It’s The Quiet Weeks That Get You

The data docket is a bit sparse in the US this week, and Fed officials are in the pre-meeting quiet period ahead of this year’s final policy gathering.

Ostensibly, that sets up an uneventful few days, but (too) often, it’s the quiet weeks that get you.

The calendar isn’t totally blank in the US. ISM services is due Monday. It’s fairly obvious that the manufacturing sector in the world’s largest economy is decelerating, but America is a services-based society. The “sticky” inflation is in services, and that’s also where some of the wider disparities between job openings and available labor reside, which means the risk of a wage-price spiral is perhaps more acute in services than anywhere else. The leisure and hospitality sector is still almost a million jobs short of pre-pandemic employment levels, for example.

The ISM update (and the final read on S&P Global’s services gauge for November) won’t answer all (or any) of the burning questions silently posed above. But the incremental information could be useful, particularly the update on the services price gauge. The disparity between the price indexes in the two ISM surveys is wide (figure below).

“There has been a divergence between prices paid in the manufacturing and services surveys, which is consistent with what we’re seeing in the broader consumer price data,” Wells Fargo remarked. “Goods inflation has begun to ease, but services inflation remains elevated as providers aren’t seeing the same relief on costs as manufacturers.”

The hot read on wage growth that accompanied the November jobs report should hang over sentiment at least to the extent it suggests traders can’t relax until December 13, when CPI either will or won’t frustrate Fed officials who’ve already decided to downshift to a 50bps rate-hike increment the following day.

“The strong labor market put a dent in the recent market repricing lower of the Fed hiking path,” TD’s Priya Misra said. “The strength in wages also reinforces our view that core services inflation could be sticky on the way down, and force the Fed to hike more than is priced in.”

Misra did express “sympathy” for the bid at the long-end, given that it’s effectively just the other side of the same coin: An expression of the view that a Fed which achieves a terminal rate materially higher than 5% and manages to hold terminal for any appreciable length of time is a Fed willing to countenance a recession. The higher the odds of recession, the more sense any grab for duration makes, particularly in the context of the highest yields on offer in recent memory.

Notably, the popular long-end ETF is enjoying a streak of very large weekly gains (figure above). Of course, the recent rally comes on the heels of an unthinkable drawdown.

The more persistent the bid for the long-end in the face of stubborn inflation and hawkish monetary policy, the more entrenched the flattener. “The prospects for a deeper curve inversion remain extremely topical as the market acknowledges the disconnect between the Fed’s battle to restore price stability and investors’ increasing recessionary angst,” BMO’s Ian Lyngen Ben Jeffery said. “It’s not uncharted territory by any stretch of the imagination to observe that the more aggressively the Fed acts in its efforts to reestablish the anchor of inflation expectations, the greater the risk of a hard landing.”

When it comes to timing the recession, it’s the steepener you’re looking for — a front-end rally on expectations for Fed easing. It’s too early for that, even in the context of markets ready and willing to jump the gun.

PPI is due Friday, along with the preliminary read on University of Michigan inflation expectations for December. Those prints are material, and they could be tradable, at least for a few minutes. Other data includes an update on consumer credit and claims which, eventually, will be relevant again.

Finally, the RBA and BoC will hike rates. Both are likely near the end of their respective hiking cycles. And both are staring at domestic housing bubbles.