Is Inflation now the wrong enemy?

Thoughts of the Day

In August, US Core PCE Price Index increased by +3.9% YoY (as exp, prev: +4.3%). The headline index, including energy and food, rose +3.5% (as exp, prev: +3.4%). The Core Index, favoured by the Fed is showing +2.2% when annualising the data from the past 3 months. Eurozone inflation is also slowing faster than expected, raising questions about the need for further interest rate hikes.

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Week Ahead

Monday: The Euro Area unemployment rate for August is expected to have remained at 6.4%.

Tuesday: The Reserve Bank of Australia is expected to keep interest rates at 4.1% in its monetary policy decision.

The US JOLTS job opening is expected to show a modest rise in the number of jobs available to 8.83 million in August from 8.827 million in July.


Wednesday: The Reserve Bank of New Zealand is expected to keep interest rates unchanged at 5.5% in its monetary policy decision.

The US ADP Non-Farm Employment Change is expected to show 160k jobs being added to the economy in September, slightly less than the +177k added in August.

The OPEC+ will be meeting to discuss their oil production limits.

Thursday:

Friday:

The US Nonfarm Payrolls is expected to show +163k jobs being added to the economy in September, down from the +187k in August. The US unemployment rate is expected to decline slightly to 3.7% from 3.8%.

The Canadian Employment Change is expected to show +17k jobs being added to the economy in September, down from +39.9k in August. The unemployment rate is expected to rise slightly to 5.6% from 5.5%.

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What Happened Yesterday

Market Movements as of New York Close 29 Sep 23 (1 Oct for Cryptos) 
  • Fedspeak:
    Williams (current voter, slight hawk):
    “Fed is at or near peak for the federal funds rate. The Fed will need a restrictive policy stance for some time to achieve goals.”
    Goolsbee (current voter, slight dove): “Holding to the inevitability that job losses are needed to slow inflation risks a near-term policy error. Some analysis shows inflation reaching target soon, without further policy tightening and only a modest slowdown in growth..”
  • The Euro Area Consumer Price Index for September showed that prices rose 4.3% Year-on-Year (vs 4.5% expected), down from 5.2% in August. The core index showed a softer than expected increase as well with a print of 4.5% (vs 4.8% expected), down from 5.3% in August. The EUR reaction to the data was muted.
  • The US PCE Price Index, the Fed’s preferred measure of inflation, showed that prices rose 3.5% Year-on-Year in August as expected, up from 3.4% in July (revised from 3.3%). The core index, which excludes the more volatile components of energy and food, moderate to +3.9% YoY as expected from +4.3% in July (revised from +4.2%).
  • The final print for the University of Michigan Consumer sentiment was 68.1 (vs 67.7 expected), slightly lower than the previous print of 69.1. The inflation expectations for the year ahead fell to 3.2% (vs 3.1% expected) from 3.5% previously.
  • The US Treasury Yield curve inversion narrowed slightly to 0.44% as the US 2-year bond yield fell -0.01% to 5.03% while the 10-year bond yield remained at 4.59%.
  • The US stock futures rose steadily through the Asian and London trading sessions with the S&P 500 futures rising +0.23% before the release of the US PCE Price Index data. The inflation print which confirmed moderation in inflation then pushed the S&P 500 futures up by another +0.37% before the New York session.
  • The US stock market opened higher from Thursday. However, the rally started to fade as the deadline of the government approached with no signs of an agreement as House GOP leaders failed to pass a short-term spending bill on Friday (Biden has since signed a funding bill to keep the government open – see Article 2). Consequently, the S&P 500 closed -0.27% lower (high: +0.78%, low: -0.58%), the Dow fell -0.47% (high: +0.68%, low: -0.77%) while the Nasdaq eked out a gain of +0.08% (high: +1.35%, low: -0.26%).
  • The crypto market gained due to a more than 3% spike earlier in the wee hours of Asian morning, resulting in a +3.8% gain in both Bitcoin and Ether.
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Headlines & Market Impact

China’s economy stabilises, factory activity returns to expansion

Notable Snippet: “China’s factory activity expanded for the first time in six months in September, an official survey showed on Saturday, adding to a run of indicators suggesting the world’s second-largest economy has begun to bottom out.

The purchasing managers’ index (PMI), based on a survey of major manufacturers, rose to 50.2 in September from 49.7, according to the National Bureau of Statistics, edging above the 50-point level demarcating contraction in activity from expansion. The reading beat a forecast of 50.0.

The PMI, the first official statistics for September, adds to signs of stabilisation in the economy, which had sagged after an initial burst of momentum early in the year when China’s ultra-restrictive COVID-19 policies were lifted.

Preliminary signs of improvement had emerged in August, with factory output and retail sales growth accelerating while declines of exports and imports narrowed and deflationary pressures eased. Profits at industrial firms posted a surprise +17.2% jump in August, reversing July’s –6.7% decline.

China’s non-manufacturing PMI, which incorporates sub-indexes for service sector activity and construction, also rose, coming in at 51.7 versus August’s 51.0.

The composite PMI, including manufacturing and non-manufacturing activity, climbed to 52.0 in September from 51.3.

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Government shutdown updates: Biden signs 45-day funding bill to keep government open

Notable Snippet: The Senate passed a last-minute spending bill Saturday night averting a government shutdown that would have triggered a calamitous domino effect on the American public and economy.

The Senate voted to pass the continuing resolution 3 hours before a 12:01 a.m. shutdown of the federal government would have taken effect. The measure was signed into law by President Joe Biden late Saturday night.

The bill allows the government to stay open for 45 days, giving the House and Senate more time to finish their funding legislation.

The 71-page short-term bill, crafted by House Speaker Kevin McCarthy, R-Calif., allocates disaster relief funds, but does not include new financial assistance for Ukraine’s ongoing war with Russia.

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BOJ’s Ueda dispels view that risk will impede easy-policy exit

Notable Snippet: Bank of Japan Gov. Kazuo Ueda said considerations over the central bank’s finances would not prevent it from phasing out its massive monetary stimulus when the appropriate time comes.

While Ueda said there was “still a distance to go” before the BOJ exits its ultra loose monetary policy, his remarks come amid widespread market speculation that he will dismantle his predecessor Haruhiko Kuroda’s radical stimulus program.

Speaking at an academic seminar on Saturday, Ueda said the BOJ’s profits will be squeezed when it raises interest rates because doing so would increase interest rate payments it makes to financial institutions’ reserves parked at the central bank.

But it is also likely to earn higher interest income as its current government bond holdings are replaced by higher-yielding bonds, he said, adding it was hard to accurately predict to what extent a future exit could affect the BOJ’s finances.

“The objective of the Bank’s monetary policy is achieving price stability, which is its mission as stipulated by law. Considerations of the Bank’s finances, etc. do not prevent it from implementing necessary policies,” Ueda said in a speech at an annual meeting of the Japan Society of Monetary Economics.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord