1. Fed minutes (Sep) – 11/10 – There were no surprises from last month’s Fed meeting at least as far as the decision to keep rates on hold was concerned. The surprise came with the hawkish guidance when it came to the prospect of a November rate rise. The clear shift towards not only higher for longer, but possibly even more hikes has seen long term yields surge higher along with the US dollar. Rate cut expectations for 2024 were also scaled back sharply as the FOMC raised its 2024 rate guidance for the Fed Funds rate to 5.1% from 4.6% while keeping their guidance for 2023 unchanged at 5.6%, while 2025 rate guidance was also revised higher. The Fed also revised its guidance for 2023 GDP higher, to 2.1% as well as revising its unemployment guidance lower to 3.8%. It’s important to remember that the Fed continued to make the case that it remained data dependent when it comes to further rate rises, however the resilience of the US economy isn’t doing the markets any favours keeping alive the prospect that the Fed remains far from done. This week’s minutes should offer the markets further clues as to how concerned Fed officials are when it comes to the risk of overtightening. It was notable that Powell emphasised that the Fed was going to be careful when it came to further policy moves, which suggests a good deal of uncertainty about the risks of doing too much on rates. One other thing the dot plots told us about 2024 was that Fed officials were much less dovish about where rates were likely to go over the next 12-18 months, with the Friday payrolls report justifying the Fed’s decision to up its 2024 rate guidance..
2. US CPI (Sep) – 12/10 – This week’s September CPI data is likely to be the final guide as to whether we’ll see another US rate hike on November 1st when the Federal Reserve next meets for its penultimate policy meeting for 2023. Recent economic data would appear to suggest that one more rate rise is more likely than not, especially since headline CPI has started to tick higher again, although it is also notable that core CPI has continued to drift lower. While the market has been focussing on the recent rebound in headline CPI from the June lows of 3% to current levels of 3.7% it’s important to understand what’s driving the rebound in headline inflation, which has also pulled headline PPI off lows of 0.2%. On core prices these continue to drift lower, and it is here that the Fed’s attention is likely to lay. Core CPI in August fell to 4.3% and is expected to slow further in September to 4.1%, while core PPI also slowed to 2.2% in August. If the weaker trend of slowing core continues in September, the Fed may well look through the stickiness in headline inflation and decide to sit on its hands in November. Headline inflation is expected to remain steady at 3.7% for September.
3. China Trade/CPI (Sep) – 13/10 – There’s been little sign in recent trade numbers that the Chinese economy is close to achieving a significant pick-up in economic activity. The sharp slowdown in the recent Caixin manufacturing and services PMIs appears to suggest that confidence remains low, and that the modest improvement seen in August may well have been a one-off. Imports have fallen for every month this year highlighting the challenges facing the Chinese government in stimulating domestic demand. With the woes in its property sector far from resolved, and youth unemployment well above 20% there appears to be little sign that will see an economic pickup any time soon. Not only has domestic demand been weak, but global demand for Chinese goods has slowed sharply since April with declines in exports every month since then. This weakness has been reflected in price pressures in the Chinese economy with the economy slipping into deflation in July, although we have seen a modest uptick in headline CPI since then to 0.1%. PPI, on the other hand, has been in negative territory since October last year. Exports declined -8.8% in August and are expected to slide further by -7.5% in September, while imports are also expected to decline -6%, a modest improvement on the -7.3% seen in August.
