Please see the below article from Brooks Macdonald, providing a detailed summary of the week’s economic and market news. Received late yesterday evening – 08/08/2022
The market lost confidence that the Federal Reserve (Fed) was set to pivot its focus from inflation to recessionary risks
The market’s confidence in the Fed’s ‘pivot’ from an inflationary focus to a recessionary focus was questioned last week, leading to bond market volatility. The market had already begun to conclude that the Fed had not in fact pivoted after a series of more hawkish Fed speakers, however it was the US employment report on Friday that firmed this view. As a result bond yields rose substantially, with the US 2-year yield rising by 34bps and the 10-year yield by 18bps. This left the yield curve even more inverted as investors took a lack of Fed pivot as making a US recession even more likely.
A strong US employment report suggests that the US labour market remains hot
The US employment report saw a significant beat in the number of new jobs created in July, with 528,000 jobs created versus 260,000 expected. Not only did this suggest a far hotter labour market than expected, but the June reading was also revised up higher. US average hourly earnings rose more than the market was expecting, hitting 5.2% year-on-year, suggesting that the inflationary pressures from wage rises are likely to continue to play a part in the inflation readings.
This week’s focus will be on the US Consumer Price Inflation (CPI) report with headline CPI expected to fall and core CPI rise
This week’s main planned macroeconomic event will be US CPI on Wednesday which is expected to see headline CPI fall from 9.1% to 8.7% but for core CPI to move from 5.9% to 6.1% year-on-year. What the market will make of falling headline CPI but rising core CPI may have as much to do with sentiment as economic reality. Core CPI is far more important to central bankers however headline CPI is arguably more politically charged. If there was a political element to the Fed’s hawkishness, driven by the Biden administration keen to get the cost-of-living squeeze under control, then a headline fall would be an important win. The release of US producer price inflation will also garner attention with the cost of healthcare expected to become an increasingly important sub-component.
Markets arguably read far too much into Fed Chair Powell’s comments at the post committee meeting press conference. Ultimately, a fall in the CPI readings are the only sustainable exit ramp for the current hawkish policy. Should a recession occur this may come through a hit to demand, in the interim markets will be hoping for signs of softening pressures this week.
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Alex Kitteringham
9th August 2022