ON DECK FOR WEDNESDAY, SEPTEMBER 13
KEY POINTS:
- Risk-off sentiment ahead of US CPI
- US core CPI expected to be soft…
- …but does it matter if not?
- Japanese PMI Kishida flags coming fiscal supports…
- …that may add to the case for ending the BoJ’s negative rates
- UK data disappoints again
Global markets are treading somewhat carefully ahead of US CPI. Gilts are outperforming following weaker than expected UK releases. Oil keeps gaining.
Comments by Japan’s PM Kishida are worth paying attention to. His remarks reinforce the view that the global tango that has governments taking one stimulus step forward while central banks take one tightening step backward continues unabated. Kishida said his government will introduce policies on higher pay in October that will seek to have wage gains outpace inflation while offering higher gas subsidies in a larger package of fiscal measures. The comments hit after Tokyo markets shut. At the margin, however, they add to sentiment that the end of negative rates at the BoJ lies within reach. OIS markets are pricing a zero rate by December and then a move from -0.1% to a target rate of about 20bps by next summer.
This is a further negative for global bond markets. There are few forms of policy advice that have proven to be more disastrous than the advice offered by some to governments to lock and load with increased long-term spending on the view that bond yields couldn’t possibly go up much. That advice was especially influential in my home country of Canada and the fact it has been dead wrong is contributing to rising long-term structural deficits.
UK GDP fell by -0.5% m/m in July (-0.2% consensus). Services disappointed as the monthly index fell by -0.5% m/m (-0.1% consensus). Industrial output landed on the screws at -0.7% m/m. Construction output also fell by -0.5% and on expectations.
Most of the focus will be upon US core CPI. Most—including Scotia—expect a gain of 0.2% m/m SA. A minority expect 0.3 and one or two are at 0.1. The Cleveland Fed’s ‘nowcast’ is tracking 0.4% but has overestimated core CPI for a while now.
Gasoline will be the big driver of the large, expected jump in headline CPI as the all-grades gasoline price composite hits the year’s highs. Shelter is likely to remain disinflationary at the margin as we’re trending off peak gains in OER and rent of primary residence in lagging response to prior softening of market rent gauges. Vehicle prices should have little effect but there is always risk in how the BLS captures known information through partial samples and adjustments. Core services ex-housing prices are expected to remain subdued compared to the peak rates of increase earlier in the pandemic period.
As argued in my week ahead (here), I don’t think the release will be enough to sway the FOMC away from a pause next week. The trends in core inflation and jobs plus rising downside risk to GDP growth after Q3 could drive a cautious approach. Toss in the risks of a UAW strike announcement as soon as tomorrow and a US government shutdown into October plus student loan payments shock and our best guess at Q4 GDP growth is tracking about 0% growth to err on the side of caution. After that we’ll see, since some of these shocks could reverse into early 2024 and therefore complicate the Fed’s ability to read the tea leaves.
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