US Prices Back To Center Stage In The Week Ahead

The main contours of the investment climate have not changed. The evolution of the virus is seeing the re-introduction of social restrictions, extending lockdowns (e.g., Sydney), and prolonging formal emergencies (Japan). The return to the office in the US is being postponed for many companies. Confidence in mass transportation will likely take longer to return.

The direct economic impact is difficult to tease out of the data. This could be, at least, in part, due to the lags in economic reports. It may also be difficult to distinguish between the maturing of the recoveries in several Asian countries and the increase in the virus. Bottlenecks and shortage of supplies may be another consideration sapping some economic momentum.

The strength of the US employment data keeps the Jackson Hole conference as the next opportunity for an update on the pace (and possibly, the composition) of the Fed's bond purchases. With the Treasury net issuance to slow in the coming months, the Fed is buying a larger share of the new supply.

At the same time, price pressures may be cresting Prices paid in the ISM manufacturing report fell to 85.7 in July from 92.1. It is the lowest reading in four months, and the second decline in three months.

The US reports July CPI on Aug. 11. The headline rate is expected to ease for the first time since last October. To be sure, it will remain elevated and likely above 5% year-over-year. The possible slippage of the headline rate will probably reflect the decline in the core rate.

Of course, it is too early for officials to draw much comfort from it. However, recent comments underscore our sense that the "transitory" nature of the increase in inflation means that prices pressure should slacken before the end of the year, or the hypothesis will be re-examined.

As central banks move from providing emergency support to pursuing policy targets, there is scope for diverging opinions. It is perhaps easiest for the media to see it at the European Central Bank, or more recently, the Bank of England, but it is also clear at the Federal Reserve, even though there have been no dissents.

Traditionally, there is greater discipline among the Board of Governors than the regional presidents, and structurally, when fully staffed, the Board of Governors (seven) outnumber the regional presidents, who share five votes. The power of the regional presidents is also circumscribed by the fact that the NY Fed has a permanent vote on the FOMC, is often part of the leadership, and rarely dissents. However, recent comments from Governors Clarida, Waller, and Brainard suggest that the consensus at the Board may be fraying. 

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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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