Macroeconomics: The Week Ahead

Author: Marc Ostwald, Chief Economist & Global Strategist, ADM Investor Services International Limited

The week’s calendar has a considerable volume of US data (Consumer Confidence, Durables, Personal Income/PCE, revised Q2 GDP, Goods Trade Balance), France & Japan (Tokyo) CPI, Canada Q2 GDP, a raft of national surveys in the Eurozone (including Ifo) and Chinese Industrial Profits. The KC Fed’s annual (virtual) Jackson Hole symposium ends the week, which will include Powell talking about the Fed’s policy framework review on Thursday (14:10 BST), and a speech by BoE’s Bailey.

Last week of northern hemisphere summer holiday season, eminently heavily impinged by rising COVID-19 infection rates in Europe, and still very, though falling rates in US. US Labour Day holiday on September 7 looks increasingly likely to be a watershed for a gradual closing of financial market markets holiday euphoria and the dustbowl of economic realities.

Still no sign of any agreement on US additional COVID-19 spending bill, and UK/EU Brexit talks still more likely to end in no deal. Plenty of focus on what will actually happen in terms of schools re-opening in the new academic year starting in September in Europe and North America, far from clear outcome; return to physical workplace trends also up in air.

Earnings season winding down, but govt bond issuance ramping up, U.S. leads with record $152 Bln total of 2, 5 & 7-yr and further $22 Bln of 2-yr FRN; ‘summer lull’ in Europe has EUR 9.5 Bln in Germany of 2 & 15-yr, the end of month Italy BTP, CTZ & BTPei auctions (ca. EUR 7.-8.0 Bln) and GBP 7.0 Bln of UK 6, 10 & 34-yr. Usually quiet month for corporate bond issuance has already seen record >$120 Bln issuance in USD Investment Grade sector.

Jackson Hole – Powell will open this year’s virtual meeting with a speech on the Fed’s policy framework review, which will doubtless wax lyrical about allowing overshoots on both inflation and employment targets, above all after protracted undershoots. To be sure, markets will like and react positively to any talk about overshoots and ‘whatever it takes’, even if any mention of the economic outlook will hardly be upbeat. Frankly this will miss the key point: the Fed’s key policy metric is ‘financial conditions’ and it has been for more than 5 years, inflation and jobs metrics are little more than ‘lipstick on a pig’, or rhetorical roadkill. Unfortunately the metrics for tight and loose ‘financial conditions’ are all market based metrics, which as I point out in the latest Investing Channel video are ultimately purely are primarily about market volatility, and have precisely nothing to do with credit availability on ‘Main Street’ (as is the case with other G7 central banks). This is a trap of central banks’ own making, and this has led us down the path to ‘outright monetary financing’, even if it is denied by central banks, who totemize ‘financial stability’ as a (or rather ‘the) justification for their actions, whereby financial stability really means that nothing of any size within the financial sector can be allowed to fail – in other words a quasi-permafrost of zombiefication. This in turn appeases the Pavlovian, and yet also inordinately financial repressed spirits of financial markets, building an ever big chasm between their performance and economic reality – the only question is if and when will this become a ‘black hole’ that devours the global economy.


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