Investors will get an update on consumer spending across the world’s largest economy this week, while traders keen to refine expectations for this year’s remaining two FOMC meetings will hear from a whole host of Fed speakers.
Jerome Powell is set address the Economic Club of New York on Thursday. That’ll garner quite a bit of attention. By my count, the market will hear from Fed officials 21 times this week, including Powell’s marquee speech. Other scheduled speakers include Barkin, Barr, Bowman, Cook, Goolsbee, Harker, Jefferson, Kasahkari, Mester, Waller and Williams.
Recent rhetoric suggests the Committee is inclined (or at least willing) to forgo the final rate hike tipped by the dot plot based on the notion that the repricing at the long-end of the Treasury curve, and particularly the cumulative 100bps increase in the term premium, can stand in for a hike.
The figure above shows Goldman’s financial conditions index along with the term premium. The trek higher for both since late July, and the swoon in equities which played out over the same period, is viewed in some corners as sufficient to obviate the need for another hike.
This is complicated by the market’s penchant for pulling forward expected future outcomes. As soon as Fed officials started to hint at skipping the final hike, yields fell. Popular long-end Treasury ETFs enjoyed their best week since March, and while some of the rebound for bonds was attributable to a haven bid in light of events in the Mideast, officials’ rhetoric was at least as important. Either way, the Fed has to be wary. When “the Fed says ‘the market did the (tightening) job’ for them” the market will be inclined to “undo that job,” as Nomura’s Charlie McElligott put it, describing the Committee’s “extreme FCI reflexivity.”
That’s the backdrop for this week’s packed slate of Fed speakers. If they pound the table too hard vis-à-vis skipping the last hike, they risk seeing bonds and stocks rally in their faces, easing financial conditions in the process. Policymakers habitually underestimate the (counterproductive) efficiency of that “dysfunctional feedback loop,” as McElligott aptly described it.
Last week’s inflation data (both PPI and CPI) suggested price pressures are still percolating. The inflation demon isn’t fully exorcised. Call Lankester Merrin.
Retail sales data due Tuesday will be eyed closely for evidence that the US consumer is tiring — or not. Consensus is looking for 0.3% from the headline and, more importantly, a slight drop from the control group.
A beat would suggest the still robust labor market continued to support nominal spending at quarter-end. If the headline print shows a gain, it’d be the sixth consecutive.
Housing updates will also start to roll in this week in the US. Builder sentiment for October is due Tuesday, followed by starts and permits on Wednesday, then existing home sales on Thursday. Jobless claims remain in focus amid a string of very low prints which together suggest labor market doomsayers are no closer to being right.
“For all of the slowdown angst, the real economy continues to outperform expectations, an underlying disconnect that we anticipate will remain relevant,” BMO’s Ian Lyngen and Ben Jeffery remarked, using the disparity between the Atlanta Fed’s GDPNow tracker and the St. Louis Fed’s Nowcast to illustrate the divergence between soft and hard data.
Elsewhere, China will release activity data for September (it may or may not include an update on youth joblessness, which the Party stopped publishing over the summer) and GDP data for Q3 (which may or may not be partially fabricated). The UK will release key wage data on Tuesday and inflation figures on Wednesday.
Of course, all of this will take a backseat in the headlines to the onset of Israel’s military operation in Gaza.
