Please see below commentary received from Brooks Macdonald yesterday evening, which presents market analysis following the European Central Bank’s latest monetary policy meeting.
This week begins with a holiday Monday in the US for Labor Day, with markets closed in the country. In reality, this is just a brief respite before the pace picks up a gear, and there’s quite a lot to keep investors focused.
The big event this week is the ECB’s latest monetary policy meeting due on Thursday, where attention will be on whether or not they decide to start to taper back their recent higher-level of asset purchases. Elsewhere, we also have central bank policy decisions from Australia (on Tuesday), and Canada (on Wednesday).
The recent US Jobs Report significantly missed expectations
In the US, investors will be trying to figure out what last week’s US jobs miss means for the Federal Reserve (Fed) and for the timing of any tapering decision. Later this week, the US Producer Price Index (PPI) is due on Friday, which sets up the inflation-focus ahead of US Consumer Price Index (CPI) due the following week. Finally, according to recent reports from Bloomberg, US President Biden might decide this week who is going to be the next Fed Chair. Powell’s current term as Chair ends in February next year, but expectations are that he is likely to get a second term, not least given reports last month that US Treasury Secretary and former Fed Chair Janet Yellen has endorsed Powell’s renomination.
Just as markets had digested Fed Chair Powell’s Jackson Hole script, Friday’s US jobs report has put a bit of a spanner in the works. A week ago, Powell had indicated that with an inflation goal already met and an employment goal in sight, the Fed might soon start to taper its $120bn a month of asset purchases. But then Friday happened, and US non-farm payroll data showed just 235,000 jobs added in August. This is a big miss, given markets had been expecting a print more than three times bigger, versus 725,000 expected1.
It was also well outside of the bottom of the forecast range (of 400,000 to 1 million). To put it in context, despite a positive revision to July, this was the lowest monthly jobs add in seven months. Behind the weakness, there was a sharp slowdown in hospitality and retail job creation. Employment in ‘retail trade’ declined over the month by 29,000 jobs, and there was also a loss of 42,000 jobs in ‘food services and drinking places’2. As the US Bureau of Labor Statistics report noted, ‘employment in leisure and hospitality is down by 1.7 million, or 10.0 percent, since February 2020.’ All in all, it’s hard not to see how this report will give some support to the view that the COVID-19 Delta variant is having an impact on both the pace of the economic recovery and the labour market recovery. In terms of how it might influence Fed-thinking, it will be interesting to see what Fed members say about the jobs report, and this week, we have a number of scheduled Fed-speaker events worth keeping an eye on.
Investors will look to see if the ECB will slow down the Pandemic Emergency Purchase Programme (PEPP)
The highlight for markets this week will be the ECB’s latest monetary policy decision due on Thursday, along with ECB President Lagarde’s press conference that follows the statement as usual. The big question for investors is whether or not the ECB will decide to slow down the recent ‘significantly higher’ rate of Pandemic Emergency Purchase Programme (PEPP) purchases into calendar Q4. In the last week or so, we’ve seen a more public airing of views from both hawkish and dovish ECB governing members. On the outlook for inflation, on the one hand we’ve seen Germany’s Bundesbank chief Weidmann saying ECB members shouldn’t disregard the risk that inflation could accelerate faster than currently anticipated. Against this, ECB chief economist Philip Lane, who recently argued that inflation surprises still did not challenge his views about the temporary nature of price pressures as wage growth, remained muted in his view. All in all, it’s difficult to come down on one side or the other ahead of Thursday.
With the miss in the US jobs report, it is perhaps inevitable that investors will worry that a resurgent COVID-19 infection picture is impacting on the pace of the US economic growth recovery. As for the monetary policy outlook, for the Fed to green-light a future taper programme, the labour market needs to show continued improvement, and Friday’s print won’t have helped that cause. At the end of the day, we have to keep in mind that it’s only one data point. Instead, it now leaves the focus for markets on the Fed’s next monetary policy meeting later this month, on 21 – 22 September. However, the odds that the Fed will press the button on a taper start-date at this September’s meeting are now a little bit longer.
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