Macro/FX Watch: US CPI may not be a game-changer for September Fed meeting
Summary: The US dollar started the week on the backfoot as intervention threats from Chinese and Japanese officials ramped up. However, fundamentals need to support intervention efforts to bring a more noteworthy recovery in yen or yuan. US CPI on the radar for Wednesday and even a beat on core may not be able to change the pause expectations for September, but could still bring upside in USD if higher-for-longer prevails. UK jobs data, meanwhile, starts to be mixed and may open the door for dovish BOE repricing.
US CPI preview: Unlikely to be a game-changer for the September meeting
US August CPI report is due this Wednesday at 1230 GMT and will be the final look the Fed gets into the inflation dynamics ahead of the September 23 meeting. Consensus expectations are pointing to an uptick in headline print on the back of a weaker base and gains in gasoline prices that could also threaten a rebound in airfares. Headline inflation is expected to come in higher at 3.6% YoY in August from 3.2% previously and 0.6% MoM from 0.2% previously.
Markets may however focus on core or supercore measures, which means interpretations of the release can continue to vary. Core prices could also see upside pressures due to the entertainment events such as Beyonce and Taylor Swift pushing up services costs like hotels and accommodation as well as transport. Autos and housing could however continue to put downside pressure on the core measure as higher rates bite, and rent measures – as shown in the chart below – suggest that disinflation theme has further runway. Expectations for core are therefore more modest at 0.2% MoM (prev. 0.2%) and 4.3% YoY (prev. 4.7%).
The FOMC is already in blackout ahead of the meeting next week, and weekend article from WSJ’s Nick Timiraos, who is considered to be a mouthpiece for the Fed especially in blackout periods, seems to be communicating a key message. He wrote the Fed is likely to pause rate increases in September, then take a harder look at whether more are needed. This has reaffirmed expectations for a pause, which may not be muddled even by an inflation surprise. The bigger debate will center around expectations for a November rate hike, and September dot plot may continue to show that an additional increase is still on the table. But whether they deliver such an increase will be dependent on data from there. Focus is shifting towards growth and how fast the growth indicators weaken will decide whether peak Fed rates are here.
An upside surprise in core inflation, however, can still push the dollar higher as rate cut expectations continue to be pushed forward and higher-for-longer expectations prevail. A weak report, especially on the core, could lower November rate hike bets which currently stand at about 45% probability. This could mean lower yields and a weaker dollar as soft-landing calls get louder again, for now.
JPY and CNH: Leg up in Asia’s hawkishness will need to be supplemented
We have seen verbal interventions rising from both Japan and China as the mighty dollar closed its eighth consecutive weeks of gains last week. Weekend interview of BOJ Governor Ueda has fueled speculation that the timeline for the policy review, which was earlier stated to be 18 months, may be brought forward. The Governor said that it’s possible the central bank will have enough information and data by the year-end to judge if wages will continue to rise, a condition for adjusting stimulus. Ueda did caveat this observation noting the central bank is still some distance away from achieving its price stability target and would continue its patient monetary easing.
Market participants are now pricing in an end of the negative rate policy by Q1 2024. While that has prompted JGB yields to move to fresh highs above 0.7%, the respite for the yen may remain short-lived until these claims are supplemented by fundamentals or a shift in Fed policy. Comments from Ueda have also not been bolstered by other Japanese officials so far this week, and markets are starting to take this just as a jab to prevent more yen damage. Still, more gains in the yen cannot be ruled out as speculations of a tweak could continue to rise into the next week’s meeting and more so, if US 10-year Treasury yields continue to find it hard to ascend towards 4.4%.
Meanwhile, yuan has recovered some of last week’s losses and USDCNH took a look below 7.30 from highs of 7.36+ amid verbal warnings from authorities, better-than-expected economic data as well as the continued appreciation bias in PBoC’s daily fixings. China authorities are likely to continue to curb excessive yuan weakness into the month-end holiday period for National Day. Economic data is also starting to see a modest turnaround, with deflation exit and upswing in August credit data. This week’s August activity data, including industrial production, retail sales and fixed asset investment, as well as PboC’s Medium-term Lending Facility Rate (MLF) decision could be key not just for yuan traders, but also for AUD and metals complex which have seen a strong bid to start the week on hopes of a cyclical turnaround.
Market Takeaway: Not enough reasons yet to support a strong recovery in yen or yuan, but intervention risks from authorities may limit the downside into the next week’s BOJ meeting or month-end holidays in China respectively.
GBP: Mixed signals from the UK labor data
Commentary out of Bank of England officials has been mixed. Catherine Mann was on over the newswires yesterday saying that she would rather err on over hiking UK's interest rates (and cutting later if needed) as the danger of a rate pause is currently very high. While this is expected from Mann, the tone was at odds with Governor Andrew Bailey, who last week said the central bank is "much nearer" to ending its run of interest rates increases. This had led to a dovish re-pricing of BOE expectations, with the September rate hike odds now at about 77%.
Today’s job numbers in the UK also kept the message mixed. Wage data remained hot, with average earnings rising by 8.5% 3M/YoY vs. 8.2% expected. Last month’s was also revised higher to 8.4% from 8.2% previously. Excluding bonuses, earnings were in-line with expectations at 7.8%. However, payrolls slumped, coming in at -1K for August, with July’s print also revised lower to -4K from +97K earlier. This maybe a sign of the weakness setting in the labor market, which comes alongside mounting evidence from surveys that price pressures in the UK are easing, the jobs market is cooling, and growth is slowing.
But inflation is still at the 6% handle compared to the US inflation at the 3% handle. Does that mean BOE has to continue to push harder than the Fed on its tightening campaign? That may be a risky bet, given bankruptcy filings in the UK are pushing to GFC levels compared to still being contained in the US. Today’s job numbers do not appear to be a big hawkish push for the BOE, and scope remains for more dovish re-pricing if CPI on 20 September also comes in weaker than expected.