UPCOMING EVENTS:
Monday: NAHB Housing Market Index.
Tuesday: US Building Permits/Housing Starts.
Wednesday: RBNZ Policy Announcement, US Retail Sales, FOMC Minutes.
Thursday: Fed’s George and Kashkari.
Following the strong labour market report, the US CPI last week missed expectations across the board. The biggest contributor to the decline was energy prices. The supply side of energy didn’t change much, so it’s the demand side that is weighing on prices. This just means that the Fed (which can adjust only the demand side) needs to keep on tightening and depress demand if it wants to achieve its goal. Naturally, this leads to a worse growth outlook, which is as of now the only way to fix the current inflation problem. In fact, although the energy part fell, the other stickier components like services increased or remained high.
The reaction to the CPI report was a rally in risk assets as a less aggressive Fed coupled with unchanged or lower inflation expectations depresses real yields, and that ultimately leads to higher propensity towards risk assets. We saw the US Dollar being offered across the board, the stock market rallying, US yields falling, commodities rising and cryptocurrencies following the risk party. This is not something the Fed wants to see after just one good CPI report. If financial conditions ease too much, the Fed may even be forced to surprise with out of consensus hikes just to reimpose its will and determination. For now, the market prices a higher probability of a 50 bps hike at the September meeting.
This reaction in my opinion is wrong-footed, I think the safe assets are still the better choice and wouldn’t chase risk here as the global growth outlook will keep on weakening. Especially the USD weakening against the other major currencies like EUR, GBP, AUD and so on looks misplaced and the market in fact reversed some of the rallies out of the CPI report. The EUR/USD (chart below), which is basically the DXY (Dollar Index) upside down, points technically to further downside. The price got rejected from the top of the channel and a previous swing level. A break of the counter trendline would add even more conviction to further downside for the pair with an ultimate break of the 0.9956 low very likely.
Looking at this week upcoming data, on Monday and Tuesday we will see get the latest reports for the US Housing Market which are expected to show further declines amid tighter monetary conditions and slowing growth. The NAHB index on Monday is expected to decline to 54 from the prior 55 reading and the US Building Permits to decline 3.30% compared to the prior decline of 0.60%.
On Wednesday, the RBNZ is expected to hike rates by 50 bps bringing the OCR to 3.00%. They’re expected to maintain their hawkish stance and resolute in their commitment in bringing inflation back to their target in the 1-3% range. Note that the recent New Zealand CPI for Q2 report came out hot at 7.3% vs. 7.1% expected and 6.9% prior. Next, US Retail Sales are expected to be lower on the headline figure since it’s a nominal dollar report and prices eased in July. Later in the day we will also get the latest FOMC Minutes which is not expected to show anything market moving as it’s a three-week-old stuff and doesn’t incorporate the latest labour market and inflation reports.
On Thursday we will hear from Fed’s George and Kashkari but they’re unlikely to deviate from the current estimates of 50 or 75 bps hike at the next meeting and year-end Fed Funds at 3.50%/4.00%, waiting for the other set of reports in September.
This article was written by Giuseppe Dellamotta.
