Dysfunctional Round Trip
Market movements provided the macro news over the past week, inverting the traditional causality from data and policy news into market pricing. The risk-off move intensified on 5 August, with volatility spiking in dysfunctional dynamics. That provided an attractive opportunity to lean against overly dovish mispricing in our monthly (see HEM: Punch Drunk Doves). Much of the dysfunctional excesses have already reversed within the week, wrong-footing those commentators who default to extrapolating market moves, but we still see pricing as too dovish.
The lows in equity prices were close to the trough from historic examples of equivalent VAR shocks. Repeating those scenarios would mean recovering the highs within a few months. We also remain mindful that equity prices fell into the Fed’s first rate cut in 1998 before the tech bubble was blown. The equivalent potential for easing to prove premature is undiminished. There is no need for an emergency cut, and September’s monetary policy decisions should depend on the recession risk in macro data rather than on recent equity moves (see VAR Shock Pains Pass).
Monetary policy decisions over the past week raise the risk that we are understating the response but should be seen in the context of the tumultuous events rather than a considered reflection of the aftermath. Specifically, there were surprise rate cuts from Mexico and Peru, with at least the former explicitly open to doing more. However, further away from the Americas, the RBA was unmoved, hawkishly holding rates and emphasising the potential to hike again. Some policymakers, including those at the Fed, also sounded more relaxed about the policy relevance of market developments. Next week’s decisions come from New Zealand, Norway and the Philippines.
UK markets will probably remain more blown by global gusts than domestic winds next week, although its release calendar is packed with labour market, inflation, GDP and retail sales data. Our expectations lean hawkishly overall, starting with the unemployment rate being on the cusp of rounding to 4.4% again rather than rising as the current consensus expects. Inflation should then be confirmed to have increased amid energy price base effects. That move extends surprisingly far in our view, reaching 2.4% y-o-y. Retail sales data could cap off a resilient week with another recovery, confirming June’s drop as statistical noise again rather than a fundamental signal.
US inflation data on Wednesday are the primary release for global markets next week, with the core and headline rate expected to pick back up to 0.2% m-o-m. Meanwhile, on the global political front, Alastair Newton has been looking for clarity over China’s otherwise fuzzy economic trajectory. He sees it lying in Xi Jinping’s explanatory statement about the outcome of the Third Plenary and the oft-stated determination to make China technologically self-reliant as a hedge against external threats (see China: “Confusion Will Be My Epitaph”?).