Can the Fed afford to pump the brakes?
The end of last week was a reality check of sorts for investors who may have gotten a little carried away with the Fed’s supposed dovish turn and turned a blind eye to the data and what central bankers were saying.
Perhaps the experience of the last 12 months can explain the latter, but the data we saw on Friday cannot be ignored. The US economy is certainly not behaving as if it were in recession; rather, the labor market is so hot that the Fed may not be able to slow down as hoped.
As Britain prepares for a long period of stagflation, the US is desperate to avoid a hard landing. Next week’s inflation data could shed more light on whether the Fed can afford to hit the brakes in September, or perhaps even have to push harder.
CPI is observed after the hot jobs report
GDP is in the spotlight after dire forecasts from the Bank of England
What’s next for USDJPY?
It’s all about inflation this week. Now that some members of the Fed have abandoned the idea of a Fed pivot, investors will want to see if inflation continues to show signs that inflation has peaked. The U.S. economy may slow down, which will lead to some destruction of demand for goods.
July’s inflation report is expected to show a much slower pace of price pressures, but if it turns out to be hot, expectations for the September FOMC meeting could turn further toward a 75 basis point rate hike. The monthly figures are expected to increase by 0.2%, compared with 1.3% in the previous month. The headline rate is expected to drop from 9.1% to 8.8% year-over-year.
Another key data set for the week is the University of Michigan’s preliminary report on consumer sentiment, which is expected to stabilize.
Traders will also be paying close attention to several Fed speeches during the week from Evans, Kashkara and Daley. Ahead of September’s policy decision, traders will want to know how many Fed members favor a slower rate of policy tightening.
The election season continues with the US primaries in Connecticut, Minnesota, Vermont and Wisconsin.
Next week looks a bit quiet on the European front, with final inflation data the only notable piece of information. Of course, this will attract a lot of attention given the level of central bank activity at the moment, but revisions tend to be less influential.
Heading into winter, the focus will remain on Russian gas flows as Nord Stream 1 continues to operate at 20% capacity. Great Britain
Friday’s GDP data bodes well for next week, especially in light of the Bank of England’s gloomy outlook on Thursday. The country may not be in recession yet, but the central bank believes it will happen very soon, and the downturn will be long and painful. If Friday’s GDP data is unexpectedly negative, it will compound the woes the country faces over the next couple of years.
Inflation and GDP data will be released next week, with the former expected to fall to 15.3%, allowing the Central Bank to cut rates further as it seeks to address the strengthening of the ruble and support the economy.
Next week, only the third-level data will be released, which includes production, mining and gold production.
A roundup of economic data is due next week from unemployment to industrial production and the current account. Inflation jumped to 79.6% last month, further highlighting the failure of the monetary policy experiment. We might get more evidence next week, but it won’t change the bottom line.
Inflation last month hit 3.4%, further increasing the odds of a 50 basis point hike by the SNB next month. The central bank really likes to surprise markets, so a move between meetings is possible. Next jobless data on Monday.
China releases trade balance data over the weekend, but it should have little impact on the market on Monday. China’s CPI will be released on Wednesday with inflation expectations broadly benign at 2.50% y/y. The risk is that the inflation story will start to catch up with China, where growth is muted.
Pelosi’s visit to Taiwan is not expected to have a long-term impact on local markets, which were already pricing him in on Friday. Developments in China’s real estate developer sector, non-performing real estate and covid zero continue to pose key risks for China.
On Friday, the RBI rose 0.50%, higher than expected, with a hawkish tone to the statement. The Indian rupee did not respond positively, as did lower oil prices. The big jobs report didn’t help, and higher US inflation next week could see US inflation hit a record low against the US dollar above 80.00. It may also revive the outflow of foreign investors from the Sensex, which has recovered in the last two weeks.
AUD/USD remains dependent on international investor flows as a global sentiment gauge. AUD staged a major technical breakout to the upside, but gains were capped by AUD/JPY due to the collapse in USD/JPY.
Monday’s consumer and business sentiment are the only releases worth noting this week. Australian stocks continue to trail the Nasdaq and S&P 500.
NZD/USD remains dependent on international investor flows as a global sentiment gauge. NZD made a major technical breakout to the upside, but gains were limited in NZD/JPY due to the collapse in USD/JPY.
New Zealand e-card spending on Tuesday, as well as business PMI and food inflation on Friday are the data points for New Zealand. Higher costs and food inflation will reinforce the view that more aggressive RBNZ tightening is on the way. This could be a short-term negative for local stocks and a short-term positive for the currency. Japan
USD/JPY’s collapse extended to 130.50, just below 130.00. It is trying to establish a base at these levels, but its direction remains entirely dependent on the difference between US and Japanese interest rates. Hawkish comments from FOMC members last week lifted USD/JPY back to 132.00, while the jobs report lifted the rate once again.
Japan is having a tough week of data releases, but they are all level 2 and unlikely to have much of an impact on the markets. The Nikkei continues to closely monitor the Nasdaq.
Retail sales in Singapore were weak last week, allaying MAS fears of tightening in October. This should dampen Singapore’s GDP this Thursday, and if the data is soft, SGD weakness could resume. A hawkish MAS means SGD outperformed in the Asia FX space.
Singapore earnings were solid in Q2, supporting share prices.
Economic calendar Saturday, August 6
US Secretary of State Blinken visits the Philippines
Published quarterly earnings of Berkshire Hathaway Inc
Sunday, August 7
China’s trade, foreign exchange reserves
US Secretary of State Blinken is going to Africa
Monday, August 8
Australian foreign reserves
Singapore’s foreign reserves
2-year inflation expectations in New Zealand
Negotiations on the nuclear deal with Iran will continue in Vienna
Tuesday, August 9
NFIB US Small Business Optimism, Non-Farm Productivity
Primary elections in the US are held in Connecticut, Minnesota, Vermont and Wisconsin
NAB Australia Business Trust, Household Spending
China’s aggregate financing, money supply, loans in new yuan
Japan M2 cash reserve, orders for machine tools
Mexico’s CPI, international reserves
Heavy traffic index in New Zealand, card costs
Philippines GDP, Trade, Unemployment
Consumer confidence in Thailand
The parties are vying for the 1st District seat left vacant by the death of Republican Rep. Jim Hagedorn
Wednesday, August 10
July US CPI M/M: 0.2% to 1.3% earlier; Y/Y: 8.8% to 9.1% earlier, wholesale stocks
CPI of Germany
CPI of Russia
Consumer confidence in Australia
Thailand bid decision
Chicago Fed President Evans talks about the economy and monetary policy
Minneapolis Fed President Kashkari talks about stagflation
Chinese Ambassador to Australia Xiao Tian speaks at the National Press Club of Australia
EIA Crude Oil Inventories Report
Thursday, August 11
US PPI, Initial Jobless Claims
CPI of Argentina
Consumer Inflation Expectations in Australia
Rate decision in Mexico (Banxico): Overnight rate expected to increase by 75 bps. up to 8.50%
Industrial production of Mexico
Home sales in New Zealand, net migration
Decision on the exchange rate of Peru
GDP of Singapore
Production of South Africa
Money supply of South Korea
Thailand’s foreign policy reserves
Turkish current account
San Francisco Fed President Daley is interviewed on Bloomberg TV
The leadership of the Tory party of Great Britain is holding an election in Cheltenham
The Danish government is holding a conference on Ukraine
Friday, August 12
US University of Michigan Consumer Sentiment
CPI of Spain
CPI of Poland
CPI of India
GDP of Russia
China medium-term lending
Industrial production of the Eurozone
Unemployment rate in France, CPI
India industrial production, trade
Trade of Italy
Food prices in New Zealand, PMI
Industrial production of Turkey
UK Industrial Production GDP
EasyJet Plc pilots to go on strike in Spain
Sovereign rating update