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Markets primed for US inflation, FOMC minutes, JPM kick off earnings season proper
European stocks were off half a percent this morning in early trade after another fragile day on Wall Street saw selling into the close and another weaker finish. All eyes today on the US CPI inflation number, minutes from the FOMC’s last meeting and the start of earnings season with numbers due out from JPMorgan. Asian equities mixed after Chinese trade data was better than expected.
Markets in Europe turned more positive after the first half-hour but it’s clear sentiment is anaemic The FTSE 100 is chopping around its well-worn range, the DAX is holding on to its 200-day moving average just about. Possible bullish crossover on the MACD needs confirming – big finish required.
JOLTS: We saw a marked jump in the “quits rate” with 4.3m workers leaving their jobs, with the quits rate increasing to a series high of 2.9%. Tighter labour market, workers gaining bargaining power = higher wages, more persistent inflation pressures.
But… 38% of households across the US report facing serious financial problems in the past few months, a poll from NPR found. Which begs the question – why and how people are not getting back into work and quitting. One will be down to massive asset inflation due to central bank and fiscal policy that has enabled large numbers of particularly older workers to step back sooner than they would have down otherwise. Couple of years left to retire – house now worth an extra 20% and paid off, 401k looking fatter than ever, etc, etc. Number two is something more sinister and damaging – people just do nothing, if they can. Working day in, day out is like hitting your head against a brick wall – you get a headache, you die sooner, and you don’t go back to it once you’ve stopped doing it. Animal spirits – people’s fight to get up and do things they’d prefer not to do – have been squashed by lockdowns.
More signs of inflation: NY Fed said short and medium-term inflation expectations rose to their highest levels since survey began in 2013.
UoM preliminary report on Friday – will give us the latest inflation expectation figures. This is where expectations stand now. Today’s CPI print is expected to show prices rose 0.4% on the month to maintain the annual rate at 5.4%.
The Fed’s Clarida said the bar for tapering was more than met on inflation and all but met on employment. FOMC minutes will tell us more about how much inflation is a worry – we know the taper is coming, the question is how quickly the Fed moves to tame inflation by raising rates.
Watch for a move in gold – it’s been a fairly tight consolidation phase even as rates and the USD have been on the move – the inflation print and FOMC minutes could spur a bigger move. Indicators still favour bulls.
US earnings preview: banks kick off the season
Wall Street rolls into earnings season in a bit of funk. The S&P 500 is about 4% off its recent all-time high, whilst the Nasdaq 100 has declined about 6%, as the megacap growth stocks were hit by rising bond yields. S&P 500 companies are expected to deliver earnings growth of 30%, on revenue growth of 14%.
JPMorgan Chase gets earnings season underway with its Q3 numbers scheduled for Oct 13th before the market open. Then on Thursday we hear from Bank of America, Citigroup, Morgan Stanley and Wells Fargo, before Goldman Sachs rounds out the week on Friday. JPMorgan is expected to deliver earnings per share of $3, on revenues of $29.8bn. Note JPM tends to trade lower on the day of earnings even when it beats expectations for revenues and earnings.
Outlook: Nike and FedEx are among a number of companies that have already issued pretty downcast outlook. Supply chain problems are the biggest worry with a majority of companies releasing updates mentioning this. Growth in the US is decelerating – the Atlanta Fed GDPNow model estimates Q3 real GDP growth of just 1.3%. Higher energy costs, rising producer and consumer inflation, supply bottlenecks, labour shortages and rising wages all conspiring to pull the brake on the recovery somewhat. Still, economic growth has not yet given way to contraction and after a global pandemic it will take time to recovery fully.
Trading: Normalisation of financial markets in the wake of the pandemic – ie substantially less volatility than in 2020 – is likely to weigh somewhat on trading revenues, albeit there was some heightened volatility in equity markets towards the end of September as the stock market retreated. Dealmaking remains positive as the recovery from the pandemic and large amounts of excess cash drove business activity.
Costs: The biggest concern right now for stocks is rising costs. Supply-side worries, specifically rising input and labour costs, pose the single largest headline risk for earnings surprises to fall on the downside. The big banks have already raised their forecasts for expenses this year on a number of occasions. It’s not just some of the well-publicized salary hikes for junior bankers that are a concern – tech costs are also soaring.
Interest rates: Low rates remain a headwind but the recent spike in rates on inflation/tapering/tightening expectations may create conditions for a more positive outlook. The 10s2s spread has pushed out to its widest since June. Rising yields in the quarter may have supported some modest sequential net interest income improvement from Q2.
Chart: After flattening from March through to July, the yield curve is steepening once more.
Loan demand: Post-pandemic, banks have been struggling to find people to lend to. Commercial/industria loans remain subdued versus a year ago, but there are signs that consumer loan growth is picking up. Fed data shows consumer loan growth has picked up as the economy recovers. However, UBS showed banks were lowering lending requirements in a bid to improve activity, which could impact on the quality, though this is likely a marginal concern given the broad macro tailwinds for growth. Mortgage activity is expected to be substantially down on last year after the 2020 surge in demand for new mortgages and refinancing.
Chart: Consumer loan growth improving
Other stocks we are watching
The Hut Group (THG) – tanked 30% yesterday as its capital markets day seems to have been a total bust. Efforts to outline why the stock deserves a high tech multiple and what it’s doing with Ingenuity and provide more clarity over the business seemingly failed in spectacular fashion. The City has totally lost confidence in this company and its founder. No signs of relief for the company as investors give it the cold shoulder. Shares are off another 5% this morning.
Diversified Energy – the latest to get caught in the ESG net – shares plunged 19%, as much as 25% at one point after a Bloomberg report said oil wells were leaking methane. Rebuttal from company seemed to fall on deaf ears. Shares recovering modestly, +3% today.
Analysts are lifting their Netflix price targets, partly on the popular “Squid Game.” Netflix will report its third-quarter earnings next week.
Mixed start for European equities ahead of NFP
Mixed start in Europe after another positive session on Wall Street as the US Senate approved raising the debt ceiling until December. Treasury yields are higher, with the 10yr hitting 1.6%, which may cool megacap tech’s recovery. All eyes today on the nonfarm payrolls report and what this means for the Fed and tapering.
Whilst European bourses are mainly in the red the FTSE 100 is trying to break above 7,100, but as noted yesterday there is moving average congestion to clear out the way just underneath this and it’s still firmly within the range of the last 6 months. The S&P 500 was up 0.83% on Thursday and has now recovered a chunk of the Monday gap and is now just 3% or so off its all-time high. Momentum just flipping in favour of bulls (we note bullish MACD crossover for futures) – has the supply chain-stagflation worry peaked? Maybe, but rising rates could undermine the big weighted tech sector in the near-term and it is unclear whether there is enough appetite among investors to go more overweight cyclicals when the macro outlook still seems somewhat cloudy in terms of growth, policy and inflation. Next week is earnings season so we either get more bullish conference calls for the coming quarters or a bit of sandbagging re supply chain issues, inflation – for the index a lot will depend on whether the C-suite is confident or cautious about their outlooks.
Inflation nation: We can keep banging on about inflation, but it’s well understood now. Even the Bank of England has woken up – BoE chief economist Pill warned that inflation looks to be more persistent than originally anticipated. UK inflation expectations have hit 4% for the first time since 2008 – soaring gas and fuel bills not helping. “The rise in wholesale gas prices threatens to raise retail energy costs next year, sustaining CPI inflation rates above 4 per cent into 2022 second quarter.” said Pill. Tax hikes and labour shortages also featuring in the inflationary mix. There was a rumour doing the round yesterday that BoE’s Broadbent has “taken Nov off the table”. However, with inflation racing higher it’s clear the Bank should be acting to hike in Nov to get ahead. Markets currently pricing a first 25bps rate hike fully by Feb 2022, another 70bps by the end of that year.
Nonfarm payrolls watch: US employers are expected to have added 490k jobs in September, up from 235k in August, which was a big miss on the forecast. NFPs are important and could be market moving later since the Fed has explicitly tied tapering + subsequent rates lift-off to the labour market. A weak number could just dissuade the Fed from announcing its taper in Nov, but I see this as a low-risk outcome. More likely is steady progress on jobs (ADP was strong on Wed) and the November taper announcement to follow. The persistence of inflation and rising fuel costs in particular has changed the equation for the Fed entirely. Benign inflation that we were used to is no longer to be counted on to provide cover for trying to juice the labour market. The problem is not demand side, it’s supply side. Central banks are seeing rising inflationary pressures that are proving more persistent than thought. Slowing economic growth and risks to the outlook stem from the supply side not the demand side – so pumping the demand side even further into a supply side crisis is not helping matters much.
Soaring energy prices driving stagflation fears, yields up, stocks down
Inflation/stagflation, supply chain problems, the US debt ceiling, an energy crisis as natural gas prices soar to new records in Europe and the UK, tighter monetary policy from central banks, worries about the Chinese property sector – all swirling around equity markets this week and not going away any time soon. Chiefly this morning we might say that rising Treasury yields and soaring energy prices are conspiring to knock risk appetite.
European stock markets declined by around 1-2% in early trade on Wednesday despite something of a Tuesday turnaround for the US. The DAX tumbled 2% and under its 200-day moving average as German factory orders declined 7.7% in August amid supply chain problems, a sharp decline from the 4.9% increase in July. Although some of the decline could be a reaction to big jump in July, it’s nevertheless pointing to a slowdown in activity. Motor vehicles and parts were –12%. Meanwhile the British Chambers of Commerce released a survey showing UK companies are deeply worried about inflation and supply chain problems, and it warned that a period of stagflation may be coming. Boris Johnson is due to speak later but I cannot believe he will instil much confidence. The ‘everything is fine’ meme springs to mind… The FTSE 100 fell by more than 1% to under 7,000, though still within its 6-month range.
Wall Street rallied on Tuesday, reversing some of the Monday slip. Mega cap tech rose, whilst energy also rallied again on higher oil prices with WTI approaching $80. Henry Hub natural gas rose to just about its highest level in 13 years, with yesterday’s 9% gain seeing the US contract on the Nymex close at its highest since Dec 2008. Treasury yields are higher again, with 10s at 1.570%, the highest since mid-June. Soaring energy prices are pushing up inflation expectations, pushing up yields and weighing on stocks. The dollar is bit stronger this morning with EURUSD taking a 15 handle again and cable under 1.36. US futures are weaker to the tune of 1%, indicating another rocky session on Wall Street with the S&P 500 ready to test the 4,300 area again.
Tesco shares rose over 4% in early trade after raising its full-year outlook on a profit beat and initiated a £500m share buyback programme. The company said it expects full-year adjusted operating profit of £2.5bn-£2.6bn, about a £100m ahead of analyst expectations, after H1 adjusted retail operating profit rose 16.6%. The strong retail showing reflected UK market outperformance and sharp recovery of Booker catering, management said. Shares in Sainsbury’s also climbed more than 1% despite a soft session for the FTSE 100.
The Reserve Bank of New Zealand raised rates for the first time in seven years, hiking the main cash rate by 25bps to 0.5%. The central bank warned that cost pressures are becoming more persistent and that headline inflation would rise above 4% in the near term. But it was confident that current covid-19-related restrictions ‘have not materially changed the medium-term outlook for inflation and employment’ and that the ‘further removal of monetary policy stimulus is expected over time’.
Oil prices keep on rising with front month WTI approaching $80. APi figures showed inventories increased by 950k barrels for the week ended Oct 1st, vs expectations for a draw of 300,000 barrels. There were also builds for stocks at Cushing, distillates and gasoline. EIA figs today expected to show a build of 0.8m barrels. Small inventory builds in the US won’t really change the narrative.
Finally, Deutsche Bank has a note out today warning about the impact of the shortages in the UK economy, which are beginning to ‘bite’ in the manufacturing sector – important for exports and therefore the currency. “In the medium-term, shortages in sectors like manufacturing should mean that UK suffer from a (relative) fall in output and have to be replaced by imports from abroad, weakening the current account and the pound,” they say. GBPUSD trades noticeably weaker today but it’s more a dollar move after a decent recovery over the last 4 sessions and with EURUSD also moving to its weakest since last July.
Watch for more downgrades, AO World sinks
Stock markets in Europe fell sharply in the first day of trading in the new quarter, taking the cue from a dismal finish on Wall Street. It’s a sea of red for European bourses, though hefty early losses were pared after the first hour of trade. The FTSE 100 briefly dipped back under 7,000 – remains fully range bound. Banks and cyclicals bore the brunt, whilst utilities is the only sector in the green as defensives find some bid. The S&P 500 dropped steeply into the close, shedding about 40pts in the last 20 minutes of the session and ensuring the broad market’s worst month since March 2020 – remember it? It’s now through the 100-day SMA and well south of its 50-day line, about 6% off the all-time high – another 4% takes you to the 200-day support and almost a 10% correction. Stocks in Asia were broadly weaker, with the Nikkei off by 2.3% and the ASX down by about 2%. China and Hong Kong were closed for holidays.
I’ve been warning for a long time about stagflation – now this is at the heart of the market’s selloff. We can pin it on worries about persistent inflation, supply chain trouble making things more expensive, labour shortages in key areas because no one wants to work, central banks tightening to avert inflation becoming unanchored and slowing growth. It’s recalibration for a macro outlook that seems to be less optimistic than it was in the first half of the year. Yields were actually down, with US 10s back below 1.5%, though these have just picked up in the early European session again. Tech stocks were outperformers so the Nasdaq fell less than peers. It’s all rather messy, volatile and indicative of a kind of negative rotation taking place. Gold rallied as yields pulled back and the dollar treaded water for a second day after Wednesday’s big rally. Oil steadied as markets look ahead to Monday’s OPEC+ decision on production increases. No reason for the cartel to open the taps any more than they have already indicated they will through to Dec.
S&P 500 – looking like a rerun of 2020 for Sep/Oct?
Bed Bath and Beyond joined the likes of Boohoo, Nike, FedEx and Kingfisher in warning on supply chains, rising costs etc – this is how it’s going to go in Q4 and we can expect more downgrades, decelerating earnings growth and lower margins – not a great setup for equity markets into a volatile month.
AO World is the latest as it warned of “challenging market dynamics in both the UK and Germany” which resulted in lower volumes than expected and affected operational leverage. Management said UK growth was hit by the nationwide shortage of delivery drivers and ongoing disruption in the global supply chain. The company also noted “industrywide issues relating to ongoing supply chain disruption”. Shares took right at the update, plunging 17% with the growth rates in Germany of 3% in particular well below market expectations for +30% for the full year. AO World needs high double-digit revenue growth to justify its valuation. Margins in a highly commoditized business were always a problem and now the supply chain woes coupled with a shortage of drivers creates some serious headwinds for the stock, which benefitted greatly from the surge in online demand last year. It now faces some new challenges which seem set to perform the double trick of hammering margins and lowering revenue growth.
JD Wetherspoon shares fell 4% at the open before recovering as it warned off the chilling effect of lockdowns and problems in finding staff. The pub group said like-for-like sales in the first nine weeks of the current financial year were 8.7% lower than the same weeks in August and September 2019, before the pandemic started.
Today we look ahead to US inflation and the PCE personal income and expenditure report which is expected to hold steady at 4.2%. Core month-on-month is forecast to slow to +0.2% from +0.3% registered in July. Year-on-year core inflation has been steady at 3.5/6% for three months, but the headline PCE number has been on the march higher from 2.5% in March to 4.2% in July. It’s unclear whether this can change the narrative, which seems to have evolved from inflation being transitory to it being far more persistent. Input cost pressures and the supply chain problems don’t suggest we will see consumer inflation ease.
Finally, it seems Tesla bulls are getting out. Cathie Wood of Ark has dumped about 20% of its holding. Chamath Palihapitiya said he’s sold his Tesla stake, despite once being one of its biggest cheerleaders. Now he likes offline highly cash generative businesses. So I assume by that he means miners and oilers…Meanwhile, ARK investors are also getting out – third-biggest daily outflow ever on Wednesday…
Volgende week: Geven de Amerikaanse consumptiecijfers de Fed het laatste zetje?
Deze week op de agenda: We nemen afscheid van Angela Merkel, nu Duitsland voor het eerst in meer dan tien jaar een toekomst zonder haar leiderschap tegemoet gaat. Ook kunnen we een groot aantal belangrijke cijfers verwachten, waaronder de voorkeursinflatie van de Fed en het Canadese bbp. Doen we opnieuw een stap terug?
We weten allemaal dat de Fed houdt van PCE-cijfers. Personal Consumption Expenditures, of persoonlijke consumptieve bestedingen, zijn de favoriete inflatiemaatstaaf van de Fed – en zou de afbouw van het obligatie-opkoopprogramma concreet kunnen maken, afhankelijk van de cijfers voor augustus.
Over de gehele breedte van de markt wordt aangenomen dat de Fed in november of december haar economische steunmaatregelen zal gaan afbouwen. De vraag is nu of de rentes ook gaan stijgen. De Fed heeft de verwachte kerninflatie voor 2021 al bijgesteld van 3 procent in juni naar 3,7 procent nu – de economie draait op volle toeren. Voorzitter Powell heeft aangegeven dat de Fed zo goed als zeker nog dit jaar met afbouwen zal beginnen. De vraag is nu of de Fed haar verwachtingen verder opwaarts heeft bijgesteld en wat dit kan betekenen voor de voorziene renteverhogingen. Mocht de inflatie hoger zijn dan algemeen wordt aangenomen, dan zouden renteverhogingen zeker niet ondenkbaar zijn.
Natuurlijk spelen er ook andere factoren mee. We mogen ook niet vergeten dat de toename in juli van 0,4 procent in lijn was met de verwachtingen en wees op afkoeling ten opzichte van juni.
In juli bedroeg de algemene inflatie 4,2 procent. Afgaande op de consumentenprijsindex die onlangs werd gerapporteerd, namen de kosten van consumptiegoederen in augustus toe met 5,3 procent. Dit lag in lijn met de verwachtingen. Ook kan het een voorproefje zijn van waar de PCE-cijfers op zullen wijzen.
De Fed laat naar verluidt weten het geen ramp te vinden om de inflatie boven het streefcijfer van 2 procent te laten uitkomen, omdat de huidige hoge inflatie nog altijd als tijdelijk wordt beschouwd.
Net als alle andere grote economieën laat ook de VS de pandemie langzaam achter zich en wordt er geprobeerd weer enige vorm van normaliteit te vinden. Het zou kunnen dat de hoge inflatie nog even de tanden zet in de economie, om in 2022 weer weg te ebben.
Op vrijdag verwachten we de nieuwste PCE-cijfers.
Nauw verwant daaraan is het Amerikaanse consumentenvertrouwen. Het is logisch om aan te nemen dat hogere prijzen resulteren in een lager consumentenvertrouwen. Dit werd al gereflecteerd in de cijfers van augustus, en zou zomaar ook het geval kunnen zijn wanneer we dinsdagmiddag de cijfers van september krijgen.
In augustus daalde het consumentenvertrouwen tot het laagste punt in zes maanden. De index van de Conference Board daalde tot 113,8 punten – in juli stond de index nog op 125,1.
“Zorgen over de deltavariant en in mindere mate over hoge gas- en voedselprijzen resulteerden in een minder positieve blik op de huidige economische situatie en groeikansen op korte termijn,” aldus Lynn Franco, senior-directeur economische indicatoren van de Conference Board, in een verklaring over de dip.
Sinds de start van de pandemie zijn er in de VS al meer dan 39 miljoen besmettingen met COVID-19 geregistreerd.
Buiten de VS sluit Duitsland het hoofdstuk van Angela Merkel als bondskanselier. Na zestien jaar vindt Merkel het genoeg geweest, wat de verkiezingen van vandaag extra interessant maakt.
Aan het einde van de dag zal Duitsland een nieuwe bondskanselier hebben. SPD-leider Olaf Scholz was lang de gedoodverfde winnaar met een straatlengte voorsprong op rivalen van de CDU en de Groenen.
Desondanks zullen de Groenen, die op koers liggen om hun beste verkiezingsresultaat ooit te behalen, waarschijnlijk de voornaamste partner worden in een coalitie met de SPD.
Onze macro-economisch en politiek expert Helen Thomas heeft onlangs de Duitse bondsverkiezingen geduid. Zullen haar voorspellingen uitkomen?
Over verkiezingen gesproken: de Canadezen hebben onlangs gestemd voor een nieuwe golf van politieke veranderingen, waarbij premier Trudeau voor een derde termijn het land zal besturen. Van een liberale meerderheid in het parlement is geen sprake meer, wat tot interessante economische ontwikkelingen zou kunnen leiden.
De nieuwe bbp-cijfers van Canada worden deze maand gepubliceerd, na een eerdere daling van 1,1 procent op maandbasis. Schattingen gaan uit van 2,5 procent groei, dus zelfs met een nieuw verkiezingsmandaat zal Trudeau weer dezelfde uitdagingen moeten aanpakken.
Het economisch herstel zal “dezelfde mate van buitengewone steun” blijven vereisen, aldus de gouverneur van de Canadese centrale bank, Tiff Macklem. Er wordt geen wijziging van het economisch beleid verwacht, ondanks de tegenvallende bbp-cijfers van vorige maand. Misschien zal er deze week een omkering plaatsvinden, of zal de situatie in de nasleep van de verkiezingen juist vertroebelen?
Belangrijke economische data
|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|
|Fri 01-Oct||8.55am||EUR||German Final Manufactuing PMI|
|1.30pm||USD||Core PCE Index m/m|
|3.00pm||USD||ISM Manufacturing PMI|
Sterling HOD, FTSE weaker as markets digest slightly hawkish BoE
After a bit of time to digest the Bank of England decision, it looks to have provided that hawkish pivot we’d anticipated. But I would not say it’s enough to really tell the market that it will fulfil its mandate to keep inflation in check and ensure longer-term inflation expectations remain in check. A missed opportunity, I would say, to get a better grip on inflation expectations.
• MPC votes 7-2 to maintain QE, unanimous on rates
• Ramsden joins Saunders in voting to scale back the QE programme to £840bn, ending it immediately
• CPI inflation is expected to rise further in the near term, to slightly above 4% in 2021 Q4 – and the BoE signalled greater risk it would be above target for most of 2022
• Overall, Bank staff had revised down their expectations for 2021 Q3 GDP growth from 2.9% at the time of the August Report to 2.1%, in part reflecting the emergence of some supply constraints on output
• Shift in forward guidance: MPC noted ‘some developments … [since the August Monetary Policy Report] … appear to have strengthened’ the case for tightening monetary policy.
• Rate hikes could come early, even before end of QE: “All members in this group agreed that any future initial tightening of monetary policy should be implemented by an increase in Bank Rate, even if that tightening became appropriate before the end of the existing UK government bond asset purchase programme.”
Market reaction thus far
• GBPUSD has rallied to highest since Monday off a month low and is looking to hold above 1.37, having risen one big figure today. Needs 1.3740 for bulls to regain control, big test here with trend support recently tested at the neckline. Question is this mildly hawkish pivot is enough to put the floor under GBP. I would still argue for softer dollar into year end allow GBP (and EUR) some scope to strengthen, particularly if the BoE is progressing towards raising rates sooner than previously thought.
• That sterling strength sent the FTSE 100 lower after a solid morning session, leaving the blue chips flat on the session, around 45pts off the highs of the day. Looking now for a lift from Wall St with US futures indicated higher: S&P 500 around 4420, Dow Jones at 34,460.
• 2yr gilt yields jumped to +0.3435% from around 0.28% earlier in the day as markets moved expectations for the first 15bps rate hike forward to Feb 2022.
The BoE trying to tell what we already know without telling us what we already know; ie, that inflation is way stickier than they thought it would be. The BoE said “there are some signs that cost pressures may prove more persistent. Some financial market indicators of inflation expectations have risen somewhat”. Somewhat what? It’s all a bit wishy washy. The problem is the dogma of transient inflation is hard to shake without admitting that they were plain wrong on a very basic assessment of the economic outlook. “The committee’s central expectation continues to be that current elevated global cost pressures will prove transitory,” the statement from the BoE said.
Earlier, PMIs show across Europe and Britain growth momentum is waning, inflation is sticking. The UK composite PMI revealed further loss of growth momentum as output slowed to the weakest in 7 months, whilst the rate of input cost inflation accelerated and charges raised to the greatest extent on record.
Taken together with the PMIs this morning and the Fed last night we are presented with a very simple picture: growth is slowing, supply constraints are deepening, inflation is proving way more persistent than central banks anticipated. This could have important consequences for monetary policy going forward, but for now the CBs are still waiting it out and getting further behind the curve. A bitter pill today has been avoided, but the medicine required will be harder to swallow when it finally comes. Rates are going to need to rise to tame inflation.
The Federal Reserve is playing for time – more certainty from Washington as much as inflation and the path of growth are needed before they really start to move, but the consensus is clearly tilting towards a marginally more hawkish view with rate hikes now pencilled in for 2022. Market reading this as marginally dovish since the taper was not announced but this is balanced by the more hawkish dots. On balance market reaction seems a little off kilter but we await chairman Powell next.
On tapering – if economic progress continues then reducing asset purchases would be warranted. It’s a prewarning but they are not tying themselves to any date just yet. Still set to taper this year but the absence of a clear signal in the statement indicates it’s more likely to be Dec after being announced in Nov.
On lift for rates – median hike brough forward to 2022 from 2023 previously. Markets had already been pricing Dec 2022 as the lift-off for rates so this is well anticipated. Dot plots are firming up the shorter maturities as investors price in the Fed raising rates in the near future but the long end is not playing ball as no one sees long-term growth picking up massively – so more curve flattening, not the big steepener we’d thought earlier this year – but that is just for the time being. 10s are weaker around 1.305%, down heavily from the 1.34% area traded earlier today. Gold is firmer and the dollar weaker, though the kneejerk in the seconds after the release was the reverse. The Dow trades firmer and the S&P 500 rallied to session highs in the wake of the release. So far the market is buying the Fed’s line that tapering ain’t tightening and that it will do all it can to avoid a tantrum in the bond market.
On inflation – the core PCE inflation number for this year was hiked to 3.7% from 3.0%, the 2022 figure to 2.3% from 2.1%. They’re pulling out the ‘transitory but not quite as transitory as we thought’ line. I called 3.5% for 2021 and 2.5% for 2022 – so Fed still frontloading inflation expectations here – more in 2021, cooling sharply next year. Still not the ‘substantial further progress’ because it’s transitory – go figure.
On growth – hotter this year, cooler next, reflecting the slowdown in the reopening burst and also the problems in global supply chains, labour shortages leaving the economy running below potential and the impact of inflation.
On employment – like the more circumspect growth outlook the unemployment outlook for this year is not so good – 4.8% vs 4.5% in June. Slower growth, plus a less racy recovery in the labour market net out the inflation concerns – but it’s signalling stagflationary trouble ahead.
Bank of England responds to hot inflation print
The Bank of England will need to respond to biggest jump in inflation on record when it convenes this week. Inflation accelerated to 3.2% in August from 2% in July, well above the central bank’s 2% target. Could this force the BoE to tighten monetary policy sooner than had been expected? A hawkish-sounding Bank of England would be a boost for sterling. In order to be hawkish enough to nudge sterling higher and show it’s prepared to kill inflation as required, the Bank probably ought to end QE now – as the now ex-MPC hawk Andy Haldane argued for last time around. There is a clear risk inflation will overshoot the 4% forecast, let alone the 2% goal. Unanchored inflation expectations are the worst possible outcome for a central bank they’ve been too slow to recognise the pandemic has completely changed the disinflationary world of 2008-2020. Hikes will be required too in the not too distant future and the bank should appreciate that a bitter pill now would be better than even harsher medicine later on. A jobs market with 1m vacancies does not suggest the UK economy is in trouble at the moment. Wage growth remains strong – albeit the picture is very complex due to furlough, the pandemic and base effects + inflation on real wages.
Does the bank go for a more hawkish signal? That is harder to say: it’s already well into a taper and markets anticipate the BoE will be raising rates 2-3 times over the next couple of years – does it need to do more than that? The question is whether the inflation ready has got the right kind of attention that it deserves or whether the BoE is ignoring the red flags. My own view, for what it’s worth, is that the Bank, just like the Fed, has allowed inflation overshoots to allow for the recovery, but it’s been too slow and too generous. Much like the response to the pandemic itself, the medicine (QE, ZIRP) being administered may be doing more harm (inflation) than good (growth, jobs).
Fed to announce QE taper?
Whilst markets do not expect the Federal Reserve to race towards tapering asset purchases – the soft jobs report did for that – there is a broad consensus in the market that it will begin dialling back the pace of its QE programme from November. That means this week’s meeting may be an appropriate moment for the Fed to give the market fair warning. Or not. In a sense it doesn’t matter much what they say or don’t say on tapering – the risk lies in what the Fed does or doesn’t say about rate hikes. And though Monday’s market sell off may have caught the Fed off guard, with stocks just 4% off record highs and credit markets accommodative, there is not any reason for panic. Stocks have been rolling over since the weak jobs report, and Fed officials should be prepared to look through some softer data and mild pullbacks in equity markets.
Last week’s CPI inflation clouded the outlook a touch – it was a little softer than expected, giving the Fed some more breathing space. More importantly, the very weak August jobs report suggests the Fed might not want to nail its colours to a November taper launch just yet. It could signal it still believes that tapering is appropriate this year without giving a fixed schedule. But we’re talking on the margins here – expectations still squarely on the Fed to taper this year, November seems likeliest. And the bounce back in retail sales in August should give policymakers some confidence that the worst of the Delta effect – a notable chilling of confidence and spending (and hiring) – is over. So too the fact jobs openings are very high and business confidence is improving again.
Investors will be most interested in how policymakers assess the pace of the labour market recovery, and whether they believe inflationary pressures are becoming less transitory than they thought. Close attention will be paid the latest round of economic projections for a guide on whether the Fed is changing its mind on the pace of inflation and growth. My own view is that we get a Fed that is more ready to accept – at least in the projections and dots, if not Powell’s words – that inflation is stickier than they thought it would be.
And the dot plot will be scrutinised of course. The last round brought the first rate hike into 2023, but there could be an even more hawkish shift calling for lift-off sometime next year once the tapering is complete. We’ve been hearing a fair bit from some of the more hawkish members of the FOMC lately about getting on with it, but the central view of the Powell/Clarida/Williams ruling triumvirate is more dovish – so dots could offer a more hawkish outlook than is the case.
In March, 4 Fed officials expect hikes in 2022 and seven Fed officials in 2023. In June, 7 Fed officials see hikes in 2022, while 13 fed official see hikes in 2023.
On inflation – we surely have to see some uplift to the median forecasts for 2021/2022 which would accompany a more hawkish looking dot plot/communique. The forecasts just look plain wrong now.
Stocks pick up some bid after textbook S&P 500 bounce
European stock markets were modestly higher on Thursday after a rebound in the US and another dip for Asian equities overnight. Hong Kong down 1.7% as casino stocks fell again, and is now testing the lows struck in July and August, down about 20% from its Feb peak. Indebted real estate group Evergrande fell another 7%. Gold struggled to hold the $1,800 level as Treasury yields climbed a touch. The dollar is a bit stronger after yesterday’s decline.
FTSE 100 in the middle of the range after the decline of last week. Industrials and healthcare to the top, basic materials the only sector in the red. Ashtead is the top gainer, up 3%, after reporting Q1 revenues of £1.85bn and said it sees the full-year performance ahead of previous guidance. The company now expects growth of 13-16%, ahead of the 6-9% prior guidance. Rolls Royce also rallied 3% after the UK struck a security deal with Australia and the US to help supply the former with nuclear submarines. BAE Systems, another mentioned in the press statement from the government, also rose.
Buy the dip: The S&P 500 rallied 0.85% as it found support once more at the 50-day simple moving average, taking it back to where it was a month before – still down almost 1% MTD. The bounce off the 50-day line was pure textbook. Mega cap growth delivered, but cyclicals also got a boost as breadth was solid. Microsoft did some serious heavy lifting after announcing a mega buyback programme. The company will launch a share buyback programme of up to $60bn and raise its quarterly dividend by 11%. A mild gain for MSFT added almost 5pts to the S&P 500, even more to the NDX. Energy led the sectors with a gain of almost 4% as oil prices continued their ascent. Natural gas made another 8-year high.
We’ve digested a couple of inflation readings this week and it’s clear it’s stickier than central bank Panglosses told us. It comes to down to there being too much money – aka liquidity – and not enough stuff to match. People can moan about the supply chain problems and labour shortages, and claim ‘there’s nothing the Fed can do about bottlenecks at ports, or ‘what can central banks do about chip shortages?’, but this is all about the inflationary environment unleashed by governments and central banks through their printing vast sums of cash during the pandemic and failing to suck it all back in afterwards. Instead, they run it hot in the vain quest for jobs when there are plenty of jobs out there, and let inflation get higher to eat into any wage growth and make people poorer. Meanwhile the asset rich get richer.
I talked about this in May, referring to comments made a year before: “Ultimately it goes back to the question asked by the great Paul Tudor Jones about a year ago: can the Fed suck all this money back out of the system as quickly as it injected it. The answer then was almost certainly no, and post the recent policy shift and vast pro-cyclical stimulus it is clearly absolutely no. So we have inflation worries and, as described on multiple occasions last year, the worry is that the Fed allows inflation expectations to become unanchored as per the 1970s.”
Ray Dalio on Bitcoin – if it gets really successful, they’ll kill it and they have ways to kill it. Neatly sums up my long-standing position. Price higher today, but the rally off the Monday dip is losing momentum as it runs into near-term resistance around $48,500.
Bank of Japan boss Kuroda – If necessary, BOJ will further relax monetary policy such as by reducing interest rates. The comments ahead of the government’s first cut to its economic outlook in 4 months. USDJPY steady around 109.30 after touching its weakest since Aug 17th yesterday.
Cathie Wood reducing Tesla exposure: A $3,000 price target on the stock, but Ark Investment Management has sold more than a million shares in Tesla in the last 5 months, according to a Bloomberg report.
WTI is holding onto gains after briefly rising above $73 after the EIA reported US inventories fell by 6.4m barrels last week, though the impact of Hurricane Ida is to blame.