Jackson Hole the main focus this week

Chris Scicluna

Jackson Hole the focus this week with high rates for long possibly a common message
All eyes this week will be on the Kansas City Fed’s Jackson Hole Economic Symposium (August 24-26), with both Fed Chair Powell and ECB President Lagarde set to speak publicly on Friday. With rates likely close to (or already at) their peak for this cycle, and “Structural Shifts in the Global Economy” the theme of the conference, Powell and Lagarde might be most inclined to give their thoughts about the medium-term monetary policy outlook, with “High for long” perhaps a common message. The stickiness of services inflation amid still tight labour markets might also attract attention.

Flash August PMIs likely to underscore risks of euro area contraction in Q3 while services cost pressures likely to be easing gradually further
The coming week’s economic data calendar is relatively quiet, with arguably the most interesting release – the preliminary European and Japanese August PMIs – to be published on Wednesday. The euro area PMIs have weakened markedly in recent months, implying a notable deterioration in economic conditions at the start of Q3. In particular, the euro area composite PMI fell for a third consecutive month in July and by 1.3pt to an eight-month low 48.6. This left the index more than 3½pts below the Q2 average and firmly in contractionary territory for the first time since Q4. At the sectoral level, the July euro area PMIs also suggested a significant loss of momentum and slight moderation of cost pressures in services, as well as a deep contraction and falling output prices in manufacturing.

The surveys for the UK and Japan were also softer in July, suggesting contraction in manufacturing and softening in services. But the respective composite PMIs were consistent with stagnation (rather than recession) in the UK and ongoing expansion (albeit slowing somewhat) in Japan.

US new home sales likely rose further in July while existing home sales remained subdued; durable goods orders likely fell due to sharp drop in aircraft component
In the US, the data flow includes existing homes (tomorrow), new home sales (Wednesday) and durable goods orders (Thursday). In terms of the housing figures, the recent pickup has been concentrated in the new home market with sales of existing homes slowed by an exceedingly tight inventory situation as homeowners choose to remain at the current residence rather than trade up and take on new mortgage debt at sharply higher interest rates. Our colleagues at Daiwa America expect the recent trend to continue in July, with existing home sales down 0.2%M/M but new home sales up 1.1%M/M, buoyed by purchases by individuals transitioning from the rental market. Meanwhile, a drop in new orders reported by Boeing after a surge in June suggest a sharp decline in headline durable goods orders in July while the impact of restrictive monetary policy on the factory sector are likely to keep bookings excluding transportation broadly flat after a couple of months of modest gains.

Tokyo inflation likely dropped to eleven-month low on food & energy prices
Elsewhere, after three months unchanged, the headline Tokyo CPI rate is expected to drop 0.2ppt in August to 3.0%Y/Y, which would be an eleven-month low. In part, that will reflect lower fresh food inflation, excluding which the respective core measure should fall a smaller 0.1ppt to 2.9%Y/Y, which would also be the lowest since last September. And with government support measures still lowering utilities prices until the end of next month, the “core core” measure excluding fresh food and energy is expected to remain unchanged at July’s four-decade high of 4.0%Y/Y.

China cuts rate less than expected
While last week the PBOC cut its 1Y medium-term loan facility rate by a larger-than-expected 15bps to 2.50%, this morning China’s banks lowered their 1Y loan prime rate (LPR) – the reference rate for short-term corporate loans – by just 10 bps to 3.45%. And they unexpectedly quoted the five-year LPR at 4.20%, thus keeping the benchmark for mortgage rates unchanged. The surprise reticence of banks to pass on in full the PBOC rate cut further highlights the lack of clarity regarding the authorities’ strategies for supporting economic recovery and easing the pain of the (necessary) substantive ongoing adjustments in the real estate sector. Certainly, there will be difficult trade-offs to be negotiated between boosting activity, reducing imbalances and preserving financial stability.

German producer prices fall the most since the GFC highlighting marked disinflation trend in the factory sector
As expected, German industrial producer prices fell for the ninth month out of the past ten in July. But the drop of 1.1%M/M was much bigger than expected. And so, the annual rate of German PPI inflation plunged 6.1ppt to -6.0%Y/Y, marking the sharpest year-on-year decline in prices since the Global Financial Crisis in 2009. Of course, the base effect associated with the surge in natural gas prices last summer was key. Given their subsequent decline, the energy PPI fell a whopping 19.3%Y/Y in July with electricity prices down 30.0%Y/Y. Excluding energy, producer prices fell 0.4%M/M, with the respective annual rate slowing to 2.0%Y/Y. With supply chains in better shape and input cost pressures having eased, intermediate goods prices fell 1.0%M/M to be down 3.4%Y/Y. In contrast, producer prices of capital goods were up 0.3%M/M and 5.5%Y/Y. The durable consumer goods PPI was unchanged on the month but up 5.8%Y/Y. And producer prices of non-durable consumer goods were also unchanged on the month but up 8.1%Y/Y, buoyed by recent increases in food prices.

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