ECB, RBA and BOC are all expected to raise interest rates this week, Additionally, we will have inflation data from China, GDP data from Australia and employment data from Canada. New UK Prime Minister will be elected. Be mindful that Monday is Labour day holiday in the US so liquidity may be thinner than usual.
USD
ISM manufacturing PMI in August printed 52.8, same as in July. Prices paid component fell by more than expected and is now moving closer towards the contraction territory indicating that price pressures are slowing down. New orders and employment both returned into expansion with employment index reaching a five-month high of 54.2. There was a drop in production index, however backlog of orders rose which gives another positive to the reading. Additionally, there was a drop in inventories which could lead to further new orders increases in the coming months.
NFP number for August came in at 315k vs 300k as expected. The unemployment rate increased to 3.7% from 3.5% in July because participation rate increased to 62.4% from 62.1% the previous month. Increase in participation rate indicates that more Americans are returning to the workforce. Average hourly wages rose 0.3% m/m and 5.2% y/y. The report will give green light to Fed to continue with 75bp rate hikes.
The yield on a 10y Treasury started the week at 3.12% and went as high as 3.25%. The yield on a 2y Treasury reached 3.52% during the week, that is the highest since 2007. Spread between 2y and 10y Treasuries continued to widen and started the week at -36bp. Fed sped up Quantitative Tightening from September with $95bn running off their balance sheet per month. This will be achieved by not re-investing Treasuries ($60bn) and mortgage-backed securities (MBS $35bn) as they mature. FedWatchTool saw the probability of a 50bp rate hike in September at 27.5% and probability of a 75bp rate hike at 72.5%.
This week we will have ISM Non-Manufacturing PMI report for the month of August.
Important news for USD:
Tuesday:
ISM Non-Manufacturing PMI
EUR
Over the weekend we had four esteemed members of ECB state that fight against inflation is a primary concern. They have stated their concerns regarding impact of weak EUR and indicated (Isabel Schnabel) that they will need to raise interest rates even in a recession in order to reign in rampant inflation and prevent inflation expectations from being unanchored. Her message was clear, price stability more important than growth. Hints about 75bp rate hike from more hawkish governors and front-loading of rates kept EUR supported during the week. ECB Chief Economist Phillip Lane took more measured approach and opted for a steady pace of rate hikes. It could mean that he is for a 50bp rate hike next week.
AGSI data shows that the European Union storage are 80.35% full as of August 31. EU set goal of filling 80% of gas storages before November 1. Due to target being reached over 2 months before the deadline European benchmark Dutch TTF gas futures has declined as low as €220/MWh while French and German year-ahead power prices rose to new record highs of €1250/MWh and €1025/MWh respectively only to also fall almost 50% from the highs for the German €545/MWh.
Preliminary August inflation data showed headline number rise to 9.1% y/y from 8.9% y/y in July with 9% y/y being the expected reading. 9 out of 19 countries have inflation in double digits! The main culprit is energy which rose more than 38% y/y with food, alcohol & tobacco prices rising more than 10% y/y. Digging into the monthly data we can see that energy actually declined for the second straight month, however processed foods and goods saw increases. French reading posted fist decline in inflation reading (5.8% y/y vs 6.1% y/y previously) since July of 2021. Caps on energy prices that are in place until the year-end helped to lower the inflation. Spain also posted a decline in inflation, but it is still above 10% y/y. Germany saw inflation increase to 7.9% y/y from 7.5% y/y in July. Italy saw increase in prices as well (8.4% y/y) making it a new 37-year high reading. Core reading rose from 4% y/y in July to 4.3% y/y in August.
This week we will have ECB meeting where a 50bp rate hike is pencilled in with increasing possibility of hawks getting their own and bringing a 75bp rate hike.
Important news for EUR:
Thursday:
ECB Interest Rate Decision
GBP
UK regulator (Ofgem) stated over the weekend that the cap on gas and electricity will be lifted by 80% to £3,549 on October 1. This will have tremendous effect on consumers, as it will lead to increase in cost-of-living and decrease their discretionary spending. Additionally, it will almost certainly lead to inflation overshooting BOE’s target of 13% with Goldman Sachs talking about it going over 20% in Q1 of 2023!
AUD
Chinese official PMI data for the month of August saw manufacturing improve to 49.4 from 49 in July, but still remain below the expansion level of 50. Output and new orders continued to decline. Services declined on month to 52.6 from 53.8 the previous month which dragged composite with it to 51.7 from 52.5 in July. Caixin manufacturing also slipped into contraction territory coming in at 49.5 from 50.4 the previous month.
This week we will have RBA meeting and Q2 GDP reading from Australia as well as trade balance, Caixin PMI and inflation data from China. Expectations are for RBA to deliver another 50bp rate hike.
Important news for AUD:
Monday:
Caixin Services (China)
Caixin Composite (China)
Tuesday:
RBA Interest Rate Decision
Wednesday:
GDP
Trade Balance (China)
Friday:
CPI (China)
NZD
ANZ business confidence for the month of August came in at -47.8 vs -56.7 the previous month. The number is still near historic lows but this marks second consecutive month of improvements. ANZ notes that most activity indicators improved but that inflation pressures remain intense. Inflation expectations were basically unchanged and there was a small improvement in pricing intentions.
CAD
Q2 GDP number saw increase of 3.3% vs 4.4% as expected. This was the fourth consecutive quarterly increase in real GDP. Increased inventories, non-residential construction, machinery and equipment investment, and household spending on services and semi-durable goods contributed to the positive reading. On the other side, declines in housing investment, household spending on durable goods and by net trade deducted from the reading. CAD has suffered at the beginning of the week due to falls in oil prices.
This week we will have a BOC meeting and employment data. Economists expect another 75bp rate increase. This will take rate to 3.25% which is above neutral estimate of 3%. Also, a 75bp rate hike is fully priced in by the market so it will not have immediate impact on CAD. However, if BOC signals that they will keep on pushing in order to bring inflation down, markets may price in another 75bp rate hike at the next meeting which would lead to CAD strength.
Important news for CAD:
Wednesday:
BOC Interest Rate Decision
Friday:
Employment Change
Unemployment Rate
JPY
BOJ Governor Kuroda continued to propagate inflation in Japan as transitory stating that all of inflation is a result of high commodity prices. This, according to him, does not warrant change in central bank’s stance and they will continue with monetary easing policy. July unemployment rate came in unchanged for the third straight month at 2.6% while jobs to applicants ration improved to 1.29 from 1.27 the previous month. Preliminary July industrial production and retail sales both improved giving a boost to the Japanese economy, JPY and presenting signs for stronger than expected Q3 GDP.
CHF
SNB President Jordan spoke at Jackson Hole symposium and stated that “Structural factors such as the transition to a greener economy, rising sovereign debt worldwide, the demographic transition and ultimately also the fact that globalization appears to have peaked – at least temporarily – could lead to persistently higher inflationary pressure in the coming years”. He added that higher prices are passed more quickly and that companies may be able to increase prices more easily due to decline in global economic integration.
SNB total sight deposits for the week ending August 26 were almost unchanged at CHF752.8bn. Inflation in August ticked up to 3.5% y/y from 3.4% y/y in July. Core inflation remained steady at 2%. Given that SNB does not want inflation to run rampant as in other parts of the world we can see them continuing to hike at their September meeting.
This week we will have Q2 GDP reading.
Important news for CHF:
Monday:
GDP
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Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets. Please remember that our accounts have Market Execution. Please note how Execution works during high impact news and other times of low liquidity.
