate he was), suggested last week that real world inflation is peaking. “We’ll remain high in the statistics,” he told Bloomberg, referencing CPI, but cautioned that “the money supply has shrunk since March, which is almost an unprecedented occurrence.”

One implication is that real-time, anecdotal accounts may be a better guide going forward than “stale” official statistics. Although ultimately, I’d agree with Nomura’s Charlie McElligott and the incomparable Zoltan Pozsar, both of whom have suggested that exogenous shocks, particularly across the European energy complex, could make inflation feel somewhat stochastic going forward.

In any event, another “under the hood” dynamic to watch in the ISM report is illustrated in the figure on the left (below).

The headline gauge is disconnected from the new orders-inventories spread, which suggests downside for the former. And where there’s potential downside for the ISM headline, there’s potential downside for equities (figure on the right, above).

Investors will also get a “fresh” read on home prices, where the scare quotes are there as a customary reminder that FHFA and Case-Shiller are delivered on a two-month delay.

June’s prints could show a material deceleration in the pace of price gains given the peak in mortgage rates. The problem is the same as ever: Shelter inflation responds on a lag (figure below) which means we haven’t seen the peak in the data yet and the Fed is data dependent.

I suppose that only underscores Siegel’s point. Inflation is poised to stay “high in the statistics,” but the risk is that a Fed which tightens based on those statistics is a Fed that again risks being behind the curve, only this time by not recognizing the early signs of disinflation. “Although there is inflation in the pipeline, particularly the statistical pipeline, my feeling is we should not get overly aggressive at this point,” Siegel remarked, of the Fed’s next move.

Larry Summers, meanwhile, had kind words for Powell following Jackson Hole — or as kind as words from Larry can be.

“Despite some earlier confused talk about neutral, he was under no illusion that monetary policy was in an appropriate place right now,” Summers said, referencing the juxtaposition between Powell’s remarks following the July FOMC meeting and his address on Friday. “It was clear that whatever the academic arguments about supply shocks versus demand shocks said, the Fed couldn’t accept high inflation and had to act,” he added. “I think the Fed is positioned as well as it can be given the credibility losses and mistakes that there have been, to manage things going forward.”

What’s interesting for markets is that terminal rate expectations didn’t really move all that much in response to Powell. The adverse reaction in equities was down to the realization that this is a Fed that intends to overshoot neutral (soon), and cling to terminal for as long as absolutely possible. In simple terms: The Fed wants to get policy into restrictive territory and keep it there until either inflation or the economy taps out.

“Credit where credit’s due, Jay Powell’s clear, focused and forceful tone in his brief Jackson Hole message allowed him to regain the narrative for the first time in forever,” Nomura’s McElligott wrote. “The clear messag[e] was that the Fed will undoubtedly be running ‘restrictive for longer,’ which increases the odds of a US hard landing.”

Speaking of hard landings, August PMIs are due out of China this week. July’s manufacturing print found the official (i.e., NBS) gauge falling back into contraction territory (figure below) and activity data for last month was weak enough to compel a policy rate cut.

I think it’s prudent to at least consider the possibility that the Party has finally reached the limits of the death-defying tightrope act they’ve so deftly managed over the past six or seven years. Beijing has proven astoundingly capable at balancing competing priorities, but it’s just not possible to reconcile “COVID zero” with a commitment to 5% growth, especially not given legacy drag from the property curbs.

Also on deck in the new week: The first read on euro-area inflation for August. Energy and power prices in Europe went parabolic over the past several weeks, and traders will nervously eye three days of “planned” (you can interpret the scare quotes however you like) maintenance to the Nord Stream. I suppose the silver lining is that with flows running at just 20% of capacity, the Kremlin only has 20% worth of leverage left. (That’s dark humor.) Gazprom is apparently torching (literally) millions in gas meant for Europe at Portovaya.

ECB officials are reportedly pondering a 75bps hike this month. In the same remarks to Bloomberg, Summers described Christine Lagarde’s job as “much harder” than Powell’s. “They’re going to have to raise rates more than is currently priced in,” he said, of the ECB. “But that’s going to come at a time when there’s very substantial recessionary forces.”