Attack the Week (ATW)
August 28, 2023
We are closing in on another month. Jackson Hole, as expected, was a doozy. Powell’s speech on Friday didn’t give any new clues and certainly dismissed any speculation about a change in the inflation target or a discussion about higher R*. As mentioned in last week’s ATW, he did precisely leave all options on the table, which is the most prudent way forward.
Residual Fedspeak from Harker, Goolsbee and Mester had little impact on markets. BoE’s Deputy Governor Broadbent’s planned speech over the weekend didn’t hint at near-term policy choices for BoE but concluded the backdrop means the policy will likely remain constrictive for “quite some time”. BoJ Governor Ueda echoed his recent comments on the need for continued easing, and the BoJ view CPI is expected to decline toward year-end. ECB’s Kazaks, one of the most hawkish members, appeared in an interview, reiterating his Friday comments that another hike would be the safe route. Little consequence for markets.
Over the weekend, BoE’s Deputy Governor Broadbent provided a big-picture view on factors contributing to UK inflation during his scheduled comments. While not much on immediate policy outlook, he concluded the “second round” of inflation - such as domestic wage growth - may take longer to retreat and, therefore, “policy will probably have to remain in restrictive territory for quite some time yet.” They are all copying the higher-for-longer mantra.
BoJ Governor Ueda said during the panel discussion that BoJ still sees underlying inflation "a bit below our target of 2%," and this is why they are sticking with the current monetary easing framework (Reuters). He reiterated the view inflation "is expected to decline toward the end of the year”.
ECB’s Kazaks told Reuters in an interview on Saturday that another modest rate increase would be “playing it safer, rather than delaying it and then risking having to do much more later in the year or early next year." Largely repeating comments from an interview with Bloomberg on Friday.
ECB President Lagarde's speech avoided any signalling on the September meeting, repeating that the ECB is data-dependent and will decide meeting by meeting. She reiterated the ECB will set rates at “sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to our 2% medium-term target.”
ECB’s Nagel, a known hawk, spoke to Bloomberg TV at Jackson Hole, stating it is “much too early to think about a pause,” given inflation is still around 5%, well above the 2% target.
ECB’s Holzmann, another one of the most hawkish members, told local Austria press there’s still no all-clear on inflation and “a little more” tightening should be added, but data will decide, noting headline CPI is down, but core is “still very high”.
Another hawkish-leaning ECB's Vujcic suggested a September rate hike is still their base case. He noted recent weak PMIs showed the Economy will slow but added it needs to show in softer core inflation data while nodding to the next release (this week).
Elsewhere, Fed’s Harker told Bloomberg TV in an interview he wants to “keep rates where they are right now and then we’ll decide later what we do.” He caveats that if CPI were to reverse course, particularly core service inflation, then they may have to do more.
Fed’s Mester told Bloomberg TV in an interview that inflation is ‘still too high’ and under-tightening would be worse than over-tightening; she continues to see a soft landing as her base case.
Fed’s Goolsbee told Bloomberg TV in an interview that wage growth reflects price growth six months ago, which is now a lagging indicator, so we need to look at new price inflation data, especially goods and housing. We need to continue getting good news on inflation for the Fed to feel like they are on the golden path (CPI falling without a big recession).
Where does this leave us with regard to Treasuries (US 10-year yields in the below chart)?
Since May, we had about a 100 bps move higher in yields. When looking at sell-off periods over the past 20 years, the current sell-off just ranks below average. We certainly have room to move a bit higher depending on which historical period you see the strongest resemblance with.
Let’s look at the week ahead and some more interesting developments.