On Deck for Wednesday, August 3


  • Fed-speakers continue to drive the bond sell-off
  • Oil swings to small gain on disappointing OPEC+ production increase
  • Debating the ISM-prices-paid and CPI connection
  • US factory orders to follow durables higher
  • Brazil’s central bank expected to hike again
  • NZ$ slips on soft jobs data, ignores hotter wages
  • German exports power ahead

Sovereign bond yields continue to rise primarily on the back of attempts by Fed speakers to talk some sense into them during thin August trading. Equities are stabilizing partly as the pace of bond adjustments ebbs but may remain volatile pending China’s further and likely protracted response to Pelosi’s Taipei photo-op.

Back to what was said by Fed officials yesterday and building upon earlier remarks by Kashkari. Cleveland’s Mester said she hasn’t seen anything that suggests inflation is levelling off yet and wishes to see “very compelling evidence” that month-over-month price increases are moderating before declaring victory which is the better way to look at it than year-over-year. San Fran’s Daly bluntly stated that the Fed is “nowhere near almost done” in its inflation fight and is only “off to a good start” while dousing talk of easing as being “premature.” Chicago’s Evans leaned toward 50–75bps at the September meeting with a fed funds upper limit set at 3.75%–4% by 2023Q2.

Expect more of the same today with several Fed speakers on tap and likely to reinforce the recent line-up of Fed-speakers who are leaning against the narrative that the Fed is engineering a dovish pivot. We’ve just heard from Bullard who said he expects the Fed funds upper limit to get to 3.75–4% this year which is considerably above market pricing and expects job growth to hold up in 2022H2 and GDP to rebound. On tap are Philly’s Harker (10:30amET), Richmond’s Barkin (11:45amET) and Minneapolis President Kashkari (2:30pmET). The Fed’s goal of reining in inflation would be compromised by a rate rally at this juncture. I think the old playbook post-GFC that bonds should rally in anticipation of economic weakness is vastly less relevant today with inflation running at multiples of anything we saw during that prior period which puts the full emphasis upon the inflation outlook and the need to open slack in a weaker economy. Pivoting from a clear march toward something within the neutral rate range that is open to various estimates and then shifting toward data dependence in determining how restrictive to go is not the same as going dovish.

Limited US data risk is also on tap with ISM-services (10amET) likely to soften and factory orders (10amET) likely to be strong as nondurables get added to the already known strong gain in durables. ISM-services’ prices paid subindex will be watched to see if it decelerates as ISM-manufacturing’s prices paid subindex. The trillion dollar question is whether that’s telling us a) anything we didn’t already know from observing some commodity prices, b) whether it’s durable in the face of further inflationary shocks. Chart 1 compares a weighted ISM-prices paid index using the services and manufacturing weights in GDP to year-over-year CPI inflation. Chart 2 does the same using m/m CPI. ISM-prices leads y/y CPI because of the latter’s slower response to price pressures at the margin, but it’s more of a contemporaneous relationship when m/m CPI is used and also a highly imprecise one.

Chart 1: ISM Prices Paid vs Inflation; Chart 2: ISM Prices Paid vs Inflation

The latest monthly OPEC+ decision may bring out a modest production increase as news reports indicate that efforts led by the US and France to curry favour with the Saudis may yield at best limited gains. Preliminary reports as this note is being published indicate support for only a small production increase of around 100kbpd which is less than markets thought to be possible and is why oil prices have swung from a small decline earlier today toward a small increase. Watch for further announcements after the conclusion of the OPEC+ meeting by video conference that just started at about 7:30amET (here).

Brazil’s central bank is expected to hike by another 50bps this evening (5:30pmET).

The NZ$ initially depreciated when jobs and wages hit last evening but subsequently shook off that initial reaction whereas the NZ two-year yield held onto its initially rally. In so doing, the initial reaction emphasized the disappointing jobs data over the more hawkish wage figures. Employment was unexpectedly flat in Q2 and revised down a bit to being flat in Q1 as well. That drove a slight increase in the unemployment rate to 3.3% as the participation rate fell a tick. Average hourly earnings, however, accelerated to 2.3% q/q non-annualized (1.3% consensus, 1.9% prior) and private wages ex-overtime also beat consensus.

German exports were much stronger than expected in June (4.5% m/m, 1% consensus) and the prior month was revised up a lot to +1.3% m/m from -0.5% m/m. Tepid growth in imports following a large gain the prior month also contributed to the strongest improvement in the trade surplus in the pandemic to date.

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