Macroeconomics: The Day Ahead for 21 August

A slightly busier for statistics, but none which are likely to genuinely swing the pendulum of market sentiment, with Japan and South Korean trade and UK PSNB data to digest ahead of South Africa’s CPI, Polish Jobs, Wages and Production, and Canadian PPI, and annual revisions to US Payrolls. But the main focus will be on the US July FOMC minutes, with rate decisions in Thailand, Indonesia and Iceland all seen leaving rates unchanged. A busier day for govt bond supply and corporate earnings has UK 3-yr, German 10-yr, US 20-yr and Canadian 10-yr, with the US having results from Agilent Technologies, Analog Devices, Macy’s, Target and Zoom to digest.

** U.S.A. – July FOMC Minutes, Annual Payrolls Revisions **

– Today’s FOMC minutes and Powell’s Jackson Hole speech on Friday will get more attention than the week’s run of housing data, though it will be interesting to note whether today’s weekly MBA Mortgage Applications continue the prior two week surge (16.8% and 6.9%) on the back of lower rates, which will go some way to answer the question about whether the weakness in last week’s NAHB index and Housing Starts was more a function of home buyers balking at high prices and affordability headwinds, or waiting for mortgage rates to fall when the Fed initiates a rate cut cycle. The FOMC minutes will be of interest with respect to the discussions on inflation and the labour data, which the statement noted were now relatively balanced in terms of policy importance. It is expected that a few FOMC members will still raise concerns about inflation (as per Bowman overnight), though many will likely see it as now on a sustained path back to target, while a small number will likely have voiced concerns that the loosening in labour market may signal that policy may be too restrictive (as per recent comments by Daly, Goolsbee and Kashkari). As with Powell’s speech on Friday, the message will likely be that a rate cut will be ‘appropriate’ soon, but the size and trajectory of the initial and future moves is still up for some debate, before a consensus view is formed. Indeed the August labour data (due September 6) will likely be the ultimate arbiter of whether rates are cut 25 or 50 bps. However last week’s solid activity data suggest that many FOMC members will opt for a 25 bps cut, primarily because a 50 bps cut would send an unduly negative signal about the state of the economy and labour demand, which they will want to eschew, at least at the current juncture. The other focal point is what the minutes say about ending balance sheet reduction (QT), which many assume will happen by year end, and with such announcements often having been made in July in the past . Ahead of the minutes, the annual US BLS preliminary annual Non-farm Payrolls revisions have a tendency to elicit a great deal of grandstanding by commentators, who will either proclaim that labour demand has been a lot weaker than monthly reports have suggested, if the revision is down with a good deal of ‘I told you so…’ and ‘the Fed is behind the curve’, or point to faulty data collection methodology, if it is not. Ultimately it will evidence some changes to the underlying trend, with estimates varying from a 360K total reduction for the year to March 2024 (-30K per month) to a 1.0 Mln (-83K) reduction, from the initial average of 242K per month, but this would still in the worst case scenario have Payrolls growth running well above the Fed’s breakven (i.e. labour demand in balance) level of 100K per month.