With the Pacific G10 Macro Rates Team
With many of the G10 central bankers speaking last week, we focus on the main topic – average inflation targeting (AIT). The announcement of a move to AIT by Chair Powell of the Federal Reserve at the Jackson Hole symposium (virtual, of course), was the result of an 18-month study initially scheduled for release in Q1 2020.
It has led to two shifts of stance within the Fed. Firstly, realised inflation is now to be viewed symmetrically, and shortfalls will be compensated by surpluses. Secondly, the unemployment target becomes unidirectional, with only high levels of unemployment being a consideration. We believe this reduces the importance on the unemployment mandate and shifts the Fed more towards a single mandate, like the BoE and ECB.
Despite AIT being flagged for release earlier in the year and being the mostly likely outcome of the Federal Reserve’s review, the markets still reacted strongly, continuing moves higher in levels of Inflation swaps, interest rate curve steepening, and equites.
Prime minster Abe resigned due to health reasons. However, a significant departure from Abe-nomics is unlikely, when all the replacement candidates hold similar economic views.
US: Inflation data for July continued to show an uptrend, from low levels. Jul PCE Core Deflator MoM 0.3% (0.5% exp., 0.2% prev.) and Jul PCE Core Deflator YoY 1.3% (1.2% exp., 0.9% prev.) Also, inflation expectations have stabilised at reasonable levels with Aug U. of Mich. 1 Yr Inflation 3.1% (3.0% prev.) and Aug U. of Mich. 5-10 Yr Inflation 2.7% (2.7% prev.) which should give the Federal Reserve confidence that its current policy is working.. New-home sales for July were strong, but measures of expectations were weaker in the Aug Conf. Board Consumer Confidence printing 84.8 (93 exp., 92.6 prev.) and slightly stronger in Aug U. of Mich. Sentiment 74.1 (72.8 exp., 72.8 prev.). Activity data showed a bounce from July to August and July inventory numbers showed a small build.
Canada: 2Q Quarterly GDP declined by an Annualized -38.7% (-39.6% exp., -8.2% prev.) a similar magnitude to changes in GDP in the other G10 economies.
Eurozone: French Aug P CPI EU Harmonized MoM was less negative at -0.1% (-0.3% exp., 0.4% prev.). French and German confidence printed at or slightly better than expectations with Italian measures slightly lower.
Sweden: . 2Q GDP QoQ declined -8.3% (-8.6% exp., 0.1% prev.) and Jul Retail Sales MoM bounced +1.9% (1.0% exp., 1.0% prev.) and confidence measures were slightly stronger.
Norway: 2Q GDP QoQ declined to -6.3% (-6.3% exp., -2.1% prev.) Unemployment data for Jul and Aug showed a spike flowed by a rebound and Jul core Retail Sales were 0.6% (0.6% exp., 5.7% prev.).
Data was limited to the Aug Tokyo core CPI YoY printing at weaker at -0.1% (0.4% exp., 0.6% prev.).
Some noise surrounding where the chancellor would be able to increase the tax take on his budget and the rolling-off of the “eat out to help out scheme”.
Australia: No tier 1 data.
New Zealand: Q2 core Retail Sales declined -14.6% (-15.0% exp., -0.7% prev.) Aug Consumer Confidence MoM -3.9% (-0.2% prev.) reflected recent quarantine issues.
For further information on the Pacific G10 Macro Rates team, their experience and strategy please see below
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