September 20, 2022Money Education Financial literacy Economy Good reads Commentary In the news News Trending Weekly update Weekly commentary
What's Happening Today - September 20
All eyes are on the Fed this week, in anticipation of another outsized rate hike down in the States. Personally, I’m more focused on the Canadian CPI (Consumer Price Index) numbers released this morning. The consensus expectation forecasted headline CPI to drop by -0.1% month-over-month and the year-over-year increase to be +7.3% (vs. 7.6% in the prior month). In a pleasant surprise, we saw August CPI running at an annual rate of 7.0%, much better than expectations. In addition, all three measures of core inflation eased slightly, but are still a long way off from the Bank of Canada’s 2% target. Still, it’s going in the right direction.
In terms of the Fed, we continue to expect that the bank will look to hike by 75bps. The latest missive from Wall Street Journal Fed watcher Timiraos did not provide any indication of the Fed looking to up the pace of policy tightening. However, we would note that the key Fed watcher detailed that Powell used his Jackson Hole policy speech to adjust the policy narrative away from the soft landing scenario which had previously characterized Fed communications. We would reiterate our presumption of looking for 75bps and an upward adjustment to the Dot plot with the end year 2023 revised up to 4.4%, undermining the notion of an early Fed pivot. Ahead of the Fed today’s US data calendar witnesses the release of housing starts and permits. With the Fed now on a more aggressive rate hiking path than previously thought, there will be more pain felt in the housing market in the next few quarters as mortgage rates rise further, and remain elevated in 2023. As far as the August data is concerned the focus should be on permits, this comes as the market looks for a near 5% monthly decline in permits, such a retreat would mark the second biggest correction in a little over a year.
Across the pond in the Eurozone, German pipeline prices soar: European Central Bank doves such as de Cos continue to push for a gradualist approach to policy tightening. However, that assumption remains under threat amidst elevated inflationary pressures, the latest example of which comes via August German PPI registering the strongest gain on record. A 20.4 % increase in monthly energy prices resulted in the aggregate monthly measure advancing by 7.9%; the outturn was more than three times what was expected. Beyond the record jump in energy prices input prices, capital, and consumer goods all witnessed strong gains across the month. However, energy price dynamics remain key.
In the United Kingdom we head towards Thursday’s delayed Bank of England decision with the market still largely pricing in a 75bps hike. We continue to expect that BoE gradualism will prevail, albeit we expect the decision to be a close call with potentially both Mann and Haskel voting for an immediate 75bps hike. In the wake of the more aggressive policy response from the Riksbank (the Swedish central bank just hiked 100 bps) expect the pressure on the BoE to act more forcefully to build. One important distinction between the monetary policy decisions comes via the fact that the Swedish central bank adjusted policy on the back of an upgraded CPI profile. As the UK emerges from 10 days of official mourning post the death of Queen Elizabeth II we can expect the next few sessions to witness a blizzard of policy announcements from the new Liz Truss led government. The headline event will be the fiscal event by the Chancellor due on Friday. The announcement will provide more details on the UK energy support package while also announcing a rolling back in the payrolls tax increase from April, allied to the cancelation of a planned corporation tax hike. While the tax measures will provide a fiscal boost, we remain mindful of the fact that consumers are already reining in demand, as evidenced by the recent spending data and the slide in consumer confidence. As a consequence we would not expect the fiscal stimulus to materially inflate demand-pull inflation.
Asian markets closed edged higher led by China and Hong Kong while Japan advanced in late afternoon trading and other regional indexes finished with solid gains. Core inflation in Japan increased 2.8% from a year ago, the fastest rate of increase since late 2014. China’s loan prime rate was left unchanged, in line with forecasts.
Oil prices steadied as OPEC and its allies keep producing less than their quotas.
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