THE GLOBAL MACRO WEEK AHEAD – August 28, 2022

Nicholas Glinsman | August 28th, 2022

SUMMARY

After a blowout US jobs report for July, investors will get a fresh look at the US labour market on Friday. Continuing strength may temper recession worries and allow the Federal Reserve to press on with steep interest-rate hikes. The monthly payrolls report is expected to show a gain of 300,000 jobs for August, while the unemployment rate is seen holding at 3.5%, matching a five-decade low.

The US Open tennis tournament starts Monday in New York City. Serena Williams’s decision to retire after participating this year has led to a surge in demand for tickets to the two-week event. Also drawing attention is Novak Djokovic’s announcement that he won’t compete in the year’s fourth and final Grand Slam event because he’s not vaccinated against Covid and can’t travel to the US.

On Wednesday, the euro zone reports inflation data for August. Consumer prices jumped 8.9% from a year earlier in July, overshooting expectations and climbing to another all-time high.

Several big Chinese banks report earnings in the coming week, and all eyes will be on any impact from the country’s property crisis and mortgage-payment boycott. The results come as some lenders employ practices to inflate loan volumes as they struggle to meet government demands to pump more credit into the system.

US & CANADA DATA

Fed Chair Jerome Powell delivered a message at Jackson Hole that met most people’s expectations: The Fed will keep policy tighter for longer. Although the yield curve inverted further after his speech, traders haven’t given up on bets that the Fed will cut rates next year. For a bond market eager to believe a dovish Fed pivot is imminent, even Powell’s hawkish words aren’t enough to convince them otherwise.

One interesting point from the speech is that Powell views the economy’s underlying momentum as still strong. Several activity indicators appear to corroborate that view. Consumer confidence (Tues.) has clawed back from basement levels as gasoline prices fall. Job-related components may be more important in August’s Conference Board report than top-line consumer confidence. The survey may show better sentiment with gasoline prices down over $1 per gallon from June highs. Still, inflation prospects will depend in part on how successful the Fed is in trimming demand — including labour demand — with rate hikes.

The chart below shows survey respondents’ perceptions that jobs are either “plentiful” or “hard to get,” along with the unemployment rate and the average of each series in 2019, before the pandemic. The move toward looser conditions in the survey components echoes declines in job openings over March-June in the JOLTS survey. Even so, levels are still tighter on average than in 2019. It likely would take much more deterioration in these figures, and in the unemployment rate, for the Fed to feel comfortable that it has slain the inflation dragon.

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ISM manufacturing (Thurs.) is likely in expansionary territory, as a backlog of motor-vehicle demand (unit motor-vehicle sales, Thurs.) buoys production. It may well hold above 50 in August. That’s typically thought of as a breakeven level, but it would take something in the low-40s to signal economy-wide contraction. Given the potential that a weaker reading might stem from better supply-chain performance, the details on activity and tone of the included anecdotes will be more important to watch than the headline.

As an example of why a deeper dive will be required, the sub-50 employment index recorded from May-July stems more from the inability to find workers, not job cuts. The corresponding months’ jobs reports showed continued gains.

Input-price pressures likely eased in August, a preview of what will be another soft month-over-month reading for the CPI that month. Supply-chain performance probably improved. At 55.2 in July, the delivery-delays index was the lowest since January 2020. Further drops would indicate goods-sector disinflation ahead.

Regional Fed surveys were mixed to weaker in the month, with two of four regional Fed surveys already available coming in below 50 on Bloomberg Economics’ ISM-adjusted basis.

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Housing sales may be weak, but housing prices are still rising at a solid pace (Case-Shiller, Tues.). Existing-home sales were down 20.2% in June from a year earlier, with all regions recording declines. Inventory rose to 3.3 months of supply — still tight. Homes continued to sell quickly and nearly 40% of homes still commanded the full list price, according to NAR. Still, a high share of home sellers dropped their asking prices. Signs that home-price gains are slowing will increase as demand from home buyers cools.

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For now, the focus is on whether the FOMC will hike by 50 or 75 basis points at its September meeting. Bloomberg Economics expects a soft August CPI print, but Powell’s Jackson Hole speech hinted that he’d place more weight on developments in the labour market. Even though both job openings (JOLTS, Tues.) and August jobs reports (ADP, Wed.; nonfarm payrolls, Fri.) will show the labour market has cooled from red-hot to just plain hot, unemployment could continue to edge down. 

Expectations for Friday’s jobs report are for the pace of hiring to slow in August — but given our expectation of a stagnant labour-force participation rate, it will take very few added jobs for the unemployment rate to edge down. The strength of this jobs report might seal the deal for the Fed to opt for another 75-bp hike September.

The median consensus for nonfarm payrolls estimate is for a 300k increase, with the range spanning 75k-452k. The unemployment rate to fall to 3.4%.

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The labour-force participation rate will remain at 62.1%, and average hourly earnings to rise at a monthly pace of 0.5%, and 5.4% on a year-over-year basis.

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Considering the totality of the data — as Powell said he’ll do — we think a 75-bp hike is slightly more likely in September, given his focus on the labour market. We still expect the central bank ultimately will have to raise the fed funds rate to 5% to quash inflation.

ASIA-PACIFIC DATA AHEAD

China’s PMI readings for August on Wednesday headline Asia’s economic calendar, with intense focus on the drag caused by restrictions to stop the spread of Covid and an ongoing property slump. 

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Trade-reliant South Korea’s industrial production and exports data will give the latest pulse check on the global economic slowdown. 

In Japan, industrial production and retail sales data will give clues on how well the recovery in the world’s third-largest economy is progressing.

Japan Industrial Production:

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As inflation continues to creep up beyond the Bank of Japan’s target rate, board member Junko Nakagawa will give the latest thinking on policy. 

BOJ Governor Haruhiko Kuroda said Saturday in Jackson Hole that almost all of the country’s inflation is being caused by higher commodities prices and that the central bank must continue with easy monetary policy for now. “We have no choice other than continued monetary easing until wages and prices rise in a stable and sustainable manner,” Kuroda said. 

Australia’s retail sales and house prices data, and New Zealand’s business confidence data, will give insight on the state of both economies as rate hikes look set to continue. 

Australia House Price Declines Are Broadening:

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India will report GDP figures on Wednesday that will show a robust recovery in the services sector after a wider re-opening from the pandemic.

India GDP Likely to Extend Recovery:

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EUROPE, MIDDLE EAST & AFRICA

Euro-area inflation takes centre stage, with economists predicting it will hit 9% when August data are published Wednesday. In the run-up, the region’s top four economies also publish figures.

Those numbers may convince European Central Bank policy makers to raise borrowing costs by another sizable increase on Sept. 8. While officials have committed to hike costs again, few have indicated publicly how big a move they’d like. At least six of them — including Chief Economist Philip Lane — could provide more clarity when they speak before the central bank’s official quiet period kicks in on Thursday.

The situation would be exacerbated if Russian gas gets cut off permanently. Gazprom plans to close the Nord Stream pipeline for three days of maintenance starting Wednesday. There’s worry that flows may not resume after that. 

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The Bank of England may hike by a half point when it meets in mid-September. The central bank will release a survey of its own this week, likely to show that corporate decision makers expect inflation to accelerate. 

In Hungary, the central bank decides on the base and weekly interest rate, with policy makers expected to deliver hikes as inflation overshoots forecasts and the currency plummets.

Turkish trade-balance figures are expected to show a further widening of the deficit, while second-quarter economic output might be stronger than the 7.3% growth recorded in the first three months of the year.

Kenya’s statistics office is expected to announce that inflation accelerated for a sixth consecutive month in August. Prices are rising at the fastest pace in five years, which may prompt the monetary policy committee to raise interest rates when it meets next month, after unexpectedly leaving borrowing costs unchanged in July before the country held a general election.

LATIN AMERICA

Brazil’s second-quarter output report is expected to show Latin America’s biggest economy surmounted tight fiscal conditions, double-digit borrowing costs and inflation to post modest if uneven growth.

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Central bank chief Roberto Campos Neto this past week said he expects consumer prices to fall for three straight months through September, so look for Brazil’s broadest measure of inflation to have slowed in August. Industrial production in July likely shrank for a second month.

In Mexico, the highlight of the week is Banxico’s quarterly inflation report that updates policy makers’ estimates for key indicators and a cut to their growth forecasts isn’t out of the question. The central bank also posts remittance figures for July while the statistics agency publishes labor market data.

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Seven economic indicators out of Chile including GDP-proxy data, retail sales and industrial output for July are expected to turn down as Latin America’s fifth-biggest economy may be heading into a second-half recession.

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After Brazil, Peru appears to be the second economy in the region now past peak inflation. Analysts expect Lima consumer price figures for August to show a second month of deceleration.