As we hit the dog days of summer, it is all about US inflation this week after a strong US payroll report on Friday according to DB's Jim Reid, who notes that it has been quite telling that the treasury market has shrugged its shoulders and then rallied at two of the largest inflation beats in modern history over the last couple of months but did see a +7.3bp sell-off after Friday’s stronger than expected employment report.
This highlights that - as we noted two weeks ago after the FOMC that Powell defines "Substantial Further Progress" As Just Jobs, Not Inflation - rightly or wrongly employment gains are going to be the key determinant, and not inflation, for the US in terms of taper and beyond. And yet, what Reid finds confusing about this fixation with the employment report is that practically every other indicator of US employment has been very strong in recent months and therefore you can make a fair assumption that employment prospects are pretty decent at the moment outside of supply constraints. In other words, "waiting to see evidence of that might mean policy makers and bond investors are slow to react. But maybe that’s the whole point of FAIT, namely to wait for proof and not just forecasts of gains. To be fair I could have said that at 1.50% on 10yr yields and it’s still possible that delta will destroy all the good employment momentum even if I think that is unlikely. Talking of strong US employment, today’s sees the JOLTS job openings data which has been strong in recent months."
In terms of expectations, economists are looking for a +0.5% m/m increase to headline CPI on Wednesday and a tick down to 5.3% y/y, after last month came in at +0.9% m/m, which took the y/y reading to +5.4%. They expect a +0.4% m/m and +4.3% y/y core print after last month was +0.9% m/m and +4.5% y/y.
The areas that have been strong, namely new cars, used cars, and lodging away, will likely continue to be for this reading but their influence will likely fade soon. As an example Manheim used car prices have fallen by roughly 3% since the peak in May.
However this tends to lead the used car CPI contribution by two to three months so we will likely get a decent dip from this in this reading or more likely the next. However the housing strength means primary- and owners' equivalent rents (OER) should see decent gains again and this could continue to be an issue for CPI over the next 12-18 months. So in simple terms it will be a battle between cars and housing over the coming months.
Other US inflation landmarks this week will be Thursday's PPI and Friday's University of Michigan sentiment data with the inflation expectations series. In addition Cleveland Fed President Mester (non-voter/hawk) will be discussing risks to the inflation outlook in the US and Europe tomorrow at a virtual panel hosted by her bank.
On the Fed speaker front, given that the Fed’s Clarida started the US 10yr yield climb from 1.1274% on Wednesday last week to the close at 1.2969% on Friday, we will likely pay a bit more attention to Fed speakers. We have Bostic (voter / hawk) and Barkin (voter / hawk) today who will be the first to react to payrolls and likely lay out their more hawkish taper thoughts. Mester (see above), George and Logan follow before Wednesday is out.
In Congress we could see the bi-partisan infrastructure bill pass this week (although don’t rule out continued political roadblocks) and further cat and mouse progress towards the next stage - a $3.5 trillion reconciliation bill. The debt ceiling lurks in the background though to complicate matters.
Other major data releases this week include the UK’s preliminary reading of 2Q GDP (Thursday), which is expected to show the economy grew at +4.8% last quarter, following a -1.6% contraction in Q1. This reflects how restrictions were lifted during much of the spring and early summer. Outside of the US CPI reading, market participants will also focus on final July CPI data from Germany, Italy (both Wednesday) and France (Friday). Japan sees PPI on Thursday.
Finally, a strong earnings season is now starting to wind down but it’s still reasonably busy, with the highlights including BioNTech, Barrick Gold, Trade Desk and Tyson Foods today before Softbank, Coinbase, Sysco, Foxconn, Transdigm Group, and Bridgestone tomorrow. Then on Wednesday we’ll hear from NIO, Prudential, EBAY, SMC Corp, Vestas, and Commonwealth Bank of Australia. Thursday sees reports from Walt Disney, China Mobile, Deutsche Telekom, AirBnB, Doordash, and Baidu.
Day by day calendar ahead, courtesy of Deutsche Bank
Monday August 9
- Data: Euro Area August Sentix investor confidence, Germany June trade balance, US June JOLTS job openings, Bank of France sentiment index, China CPI and PPI
- Central Banks: Fed’s Bostic and Barkin speak
- Earnings: BioNTech, Barrick Gold, Trade Desk, Tyson Foods, Dish Network
- Other: The UN’s Intergovernmental Panel on Climate Change releases a special report
Tuesday August 10
- Data: Japan June BoP current account balance and trade balance, Euro Area and Germany August ZEW Survey expectations, US NFIB Small Business Optimism index, preliminary Q2 Nonfarm productivity
- Central Banks: Fed’s Mester speaks, Central Bank of Brazil’s meeting minutes
- Earnings: Softbank, Coinbase, Sysco, Foxconn, Transdigm Group, Bridgestone
Wednesday August 11
- Data: Japan July money stock M2 and M3 and preliminary July machine tool orders, Italy and Germany final July CPI, US July CPI, July monthly budget statement, and weekly MBA mortgage applications
- Central Banks: Fed’s Bostic, Logan, and George speak
- Earnings: NIO, Prudential, EBAY, SMC Corp, Vestas, Commonwealth Bank of Australia
Thursday August 12
- Data: Japan July PPI, UK preliminary Q2 GDP, June trade balance, and June industrial and manufacturing production, Euro Area June industrial production, US July PPI, weekly initial jobless claims and continuing claims, Italy trade balance
- Central Banks: Bank of Mexico monetary policy decision
- Earnings: Walt Disney, China Mobile, Deutsche Telekom, AirBnB, Doordash, Baidu
- Other: OPEC monthly oil market report published
Friday August 13
- Data: France Q2 unemployment rate and final July CPI, Euro Area June trade balance, US July import price index and preliminary August University of Michigan sentiment survey
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Finally, looking at just the US, the key economic data releases this week are the CPI report on Wednesday, the PPI report on Thursday, and the UMich consumer sentiment report on Friday. There are several speaking engagements from Fed officials this week. Here are some more details from Goldman:
Monday, August 9
- 10:00 AM JOLTS Job Openings, June (consensus 9,270k, last 9,209k)
- 10:00 AM Atlanta Fed President Bostic (FOMC voter) speaks: Atlanta Fed President Raphael Bostic will discuss building an inclusive economy during a virtual event hosted by the Greater Fort Lauderdale Alliance Foundation’s Prosperity Partnership. Media Q&A is expected.
- 12:00 PM Richmond Fed President Barkin (FOMC voter) speaks: Richmond Fed President Tom Barkin will speak to the Roanoke Regional Chamber on the economic outlook. Audience Q&A is expected.
Tuesday, August 10
- 06:00 AM NFIB small business optimism, July (consensus 102.0, last 102.5)
- 08:30 AM Nonfarm productivity, Q2 preliminary (GS +3.0%, consensus +3.2%, last +5.4%): Unit labor costs, Q2 preliminary (GS +0.8%, consensus +0.9%, last +1.7%): We estimate nonfarm productivity growth of 3.0% in Q2 (qoq saar), reflecting a larger increase in business output than in hours worked. We expect that Q2 unit labor costs—compensation per hour divided by output per hour—increased by 0.8%.
- 10:00 AM Cleveland Fed President Mester (FOMC non-voter) speaks: Cleveland Fed President Loretta Mester will make brief opening remarks on a virtual panel discussion of inflation risks in the U.S. vs Europe hosted by the Cleveland Fed.
Wednesday, August 11
- 08:30 AM CPI (mom), July (GS +0.60%, consensus +0.5%, last +0.9%); Core CPI (mom), July (GS +0.47%, consensus +0.4%, last +0.9%); CPI (yoy), July (GS +5.48%, consensus +5.3%, last +5.4%); Core CPI (yoy), July (GS +4.40%, consensus +4.3%, last +4.5%): We estimate a 0.47% increase in July core CPI (mom sa), which would lower the year-on-year rate by one tenth to 4.4%. Our monthly core inflation forecast reflects a slower pace of gains in used car prices reflecting the tail-end of stimulus and microchip effects. However, we believe chip and inventory shortage produced another sizeable sequential increase in new car prices. We also expect strength in airfares due to the interaction of reopening and the summer tourism season. Given the further pickup in our shelter tracker and continued strength in the housing market, we expect another pickup in the monthly pace of shelter categories: we estimate rent +0.26% and OER +0.34%. The sharp acceleration in low-end wage growth is also likely to boost restaurant prices. On the negative side, we note residual seasonality in apparel, hotels, and car insurance that could offset continued upward pressure from reopening in these categories. We estimate a 0.60% increase in headline CPI (mom sa), reflecting higher restaurant, grocery, and energy prices.
- 10:30 AM Atlanta Fed President Bostic (FOMC voter) speaks: Atlanta Fed President Raphael Bostic will discuss the Federal Reserve’s role in making “an economy that works for everyone” at a virtual event hosted by the Chautauqua Institution. Audience Q&A is expected.
- 12:00 PM Kansas City Fed President George (FOMC non-voter) speaks: Kansas City Fed President Esther George will deliver a keynote address at the virtual 18th Annual NABE Economic Measurement Seminar.
Thursday, August 12
- 08:30 AM PPI final demand, July (GS +0.5%, consensus +0.6%, last +1.0%); PPI ex-food and energy, July (GS +0.4%, consensus +0.5%, last +1.0%); PPI ex-food, energy, and trade, July (GS +0.5%, consensus +0.5%, last +0.5%): We estimate that headline PPI increased by 0.5% in July. We also expect a 0.5% increase in PPI ex-food, energy, and trade and a 0.4% increase in PPI ex-food and energy, reflecting a boost from continued supply chain bottlenecks and reopening pressures.
- 08:30 AM Initial jobless claims, week ended August 7 (GS 360k, consensus 375k, last 385k); Continuing jobless claims, week ended July 31 (consensus 2,880k, last 2,930k): We estimate initial jobless claims declined to 360k in the week ended August 7.
Friday, August 13
- 08:30 AM Import price index, July (consensus +0.6%, last +1.0%)
- 10:00 AM University of Michigan consumer sentiment, August preliminary (GS 82.5, consensus 81.2, last 81.2): We expect the University of Michigan consumer sentiment index increased by 1.3pt to 82.5 in the preliminary August reading, reflecting improvements in other confidence measures.
Source: DB, GS, BofA