Central Banks May Be Data Dependent But Investors Aren't

US job growth slowed in August, but nearly all the subsequent data, including retail sales, industrial and manufacturing output, housing starts, permits, existing home sales, and leading economic indicators were stronger than expected. Core CPI accelerated to an 11-year high of 2.4%. Economic surprise models have exploded, and Citibank's measure reached an 18-month high last week.

The FOMC rate cut, statement, forecasts, and the chair's press conference did not alter the expectations of the trajectory of Fed policy for the remainder of the year. The fragmentation of Fed views (dots) notwithstanding, the implied yield of the January 2020 fed funds futures settled at 1.63% on Monday (two days before the FOMC decision) and Friday (two days after the Fed's decision). The August trade and personal income and consumption data, alongside the preliminary September PMI, pose headline risks but are unlikely to change to significantly impact the outlook.

Despite the acceleration of core CPI, the FOMC statement said, "On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent."  It appears the Fed looked past the CPI and focused on the PCE deflator. The August report is due at the end of the week. The headline, which is what the Fed targets at 2.0%, is expected to be unchanged at 1.4%. The core rate, which Fed officials often emphasize, may tick up to 1.8% from 1.6%. If so, it would be a new high for the year. No few than 11 Fed official speak next week, including all four of the five voting presidents and two governors.  

European reports, including money supply, confidence surveys, and flash PMI. The ECB's die is cast. The market is trying to digest the implication of the new measures. We caution against drawing hard and fast conclusions about the weak reception to the new Targeted Long-Term Refinancing Operation. We suggest reserving judgment until after the next tranche which will be available in December after the tiering (exempts some ECB deposits from negative rates).

Japan's course is not as clear, but the issue will not revolve around the flash PMI or leading economic indicator. The fulcrum is the yield curve and the yen. While the narrative seemed obvious when US yields surged, of course, the dollar appreciated against the yen. The 10-year Treasury yields fell every day last week for a cumulative 14 bp decline, and the dollar continued to straddle the JPY108 area. It reached its best level since August 1 before pulling back. Next week's highlight may be Trump and Abe meeting on the sidelines of the UN's opening session to ostensibly sign a preliminary trade agreement. It is an executive agreement, which means that the US Congress does not need to ratify it, as it does the NAFTA 2.0. The sales tax increase on October 1 from 8% to 10% looms.

Several central banks meet next week. In East Asia, the Philippines and Thailand hold policy meetings. The former is expected to cut, but the latter is not. The Reserve Bank of New Zealand meets, and although it is not expected to cut rates now, the market has about 20 bp cut discounted for November.  Czech and Hungarian central banks meet, and neither is likely to change policy. Colombia is expected to keep policy on hold. Banixco, Mexico's central bank, surprised investors last month by cutting the overnight rate by 25 bp to 8.0% The market leans toward another 25 bp rate cut. The derivatives market suggests about 18 bp of easing has been priced in.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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