Next Week's Risk Dashboard
• US earnings season
• Will US inflation bounce back?
• FOMC minutes likely to reinforce tapering…
• …along with a heavy Fed speaker line-up
• US retail sales downside
• Chile’s central bank expected to hike
• Jobs: UK, Australia, South Korea
• China trade, financing
• Bank of Korea likely to hold
• Other Inflation: China, India, Norway, Sweden
Chart of the Week
EARNINGS—UP, UP AND AWAY?
Give your friendly local equity analyst a hug next week. Buy her a coffee, virtual or in person. Forgive the little bit of grumpiness. After all, the quarterly torrent of US earnings reports kicks off the Q3 season.
It starts off relatively slow as always, with 20 S&P500 firms on the docket and all of them toward the back half of the week. It also starts off mostly focused upon financials as usual. Key names will include the likes of JP Morgan Chase, BlackRock and Delta Airlines on Wednesday, then BofA, Morgan Stanley, Citigroup and Wells Fargo on Thursday followed by Goldman Sachs on Friday.
Analysts have recently bumped up their earnings targets for this season and subsequent ones (chart 1). Pair that with the usual reminder that US analysts’ earnings expectations have tended to be sharply lowballed ever since SOX legislation was enacted (chart 2). Lastly, while price-to-trailing-earnings ratios remain high, I don’t find price-to-forward-earnings to be particularly expensive especially if analysts are lowballing where earnings will ultimately land (chart 3).
Was the unexpected deceleration in US CPI during August a transitory development or the start of a falling trend in the pace of price changes? We’ll find out when the September readings arrive on Wednesday. It will help to inform pricing power and hence one contributor to growth in nominal earnings as a driver of nominal stock market benchmarks.
There is a good case for believing that August was just a temporary soft patch for pricing power with supporting points of a general and specific nature. I’ve gone with an estimate of 0.4% m/m for headline CPI that would translate into a rise of 5.5% y/y (from 5.3%), as well as 0.3% m/m for core CPI that would translate into a gain of 4.2% y/y (from 4.0%). There might even be upside—at least to the core measure.
In general, multiple forms of evidence point toward ongoing supply chain pressures with no real relief in store. Examples include the price gauges within the ISM-services and ISM-manufacturing reports, both of which increased during the month (chart 4).
In terms of specific inputs to the estimates, one thing to point to is that we know that used and new vehicle prices were higher in September. J.D. Power Company data is used as CPI input by the Bureau of Labor Statistics. They indicated that new vehicle prices were up by about 3% m/m before seasonal adjustment which likely means just over 3% m/m in seasonally adjusted terms. At a 3.8% weight in CPI, new vehicle prices could add 0.12% m/m to CPI. New vehicle prices increased to a new record high of US$42,802 on average for an 18.6% y/y pace of increase and with the lowest dollar amount of incentives per vehicle on record.
We also know that used vehicle prices were up again after the dip in August. Used prices were tracking about a seasonally adjusted 3.5–4% m/m gain according to J.D. Power and confirmed by the Manheim reading. With a 3.5% weight in CPI, used vehicles will contribute about 0.13% m/m to headline CPI in weighted terms. That more than reverses the drag on August CPI when used vehicle prices fell 1.5% m/m and hence knocked less than 0.1% off headline inflation.
So when combined, used and new vehicle prices should add 0.2–0.3% m/m to headline CPI before we even turn toward other considerations. Then leverage that up for core CPI that is about 79% of total CPI to get a total vehicles contribution to core CPI inflation of about 0.3–0.4% m/m. If this tracking of vehicle prices translates well into CPI, then it’s also likely that the related category of vehicle insurance premiums won’t repeat as one of the top three downsides to US CPI during August as shown in chart 5 as a reminder.
Other considerations include the fact that gasoline prices were little changed in seasonally unadjusted terms, but probably ~+1% m/m in seasonally adjusted terms. At a 3.9% weight in CPI, gasoline could add another 0.05% m/m to CPI.
Further, while the Delta variant was an ongoing factor through September and may have sapped some pricing power, it’s unlikely that we’ll see a repeat of the abrupt price movements that dragged the prior month’s CPI reading lower in high contact activities. Airline fare, lodging away from home and car and truck rentals were three of the five biggest downsides to August CPI in m/m terms with used vehicles and vehicle insurance the other two.
Another key category to watch will be drivers of shelter costs and particularly owners’ equivalent rent of primary residence that likely faces ongoing catch-up to house prices (chart 6) as well as straight up rent. The growing area of emphasis is also upon the cyclical sources of inflationary pressure versus the more idiosyncratic and transitory sources of acyclical price pressures as shown in Marc Ercolao’s cover chart.
Whatever happens, one or two CPI reports won’t settle the transitory debate. For that matter, given the length of a typical monetary policy horizon, not even a series of reports will settle the debate versus looking ahead over the full cycle. Still, even if inflation settles back upon a more moderate trend around the 2–2.5% y/y range over the next couple of years or so, it still merits ending QE and moving toward rate hikes.
CENTRAL BANKS—GOOD ENOUGH?
Two regional central banks deliver updated decisions with one expected to hike, while Fed communications are likely to reaffirm the commitment to tapering Treasury and MBS purchases.
Minutes to the September 21st – 22nd FOMC meeting arrive on Wednesday. They are likely to further drive home the guidance to taper purchases ‘soon.’ A recap of the communications that were delivered at that meeting is available here. The latest payrolls report was probably just barely adequate to merit announcing a reduction of bond purchases at the November 3rd FOMC meeting (here).
Since the FOMC minutes could be stale in light of the soft rise in nonfarm payrolls, markets will also monitor fresher Fed-speak for a sense of how various FOMC officials judge the taper criteria. Vice Chair Clarida speaks Tuesday. Governors Brainard and Bowman speak on Wednesday. There will be a heavy line-up of regional Presidents speaking throughout the week plus a speech by the NY Fed’s EVP Logan on monetary policy implementation on Thursday.
Chile’s central bank is expected to hike its overnight rate target by 75bps to 2.25% on Wednesday. The central bank has provided guidance that its policy rate will climb toward a neutral level of ~3.5% by 2022Q1 and so it clearly has a lot of work to do to get there in a short time. Surging inflation is the issue (chart 7).
The Bank of Korea is expected to hold its 7-day repo rate unchanged at 0.75% on Tuesday evening ET. If it passes on a second hike in the cycle, then watch forward guidance in relation to expectations from Scotia’s Tuuli McCully for a hike at the November meeting.
US retail sales will likely stand out the most in the grab bag of other global developments. The headline reading is expected to register another decline. We know that new vehicle sales were down 6.7% m/m with under a 20% weight that subtracts over 1% m/m from total retail sales. Some of this is going to be offset by higher vehicle prices as noted in the CPI section such that on net, the value of vehicles sold should drag around a half percentage point off of total retail sales. It could be tough to register another solid gain in sales ex-autos and gas after the prior month’s 2% rise, but assuming a small gain would still result in a drop in overall sales.
Canada’s calendar-based risks will be light over the coming week after coming back in food shock following the Thanksgiving holiday on Monday. Celebrate, but also spare a moment or two in your thoughts for those who have struggled the most throughout the pandemic. Advance flash guidance from Statistics Canada points to about ½% m/m gains in manufacturing sales (Thursday) and wholesale trade (Friday) during August. Friday also brings out the national add-up for existing home sales with the hope that the five-month trend of falling sales may be arrested partly given the gain in Toronto for example.
China is expected to update aggregate financing figures for September sometime during the week. China’s growth challenge is not just the fact that it can’t quite engineer the same leveraged growth off of its exports. China is also pursuing a relatively tight money approach compared to almost everywhere else. It has among the highest real policy rates anywhere. It has among the lowest inflation rates anywhere and with September CPI on tap mid-week. Its total universe of financing products including traditional local currency and FX-denominated loans plus bond and equity financing and social financing is growing at the slowest pace in years (chart 8). All of this stands in contrast to elsewhere and contributes toward explaining China’s recently softer growth while also suggesting that it is keeping its powder dry should future risks to the economy merit unleashing stimulus. Trade figures for September will help to further inform nearer term growth after recent surging.
Three countries will update the state of their job markets. The UK and South Korea will be updating job figures on Tuesday followed by Australia on Wednesday. The UK report will likely attract more eyes as recent weeks have seen increased bets that the BoE may bring forward its first rate hike as soon as year-end with a full hike priced in OIS by 2022Q1. A strong UK jobs report for August that builds on July’s robust reading is one such checkbox that needs to be ticked for an expedited rate hike to become a possibility. The question is whether the government’s furlough scheme in September had materially negative effects on the unemployment rate.
The Aussie labour market has fallen victim to a surge in Delta cases that led to stringent lockdowns and a halt in job creation. August jobs fell by 146k with further deterioration anticipated through September and October as lockdowns in Sydney and Melbourne remain in place. Consensus estimates another loss in excess of 100k jobs for September on Wednesday night. At risk is wiping out the year-to-date rise in employment. For fans of comparing BoC to RBA dynamics (I’m not really one of them) see chart 9 that shows how the two countries’ labour market recoveries may be crossing over one another (Canadian recap here).
Singapore Q3 GDP is due out by Wednesday evening (ET) and should rebound while nevertheless being faded given the recent rise in COVID-19 cases and restrictions.
The UK will also update August readings on Wednesday for industrial output, the monthly services index and trade figures. The general tone of the releases is expected to be constructive.
Also watch for CPI updates from India, Norway and Sweden plus Germany’s ZEW investor sentiment gauge.
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