- The confusion continues and equity markets have taken notice; the dollar continues to stabilize
- Talks on the stimulus package remain stalled; FOMC minutes did not reveal anything really new; the Fed sounds closer to finalizing its so-called Framework Review
- Regional Fed surveys for August will continue to roll out; weekly jobless claims will also be reported
- Germany will likely extend its job furlough scheme to 24 months; ECB releases the account of its July 15-16 meeting
- Norges Bank kept rates steady at zero, as expected; Turkey is expected to keep rates steady at 8.25%
- Japan reported weak July convenience store sales; Philippines kept rates steady at 2.25%, as expected
The confusion continues and equity market have taken notice. China said it will hold a call soon with the US to review progress on the Phase One trade deal. This comes a day after President Trump said he canceled that call because he doesn’t want to speak with China right now. To its credit, China has remained calm and steady even as the US continues to ratchet up tensions. The latest salvo was aimed at Hong Kong, where the US suspended its extradition treaty and ended reciprocal tax treatment on shipping. Elsewhere, the state of the next US stimulus package remains in limbo. Global equity markets are broadly lower today as rising uncertainty is proving to be a good excuse to take profits.
The dollar continues to stabilize. DXY is up modestly today for the second straight day after five straight down days. The euro is holding above $1.18, while sterling is holding above $1.30. USD/JPY has been unable to make a clean break above 106 and remains heavy. This should all be viewed as consolidative trading activity. We look for the dollar to resume weakening, as delays to the next round of stimulus support our view that the US economy will underperform in Q3, which should translate into continued dollar underperformance as well.
Talks on the stimulus package remain stalled. There have been some signs of movement, but a deal remains elusive. The White House signaled that it would be willing to boost aid to the Postal Service to $25 bln, the number that the Democrats want. However, it would require compromises on stimulus checks and small business aid. Meanwhile, 117 House Democrats signed a letter urging House Speaker Pelosi to use Saturday’s vote on Postal Service aid to tackle enhanced unemployment benefits. This notion was rejected by a senior Democratic official. Pelosi has said she will not address the stimulus package piecemeal, but she is coming under greater pressure to do so.
FOMC minutes did not reveal anything really new. At the July 29 meeting, all policy settings were left unchanged but markets were hoping the minutes would provide some more clarity on its framework review. The Fed seemed to signal a preference to rely on outcome-based forward guidance, noting “greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point.” Unfortunately, policymakers don’t sound like they’re in any hurry. The Fed was also noncommittal about Yield Curve Control, saying they were not warranted in the current environment but could be reassessed as an option in the future. The Fed didn’t discuss negative rates.
The Fed sounds closer to finalizing its so-called Framework Review. It noted that “It would be important to finalize all changes to the statement in the near future” and this “would help guide the committee’s future policy actions and communications.” This last comment suggests that the Fed wants to conclude its Framework Review first before adjusting its forward guidance. It may be helpful to think of the Framework Review as a long-term strategy, and the forward guidance as short-term tactics that will be used to meet its goals of full employment and stable inflation.
Looking ahead, the next FOMC meeting is September 16. Judging from the July minutes, it seems reasonable to expect the results of the long-term Framework Review to be released then but not to expect any changes in the forward guidance. Why bother when the pandemic is still causing so much uncertainty? New Dot Plots and staff forecasts will also be released then. Ahead of that, the annual Jackson Hole Symposium held by the Kansas City Fed is August 27-28. The Fed may drop some more hints about the Framework Review then and how it may impact its forward guidance.
Regional Fed surveys for August will continue to roll out. Philly Fed business outlook is expected at 20.8 vs. 24.1 in July. Empire survey kicked things off Monday and came in at 3.7 vs. 15.0 expected and 17.2 in July. These will be the first snapshots for August and will be watched closely for further signs of slowing in the US economy. Markit reports its preliminary August PMI readings Friday, with manufacturing expected at 51.5 vs. 50.9 in July and services at 50.9 vs. 50.0 in July.
Weekly jobless claims will also be reported. Initial claims are expected at 920k mln vs. 963k the previous week, while continuing claims are expected at 15.0 mln vs. 15.486 mln the previous week. Initial claims are at the lowest since mid-March and continuing claims the lowest since early April. All told, the data suggest the labor market is still healing, albeit slowly, as initial claims near 1 mln every week shows. Note that this week’s initial claims data will be for the BLS survey week containing the 12th of the month. July leading index will also be reported and is expected to rise 1.1% m/m vs. 2.0% in June.
Germany will likely extend its job furlough scheme to 24 months. The Kurzarbeit scheme (“short work”) is currently limited to 12 months, and allows companies to apply for aid if at least 10% of their workforce have lost at least 10% of their working hours. German companies have signed up an estimated 10.1 mln workers to the scheme, which dates back to the financial crisis. Besides the EU-wide pandemic package, individual nations are also keeping the fiscal spigots open. Germany has long been under pressure to rely more on fiscal stimulus and Merkel has taken this to heart. Of note, the UK’s job furlough scheme is winding down and set to expire in October, with many calling for its extension. Chancellor Sunak has said it won’t be extended, but we suspect pressure will be brought to bear if the labor market data continues to weaken.
The ECB releases the account of its July 15-16 meeting. It delivered no surprises then, with all policy settings left unchanged. We suspect the tone of the meeting was “steady as she goes.” New staff forecasts will be released at the September 10 meeting and even then, the bank is likely to remain on hold to see how its past stimulus impacts the economy. That said, another top up to its QE program is widely expected by year-end.
Norges Bank kept rates steady at zero, as expected. The bank kept its forward guidance unchanged from June, when it said rates would probably stay at current levels “over the next couple of years, followed by a gradual rise.” The bank noted that developments since then largely support that outlook. The bank was sanguine about rising underlying inflation, which hit a multi-year high of 3.5% y/y in July. It noted that “krone appreciation and prospects for low wage growth suggest that inflation will moderate further out.” New staff forecasts will come at the next meeting September 24. We would be surprise if it shifts it rate path again given ongoing uncertainty. Norge Bank’s June policy rate path saw rate hikes starting in 2022, earlier than the previous end-2023 guidance.
Turkey central bank is expected to keep rates steady at 8.25%. A couple of analysts look for a rate hike but we think it’s too soon for that, especially with the lira stabilizing in recent days. Rather, the bank will likely continue its backdoor tightening before eventually being forced to hike rates outright later this year. After bottoming just below 7.5% in mid-July, the weighted average cost of funding for Turkish banks has risen steadily to stand at 9.37% yesterday, the highest since late March.
Japan reported weak July convenience store sales. Sales contracted -7.4% y/y vs. 5.2% in June, breaking a two-month string of modest improvement. The data adds to a pile of indicators that show the Japanese economy remaining weak in Q3.
Philippine central bank kept rates steady at 2.25%, as expected. Governor Diokno described it as a “prudent pause” to allow previous monetary and fiscal stimulus to work their way through the economy. The bank raised inflation forecasts for 2020 to 2.6% from 2.3% previously and for 2021 to 3.0% from 2.6% previously. Note CPI rose 2.7% y/y in July, the highest since January but still in the bottom half of the 2-4% target range. While we see scope for further limited easing this year, the bank is running out of room to cut. No wonder the central bank just began QE, buying PHP800 bln of government debt last month.