Week ahead: US PCE data to nudge Fed tapering?

Week Ahead

On the agenda this week: We bid farewell to Angela Merkel as Germany faces a future without her leadership for the first time in over a decade. We’ve also a range of big data releases from the US including the Fed’s preferred inflation metric – and Canadian GDP stats. Will it backslide again? 

We all know the Fed loves PCE data. Personal Consumption Expenditures is its favourite inflation metric – and one that could force that ever-discussed tapering through earlier, depending on August’s print. 

The broad market consensus is that the Fed will begin pulling back its economic support in either November or December, so the question now is one of liftoff for rates. The Fed has already raised its core CPE inflation forecast for 2021 to 3.7% from 3% in June – they know it’s hot. Chair Powell has also pretty much announced that the Fed will start tapering this year. The question now is whether the Fed has to revise these expectations still higher, and what that might mean for the path of interest rate hikes. An expectation-beating print this week would stoke concerns that this is the case. 

Of course, there are other external factors at play. It should also be pointed that July’s 0.4% jump was in line with expectations and showed a cooling off against June’s figures. 

In July, the overall rate of inflation reached 4.2%. Going by the Consumer Price Index data reported recently, the cost of consumer goods rose 5.3% in August. This was in line with expectations. It may also be an indicator of where PCE data is headed.  

The Fed is on record as saying its content to let inflation run above its 2% target as it considers the current high levels as “transitionary”.  

The United States, like pretty much all major economies, is moving out of the pandemic economy and attempting to find some semblance of normality. It could be the case that hot inflation continues to singe the economy before burning out in 2022 and fading away. 

The latest PCE reading comes on Friday. 

Tethered to this is US consumer confidence. Logically, higher prices suggest a lowering in consumer sentiment. This has been reflected in August’s data, and it may be the case when we get September’s data on Tuesday afternoon. 

In August, consumer confidence dropped to a six-month low. The Conference Board’s index fell to 113.8 from a revised 125.1 reading in July.  

“Concerns about the Delta variant — and, to a lesser degree, rising gas and food prices — resulted in a less favourable view of current economic conditions and short-term growth prospects,” Lynn Franco, senior director of economic indicators at the Conference Board, said in a statement, explaining the dip. 

Over 39 million COVID-19 cases have been recorded in the US across the course of the pandemic so far. 

Moving away from the US, Germany closes the book on Angela Merkel’s tenure as Chancellor. After 16 years, Merkel is stepping aside, which gives today’s elections an air of exciting new change. 

By the end of play today, Germany will have a brand-new Chancellor. SPD leader Olaf Scholz was the front runner in the build-up to election, outstripping rivals from the CDU and the Greens. 

That said, the belief is the Greens, who were on course to their best-ever results prior to Germans hitting the polls, may become the SPD’s chief partner in a brand-new coalition. 

Our macroeconomics and political guru Helen Thomas previewed Germany’s latest federal elections. Have her predictions been proved correct?  

Speaking of elections, Canadians recently voted in a fresh wave of political changes, with PM Trudeau holding onto the reins for a third term. The Liberals’ majority was compromised – which could make the nation’s economic moves interest. 

Canada’s month-on-month GDP figures are released this month, following a 1.1% contraction. Estimates called for 2.5% growth, so even with the snap election keeping Trudeau in power, the same challenges he was facing before are his same challenges once again. 

Economic recovery will “continue to require the same extraordinary level of support”, according to Bank of Canada Governor Tiff Macklem. No changes to economic policy are expected – despite the lacklustre GDP showing from last month. Perhaps we’ll see a reversal this month, or a possible muddying of the waters caused by election fervour.  

Major economic data 

Date  Time (GMT+1)  Asset  Event 
Sun 26-Sep  All Day  EUR  German Federal Elections 
       
Tue 28-Sep  2.30am  AUD  Core Retail Sales m/m 
  3.00pm  USD  CB Consumer Confidence 
       
Wed 29-Sep  3.30pm  OIL  US Crude Oil Inventories 
       
Thu 30-Sep  2.00am  CNH  China Manufacturing PMI 
  1.30pm  CAD  GDP m/m 
       
Fri 01-Oct  8.55am  EUR  German Final Manufactuing PMI 
  1.30pm  USD  Core PCE Index m/m 
  3.00pm  USD  ISM Manufacturing PMI