The In-Between Week

The US employment data and the ECB meeting are behind us, and the Federal Reserve, Bank of Japan, Bank of England, and Norway's Norges Bank lie ahead.  The Norges Bank is likely to be the first central bank from a high-income country to raise rates since the pandemic first struck.  Next week is "in-between" and features the US, UK, and Canada consumer inflation reports. Finally, other high-frequency data will allow economists to fine-tune Q3 GDP forecasts.  

The general sense one gets by surveying the recent string of data is that economic activity has downshifted.  Weather shocks, which will become more frequent, and the virus, are the main culprits.  In the US, this is evident in the recent Open Table activity and TSA clearances. In August, hiring was flat for the leisure and hospitality industry (think bars, restaurants, hotels) after increasing by an average of roughly 350k over the previous six months.  Employment in daycare services also fell last month.  Citibank's data surprise model has deteriorated for most countries and regions over the past month, with New Zealand and Australia being notable exceptions.

Next week is one of the busiest for US data.  Ahead of the FOMC meeting conclusion on September 22 and new (individual) economic projections, the US will report stable though elevated CPI, firm, even if not as firm, industrial output, and weaker consumption in the form of retail sales falling for the third time in four months.  Early September survey data from New York (Empire State) and Philadelphia will also be released.  They are expected to have stabilized after sharp declines in August.  The same can be said of the University of Michigan's consumer sentiment survey.  

The August CPI reading may draw the most market's attention. Still, in terms of Fed policy and the majority that in July anticipated tapering before the end of the year, the impact is likely modest at best.  Unlike the employment report, the economist's ability to forecast month-to-month changes in CPI is fairly good, and the month-over-month increase is likely to have remained elevated in August.  A 0.4% headline rise would be the least in six months, but matching the August 2020 gain will steady the year-over-year rate at around 5.4%.  A similar development is expected with the core rate.  A 0.3% increase matches the smallest in six months. Again, it matches the August 2020 increase, leaving the 12-month rate little changed at 4.3%.  

The rounding effect could see both headlines slip by around 0.1%, but so what?  The Fed has already acknowledged that its inflation target has been met, even though it has yet to define the period the average is to cover.  For the last 60 months (five years) and 36 months (three years), the headline PCE deflator, which the Fed targets (Why call the core rate the Fed's preferred or favorite when it does not target it?) has averaged 1.8%.   For the record, the headline CPI has averaged 2.1% and 2.0% for the two periods, respectively.  

With most of the recent US data being reported below expectations, it seems like it is just a matter of time before other bank economists join Goldman Sachs in cutting its Q3 GDP forecasts.  Among the Fed's trackers, the NY Fed's GDP Nowcast forecast has been cut to 3.8% from 5.3% in late Q2.  Similarly, the Atlanta Fed sees the US economy at a 3.7% annualized pace in Q3. It had been above 6% as recently as mid-August.  We have suggested that US growth peaked in Q2 and that a year from now, a 3%-handle on GDP will be seen only in the rearview mirror.  Just like inflation is transitory, so is above 3% growth.   

In addition, the Fed, the Bank of England, and Bank of Japan's meetings are the week after next.  The high-frequency data are unlikely to have much impact on the deliberations.  Japan's economy appears to have bottomed with the 4.2% annualized contraction in Q1.  Growth in Q2 was revised to 1.9% from 1.3%.  Although the state of emergency has been extended to the end of the month, the economy appears to be expanding, even though the composite PMI has been below the 50 boom/bust level since May.  And May was a bit of a fluke.  The composite PMI has not been above 50 for two months in a row since August-September 2019. 

It seems likely that regardless of the results of the LDP leadership challenge, a large supplemental budget will be announced.  It may be thought of in the context of the output gap, estimated to be around JPY30 trillion (~$275 bln).  That likely takes the pressure off of the BOJ to respond to news that the GDP deflator fell to -1.1% in Q2, the largest year-over-year decline in a decade.  It is instructive that even with a large budget deficit, high debt levels, and a central bank's balance sheet larger than a year's output, the BOJ can still not put the deflation genie back in the bottle.  

The UK's economic calendar is busier than Japan's, and while Japan's growth surprised on the upside, the UK's high-frequency data have disappointed of late.  The employment data from July and August is not clean in the sense that the wage subsidy program will cease at the end of this month.  Even if the labor market is difficult to read, consumption, judging by retail sales, has faltered.  In each of the past three quarters, there has been one month that show a large drop.  Retail sales rose in the other two months of the quarter.  July retail sales are expected to have risen by 0.2% but instead fell by 2.5%, the biggest drop since January.  Credit/debit card and industry reports suggest retail sales likely bounced back n August.  

The CPI may draw the most attention, given the proximity of the BOE meetings.  The UK's CPI is running at an annualized rate of about 3.25% through July.  The base effect warns of upward pressure as the August 2020 decline of 0.4% drops out of the 12-month comparison.  The year-over-year rate was 2.1% in July on the preferred CPIH measure, which includes owner occupiers' housing costs, which the ECB has indicated it will include in its measures.  Recall that the core rate, which excludes energy and food, rose by 1.8% in July, slowing for the first time since February, from 2.3% in June. 

China's mid-month data splurge includes retail sales, industrial production, investment, and (surveyed) unemployment rate.  Economists expect confirmation that the world's second-largest economy has lost its forward momentum. All the time series are forecast to have slowed sequentially, except for the unemployment rate, which is projected to remain unchanged at 5.1%.  Still, the fall in the 'official" and Caixin composite PMI below 50 probably overstates the case of an economic contraction.  The market is looking for a policy response, and the favored tool was a cut in the reserve requirements, as it did in July.  However, the PBOC was understood to play this down, but further economic weakness could change the calculations.  

It seems that China's own newspapers cannot quite decide what to make of recent political developments.  One camp sees it as a "profound revolution"  that will ensure that "the capital market will no longer become a paradise for capitalists to get rich overnight." Shades of the Cultural Revolution.  The other side of the "debate" suggested that the Communist Party was united in pursuing "gradual social progress."  Perhaps the debate is tolerated because the positions are not mutually exclusive, and tolerating both interpretations may be desirable on different levels  

The timing of Xi's campaign seems to be the subject of much debate.  Perhaps, it is like Winnie-the-Pooh kicking a bee's nest, and after the bees swarm, setting it right again.  Xi's second term ends in 2023.  Next year may be about reaping what was sown this year.  Perhaps it may mean making a few examples, as Beijing has done in Hong Kong, before relaxing.  Even though the two-term limit has been effectively repealed, and Xi has ended the balance between the Princelings (blood ties to the revolutionaries) and the Communist Youth League (channel for ambitious, bright, and talented "new" people). Xi still needs to frame his decision to remain.  The arduous task of securing the fruits of development for a greater part of China's population has only just begun. Xi needs to see it through, which is nothing less than harnessing the dragon unleashed by Deng Xiaoping's political and economic reforms, the man who purged his father.   

  

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