The market dials back next year’s rate cut expectations

The Daily Shot: 17-Aug-23
The United States
The United Kingdom
The Eurozone
Japan
Australia
China
Emerging Markets
Energy
Equities
Credit
Food for Thought



 

The United States

1. The FOMC minutes showed a hawkish bias.

With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see ¬†significant upside risks to inflation, which could require further tightening of monetary policy.

But some FOMC members are becoming concerned about the impact of the increasingly restrictive policy, pointing to a growing divide on the Committee.

A number of participants judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the Committee’s goals had become more two sided, and it was important that the Committee’s decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening.

Source: @WSJ   Read full article  
 
The market dialed back next year’s rate cut expectations.
 

 
The 10-year Treasury yield hit a multi-year high.
 

 
Source: @WSJ   Read full article  

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2. US manufacturing output topped expectations, …
 

 
… boosted by vehicle production.
 

 
Source: Reuters   Read full article  
 
However, factory output has been slowing when vehicles are excluded.
 
Source: ING  
 
And automobile production is expected to decline over the next few months.
 
Source: Scotiabank Economics  

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3. The GDPNow model keeps raising growth forecasts for the current quarter.
 
Source: Federal Reserve Bank of Atlanta  
 
4. Next, we have some updates on the housing market.
 
Mortgage applications are likely to keep slowing, …
 

 
… as mortgage rates surge.
 

 
Last month’s housing starts were stronger than expected, climbing above 2022 levels.
 

 
Source: Reuters   Read full article  
 
The strength in construction was fueled by single-family housing.
 

 
Building permits were softer than expected (2 charts).
 

 

 
Multifamily housing activity continues to slow …
 


 
… amid expanding pipeline. Multifamily units under construction hit a record high.
 

 
Here are the seasonally-adjusted trends for housing starts.
 
Source: Oxford Economics  


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The United Kingdom

1. The headline CPI declined sharply last month.
 

 
But as we saw yesterday, core inflation remains stubbornly high (see chart).
 
While goods inflation is easing rapidly, …
 

 
… which is showing up in retail prices, …
 

 
… services inflation is at a multi-year high (3 charts).
 

 

 

 
Source: Reuters   Read full article  
 
Moderating producer prices …
 

 
… should ease food inflation.
 
Source: Capital Economics  

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2. Gilt yields climbed further.
 

 

 
The market expects more tightening from the BoE, …
 

 
… with some 82 bps of additional rate hikes priced in for this cycle.
 

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3. Home price appreciation continues to slow.
 

 
Private measures point to further weakness in the housing market.
 
Source: Pantheon Macroeconomics  


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The Eurozone

1. The euro-area GDP expanded by 0.3% last quarter, in line with forecasts.
 

 
2. The Dutch economy unexpectedly entered a technical recession, …
 

 
… due to softer household consumption and weaker exports.
 
Source: @economics   Read full article  
 

 

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3. Euro-area industrial production increased in June, boosted by Ireland’s output.
 
Source: @WSJ   Read full article  
 

 
Excluding Ireland’s contribution, the picture looks less rosy.
 
Source: Capital Economics  


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Japan

1. The yen continues to weaken (chart shows the dollar gaining against the yen).
 

 
2. The trade deficit was wider than expected last month, …
 

 
… due to softer exports.
 

 
Source: @economics   Read full article  

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3. Elevated wage growth has become entrenched.
 
Source: Capital Economics  
 
4. The employment-to-working-age-population ratio is rising, driven by full-time jobs. (2 charts)
 
Source: TS Lombard  
 
Source: TS Lombard  


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Australia

The labor market shows signs of sputtering, with unexpected job losses in July.
 

 
Source: @economics   Read full article  
 
The unemployment rate ticked higher, …
 

 
… and the participation rate eased.
 


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China

1. The renminbi hit the lowest level vs. USD since 2008, …
 

 
… and Beijing is trying to arrest the decline.
 
By setting a stronger fixing guidance:
 
Source: @markets   Read full article  
 

 
And via direct intervention:
 
Source: Reuters   Read full article  
 
The rate differential with the US continues to widen,…
 

 
… pressuring China’s currency.
 
Source: Variant Perception  

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2. The Shanghai Shenzhen CSI 300 Index is at support. The next stop is 3,500.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
3. Concerns are growing around China’s trust assets.
 
Source: @markets   Read full article  
 
Source: Gavekal Research  


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Emerging Markets

1. USD/INR (US dollar vs. Indian rupee) is testing resistance.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
2. South Africa’s retail sales edged higher in June.
 

 
3. Hungary remains in recession.
 

 
Source: @economics   Read full article  


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Energy

1. US crude oil inventories declined sharply last week, …
 

 

 
… but US production hit the highest level since the COVID shock.
 

 
Source: @WSJ   Read full article  
 
2. US gasoline demand eased last week.
 

 
3. The global oil market is in a slight deficit.
 
Source: PGM Global  

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4. Mexico is importing a lot of natural gas from the US.
 
Source: @EIAgov  
 
5. Storing natural gas in Ukraine presents both potential high rewards (carry profits) and risks for Western European energy traders.
 
Source: @WSJ   Read full article  


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Equities

1. Surging real yields pose risks for growth stocks.
 

 
Long-duration equities are vulnerable.
 
Source: Oxford Economics  

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2. The S&P 500 risk premium continues to tumble.
 

 
Source: @WSJ   Read full article  

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3. The proportion of companies that beat Q2 earnings estimates rose in all regions except Europe.
 
Source: Deutsche Bank Research  
 
But second-half US earnings estimates will be harder to beat.
 
Source: Oxford Economics  

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4. The leading economic index points to headwinds for stocks.
 
Source: Simon White, Bloomberg Markets Live Blog  
 
5. Fund managers have been boosting allocations to tech.
 
Source: BofA Global Research  
 
6. The S&P 500 utilities sector’s underperformance appears stretched and could approach a cycle trough next month. (2 charts)
 
Source: @bespokeinvest  
 
Source: @NautilusCap  

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7. US M&A activity has been slowing.
 
Source: @FactSet   Read full article  


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Credit

1. The Bank Term Funding Program usage keeps rising, suggesting that some smaller US banks are facing funding headwinds.
 
Source: @FactSet   Read full article  
 
2. Preferred securities issuance has been slow due to the banking turmoil this year.
 
Source: @markets   Read full article  
 
3. Ratings downgrades continue to outpace upgrades.
 
Source: Torsten Slok,¬†Apollo  


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Food for Thought

1. Average annual wages in the US and Western Europe:
 
Source: @WSJ   Read full article  
 
2. Women executives in the US and the UK:
 
Source: @financialtimes   Read full article  
 
3. Religiously unaffiliated Americans’ attitudes towards abortion:
 
Source: FiveThirtyEight   Read full article  
 
4. Commodity costs as a share of battery prices:
 
Source: IEA   Read full article  
 
5. A warm July globally:
 
Source: @axios   Read full article  
 
A warm summer in Texas:
 
Source: @JKempEnergy  

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6. Recognized asylum applications in advanced economies:
 
Source: @axios   Read full article  
 
7. Russian soldiers dying in Ukraine:
 
Source: The Economist   Read full article  
 
8. “Backchannel” word frequency in spoken English conversations:
 
Source: Science Advances   Read full article  
 

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