What happened last week
Tuesday: Brazil mid-month August CPI 7.96% vs 8.13% expected, or how emerging markets are faring better than many mature markets in the fight vs inflation. US August core durable good orders 0.2% MoM as expected. US Housing S&P/CS HPI Composite - 20 n.s.a. 16.1% YoY vs 17.0% expected for September, and down from the 21.2% YoY peak in June. US August new home sales 685k (vs 500k expected). US Sept. CB Consumer Confidence 108 vs 104.5 expected: “19.3% of consumers expect business conditions to improve, up from 17.3%. [...] Consumer confidence improved in September for the second consecutive month supported in particular by jobs, wages, and declining gas prices. [...] Meanwhile, purchasing intentions were mixed, with intentions to buy automobiles and big-ticket appliances up, while home purchasing intentions fell.”
Wednesday: Bank of England intervenes and buys Gilts to cap yields, and yields retreat below 4% after moving above 5%. The BoE said that bond purchases "will be carried out on whatever scale is necessary". French Sep. consumer confidence at 79 vs 80 expected, an all-time low. German GfK consumer climate in Oct. -42.5 vs -39.0 expected, also a series-low. Italian Sept. business confidence 101.3 vs 102.1 expected. US 30 yr mortgage rate at 6.52% (!). US pending home sales index at 88.4, lowest level since May 2020.
Thursday: The German government says it will not raise the gas levy tax but make use of the Economic Stabilization Fund instead. This represents ~ EUR 200bn or ~ 5% of GDP, close to the magnitude of the UK’s energy cap fiscal program. Spanish Sept. CPI 9% YoY vs 10% expected. German Sept. CPI 10% YoY vs 9.4% expected. US Q2 corporate profits 6.2% vs 9.1% expected, but up from -4.9% QoQ in Q1. US initial jobless claims 193k vs 215k expected. US Q2 final GDP at -0.6% YoY. Canada Sept. annualized GDP at 4.3%. Japan Aug. retail sales 4.1% YoY vs 2.8% expected. Japan Aug. industrial production 2.7% MoM vs 0.2% expected. China Sept. official manufacturing PMI 50.1 vs 49.6 expected. China Sept. official non-manufacturing PMI 50.6. China Sept. Caixin manufacturing PMI 48.1 vs 49.5 expected.
Friday: Russia announces that it will annex four occupied regions in Ukraine and says it is open to negotiations: the EU and the US announce new sanctions against Russia, Ukraine president signs expedited NATO membership application. Indian RBI hikes 50bps to 5.9% as expected. UK final GDP estimate for Q2 4.4% vs 2.9% expected. UK nationwide Sept house price index 9.5% YoY vs 10.0% expected. German Sept. unemployment rate 5.5% as expected. Eurozone Sept. CPI 10% YoY vs 9.7% expected. Eurozone August unemployment rate 6.6% as expected. US August core PCE 4.9% YoY vs 4.7% expected (health care and transportation services leading contributors to the increase). US Sept. Chicago PMI 45.7 vs 51.8 expected: “ Employment recorded the starkest decline in September,dropping 14.4 points to 40.2 in September and re-entering contractive territory.” US Michigan consumer sentiment 58.6 vs 59.5 expected.
Sunday: Japan Q3 Tankan All Big Industry CAPEX 18.8% vs 18.6% in Q2.
Nansen’s take
No crack is visible yet in the resilient US labor market as US initial jobless claims continued to fall to below 200k, their May low. This week’s payroll report will provide important complementary data points. We note conflicting messages from US regional surveys with the Chicago PMI flagging fast deteriorating employment conditions.
Numerous Fed regional presidents spoke last week, with, there again, little worry communicated around the US real growth and the future trajectory of unemployment. Inflation remained the primary focus. A notable exception is the rather dovish speech by President Brainard, who expressed her concern around the potential shocks from tightening financing conditions: “We are attentive to financial vulnerabilities that could be exacerbated by the advent of additional adverse shocks.” “[on hiking rates] we are committed to avoiding pulling back prematurely. We also recognize that risks may become more two-sided at some point.” This concern for financial vulnerabilities outside the US (e.g. currency depreciation) has not been yet been formulated by other Fed members so we can conjecture that only a domestic shock (e.g. US credit) would lead the Fed to consider pausing QT.
Outside the US, we continue to find asset price developments more interesting than lagging macro data: strikingly, the KRW, AUD, and NZD depreciated further vs the USD, and are now past or approaching their 2020 lows. Those currencies are considered barometers of global trade and usually deliver early warnings prior to global growth recessions. We also note that aggregate commodity prices, including energy, have weakened further, here again providing a negative message around global growth developments.
In Europe, Germany and the UK have followed France in capping energy bills for their respective populations. The BoE has channeled its inner BoJ and effectively practiced financial repression by buying Gilts despite elevated inflation. The valve of relief remains currency markets for the Eurozone and Japan (e.g. domestic currencies losing trade-weighted value) unless 1) energy prices slide further (would require a resolution in Ukraine), 2) the US Fed is forced to pause.
The latest developments in the Ukraine war have generated two new interesting scenarios, aside from the base case of status quo eg continuation of the local conflict: Negotiation between Russia, Ukraine and the West and validation of the territorial annexation by Russia and cease-fire or Escalation of the conflict (as threatened by President Putin) with explicit war between Russia and NATO/the West.
These two scenarios would have very different macro implications, with the latter obviously more disruptive, likely accelerating the global recession scenario while maintaining energy prices elevated. The former would be negative energy prices, at least in the short term.
For the crypto investor, who is essentially watching the Fed, a QT pause forecast is too early given US domestic macro resilience. Early signs that global volatility and financing conditions disrupt the US will be tracked by our recession dashboard (presented in last week’s newsletter).
What to pay attention to this week
Golden week in China: consumption and travel numbers are expected to be inferior to last year’s golden week. Sept. PMIs with US ISM Manufacturing PMI expected at 52.2 (Monday) and ISM Non-Manufacturing PMI expected at 56.0 (Wednesday). An important week for US labor market data: Aug. JOLTs Job Openings (10.650m expected) on Tuesday and Sept. non-farm payrolls (250k expected) and unemployment rate (3.7% expected) on Friday. The RBA meets on Monday and is expected to hike by 50bps to 2.85%. The RBNZ meets on Tuesday with a priced rate hike of 50bps to 3.5%.
