Context
A week that promised yet another set of interesting developments did not disappoint, from legal and policy issues to economic and market developments.
President Trump confirmed that he would ask the Supreme Court to overrule the appeals court judgment against one of the legal authorizations used to impose tariffs. Meanwhile, deliberation continued on the case involving Federal Reserve Governor Lisa Cook’s case against the Administration, which names the Fed and Chair Powell as co-defendants.
While on the Fed, President Trump specified that the list of finalists to replace Chair Powell included Kevin Hassett, Kevin Warsh, and Chris Waller. Meanwhile, the Senate Committee’s consideration of Stephen Miran for the current vacancy on the central bank’s Board of Governors was relatively uneventful, increasing the probability of his joining the FOMC in time for the mid-month interest rate decision. The market’s implied probability of this being a 25 basis point cut rose to 100%, pulling up the probability of a total of three cuts by the end of the year to almost 80%.
A weak jobs report was behind this move in probabilities, adding to earlier signals from the JOLTS and ADP data releases. Monthly job creation for August was 22,000, well below the consensus forecast of 75,000. With the revisions to past data resulting in a negative payroll number, the three-month moving average is now just under 30,000.
US stock indices recorded new record highs while, in the credit markets, spreads continued to compress. Once again, these “risk-on” market moves were accompanied by yet another set of record price levels for gold, the traditional “risk-off” asset. Support for the latter’s record prices came on Sunday from Chinese data showing that the central bank has increased its gold holdings for the tenth consecutive month.
The narrative on government bond markets in advanced countries fluctuated between concerns about rising yields due to debt and deficits (mainly in Europe this week) and sudden falls in yields due to weaker-than-expected data (US).
Finally, and surprising for some on account of the pressure on oil prices, there are signs that OPEC+ is very close to reaching an agreement to boost output and to continue to do so in the months ahead.
This Week
Political developments will be of interest this week, including the economic and market implications of the weekend’s resignation of Japan’s Prime Minister and the likely resignation of his French counterpart (this coinciding with Friday’s sovereign credit assessment at Fitch). In the US, we will be keeping an eye on the news on Governor Cook’s court case.
With the Federal Reserve in its blackout period ahead of next week’s policy meeting, the main central bank focus will be on the European Central Bank. Policy deliberations there, including at this week’s Governing Council meeting, are getting even more interesting. In addition to monitoring inflation, which, although notably lower than in the UK and US, is showing signs of potentially increasing despite weak growth, central bankers now need to consider the higher possibility of unsettling bond market volatility.
While on central banks, look for the outcome of the policy meeting in Turkey, where recent economic developments support another rate cut.
On the data front, the main interest will be in US CPI inflation, especially after last week’s weak job report and ahead of next week’s Federal Reserve policy meeting. The consensus forecast anticipates somewhat greater tariff pass-through, maintaining the monthly core rate at 0.3%. PPI inflation data will be released later in the week.
While on US data, there will be more than usual interest in the periodic BLS payroll revisions. This one covers the data to last March. Other interesting US data releases this week include jobless claims and consumer sentiment.
Elsewhere …
· In Europe, look for country-specific industrial production data and the UK’s GDP for July.
· Russia will issue its inflation data.
· Chinese trade data will provide some insights into the country’s initial navigation of US tariffs. There will also be a lot of interest in this week’s inflation data, including the extent to which China is slipping into deflation.
· In addition to watching the reaction to the Prime Minister’s resignation, the Japan watch includes the latest GDP data.
· Finally, in Latin America, Argentina, Brazil, and Mexico all release inflation data.
