Next Week's Risk Dashboard
• Day 1 of the debt ceiling
• Inflation’s sustainable bottlenecks
• Jobs: US, Canada, NZ
• CBs: BoE, RBA, RBI, Brazil, BoT
• PMIs: US ISM, Canada, Mexico, Brazil, Italy, Spain, EZ-r, India
• LatAm and Asian inflation
Chart of the Week
Far and away the most dominant item on the week ahead agenda will be the state of the US labour market, what it says about Federal Reserve policy risks and what that in turn says about risks to global markets. That’s not to say it will be the only consideration, but we’re entering a period in which the interplay between jobs and inflation data is going to rapidly shape policy and market risks one way or the other.
A prevailing current of thinking is that just as US job growth is accelerating, inflation may decelerate. One caveat around this thinking is that the inventory cycle and transportation bottlenecks are looking to be anything but disinflationary at this point. US inventories have returned to the lean conditions that last began to be observed at the peak of the US housing cycle before the GFC (chart 1). One indication of this is that JD Power reports that July saw a record low average number of days a new vehicle sits on dealer lots. Much of this is because economy-wide demand has accelerated so rapidly that the supply side can’t keep up but that could persist for quite a time yet. An indication of this is that the rapid rise in global shipping costs is continuing unabated (chart 2) and ditto for the soaring use of containers (chart 3) that is worsening bottlenecks at key global ports. It takes time to address such imbalances and so it’s entirely feasible that the Fed’s ‘coming meetings’ will bear witness to coincident trends of strong job growth and persistent inflationary pressures that could spawn a period of accelerated movement toward tapering and setting up heightened policy rate risks.
In the background to this market concern is that day 1 of the reinstatement of the US debt ceiling arrives on Sunday. Markets will become increasingly focused upon the added risks this could pose. The US Treasury has already suspended the sale of State and Local Government Series securities until the debt limit is suspended or raised (here). Treasury also advised that additional measures are likelier the longer the ceiling is reinstated and noted that “cash and extraordinary measures could be exhausted soon after Congress returns from recess.” The House of Representatives departs on Monday and the Senate follows the next Monday. The Democrats might rely upon reconciliation measures to unilaterally address the ceiling, but that’s unlikely to come without its own political costs.
US NONFARM—TOO EARLY FOR DELTA RISKS
Friday’s nonfarm payrolls report will be the week’s marquee macro development given the FOMC’s heightened sensitivity to the flow of data and events over ‘coming meetings’ as they put it.
I went with a similar rise to what we saw in May. A gain of around 800,000 jobs with a dip in the unemployment rate to 7.4% (from 7.8%) and an acceleration of wage growth to 4% y/y are expected.
Progress toward falling jobless claims has flatlined over the past couple of months but that doesn’t necessarily speak to hiring. Measures of hiring intentions continued to look strong. Small businesses continued to indicate record hiring plans (chart 4) but also record difficulty filling those openings (chart 5). Consumers continued to signal their awareness toward the easy availability of jobs (chart 6) but the issue remains how fast they are willing to fill those openings. Watch Wednesday’s ADP payrolls for July and readings like the employment subindices to ISM-manufacturing (Monday) and ISM-services (Thursday) for further indications.
Supply side challenges likely persisted in July which is why I didn’t quite go as far as the 1+ million part within the nonfarm consensus. Those supply side challenges were probably not further aggravated by the Delta variant just yet. That might be more of a factor in the August payrolls report due out in early September, if at all. That’s because by the time the Delta variant cases started to ramp up it was beyond the July nonfarm reference period that is the pay period including the 12th day of the month and especially upon considering the lags involved in hiring decisions.
CANADIAN JOBS—WHAT VARIANT?
As Canada’s regional economies continue to reopen (chart 7), we should see Friday’s Labour Force Survey post another impressive job gain for July.
My guesstimate is for a gain of 190,000 jobs that would dip the unemployment rate to 7.4% from 7.8% the prior month. The long-run 95% confidence interval is about +/-57k but clearly the noise bands during the pandemic are rather wider and so treat guesstimates as a very rough guide. Various indicators of the demand for labour are all strong (charts 8, 9) while mobility readings have accelerated (chart 10) and more people are searching for work (chart 11). Sector-specific evidence includes the fact that Canadian restaurant reservations are rapidly catching up to the US (chart 12).
Supply side problems may have also persisted in Canada, but the difference compared to the US is that Canada experienced a third wave that cost it some jobs in April and May such that we’re likely still seeing a reopening effect.
Unlike the US, however, Canada has not seen an appreciable rise in new COVID-19 cases driven by the Delta variant (chart 13). It’s unlikely the Delta variant will impact July’s nonfarm payrolls and even less likely to affect Canadian jobs.
A round of other macroeconomic reports will primarily focus upon PMIs and inflation readings.
China kicks off the round of purchasing managers’ indices with the private sector versions on Sunday and Tuesday and they are likely to reaffirm the signals from state PMIs that indicate modest growth in China’s economy. US ISM-manufacturing (Monday) and ISM-services (Thursday) are expected to continue to signal strong growth in the US economy but the inflation signals will be more closely watched. Canada updates its manufacturing PMI for July on Tuesday and the Ivey economy-wide PMI on Friday that are also likely to demonstrate solid growth in manufacturing but stronger economy-wide growth. Mexico’s manufacturing PMI (Monday) has been in contraction even since March of last year and has not been indicating growth for an extended period before that. Brazil (Monday and Wednesday), India (ditto), Italy (Wednesday) and Spain (Wednesday) round out the PMIs line-up.
New Zealand is likely to register another solid job gain in Q2 on Tuesday evening (ET).
German macro reports will include retail sales during June (Monday), factory orders (Thursday) and industrial production (Friday).
A wave of regional inflation reports primarily focused upon LatAm and Asian economies won’t impact the global market tone but could influence thinking about local central bank dynamics. I’ll write about those in individual notes throughout the week.
CENTRAL BANKS—POLICY DIVERGENCES
Five central banks deliver policy decisions over the coming week. Several of them could well shake up their narratives somewhat.
- RBA: Tuesday’s decision could be marked by the need to back-pedal on prior taper guidance. Recall that the RBA had announced at its prior meeting that it would reduce purchases of government bonds to A$4B/week from $5B/week. The rise of COVID-19 cases (chart 14) and the fact that Sydney will remain in lockdown until at least the end of August makes sticking to such a plan less likely. Is this a lesson for other central banks pondering either a start to tapering or further taper decisions? A key distinction lies in the fact that Australia has not done well at vaccinating its population and the vaccination rate lags well behind its Anglo-American peers.
- BoE: The Bank of England (Thursday) is unlikely to alter policy but forecast revisions and probably greater divisions on the maintenance of its gilts purchase program will be monitored as MPC members Dave Ramsden and Michael Saunders may agitate toward ending them earlier than planned. The prospect of upward revisions to inflation projections could add to 2022 rate hike bets (charts 15, 16). Tentative evidence that new COVID-19 cases are waning may provide encouragement (chart 17).
- RBI: India’s central bank is likely to find it a bit more difficult to talk through rising inflation that is well above the inflation target range of 4% +/-2%. Whether now or at a subsequent meeting, the risk lies in shifting toward a more hawkish stance.
- Brazil: Banco Central do Brasil will probably pass through another 75–100bps hike to the Selic rate on Wednesday. The policy rate of 4.25% remains significantly below guidance to get closer to a neutral rate as inflation continues to overshoot.
- Bank of Thailand: Wednesday’s decision is not expected to yield any change in policy stance as COVID-19 continues to challenge its important tourism industry.
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