The Week Ahead - Back to School

We believe that the Fed should be lowering interest rates. We feel quite confident that if you look at the inflation numbers, if you look at the CPI numbers, that it's proper and responsible for the Federal Reserve to lower interest rates. Hello and welcome to the week ahead on the Mura Podcast. I'm Dominic Bunning, head of G10 FX Strategy in London. And today is Friday the 4th of September. Well, you come to us in a highly off-dune moment. We've just had, as we record this, the latest non-farm payrolls data out of the US, which was stronger than expected on a range of different measures. And we've also had quite a volatile week in the currency markets with the dollar yen falling sharply, although it doesn't at this stage seem like there was a further intervention. In aftermath of the jobs numbers, we saw President Donald Trump tweet that this should mean the US has much lower interest rates, something echoed in the comments you heard earlier, at the top of the podcast by Vice President J.D. Vance. So we'll be talking all things US interest rates and US data with Jeremy Schwartz, our senior US economist in just a few moments, following the labor market data and ahead of next week's crucial CPI report. We do still think, for the time being, that the Fed will remain unchanged, but market pricing is just leaning towards a rate hike in September, so it could be quite a volatile few weeks ahead. Elsewhere, we also have the ECB meeting to preview, which we're doing with Josie Anderson, our European economist. And in Asia, we'll be looking at inflation numbers, trade data, and also taking a bit of a deep dive into into Indonesia with C&O, one of our Asia-Extra-Pan economists. So once again, it's a bum tradition of the podcast. Lots to talk about. We hope you stick with us. Let's get stuck in. [Music] Well, we're going to start this week in the US. We've just had the labor market data report for August, just a few hours ago as you record this. And we've got Jeremy Schwartz joining us, our senior US economist. Jeremy, thanks a lot for coming on as always. So the labor market report, you know, from the headlines, look pretty positive from what I could see, but you're the man who knows all the detail. What did you make of it? Yeah, well, I think the details really back up the headline reading in this one. So you got a very strong headline NFP rebound, but also positive revisions to prior months, turning that July initial negative reading back into positive territory. And, you know, looking through the sector details, there's a lot to like as well. So the pickup was driven by some of the industries that had underperformed in July. So some meaner version there. But looking past that, you also had pretty good breadth across sectors. Those indicators seem to be picking up. And cyclical sectors like construction and manufacturing have actually started punching up their weight a little bit. So potentially some early science that's strong investment demand is starting to filter into the labor markets. You know, turning to the household survey, you had a sideways unemployment rate in rounded terms that actually ticked up a little bit in unrounded terms up to 4.14. But again, the details look quite positive. So you six under-employments declined to its lowest in over a year. So fewer part-time workers who wanted to work full-time. He also had a rebound in labor force participation after a steep drop in the prior months. And then some of the details on how many workers are finding jobs actually started to look better as well. So overall, this points to a very healthy labor market. Household income growth is quite solid. That should support consumer spending and finances. And while there's not really a risk of overheating, it's certainly an economy that could tolerate some tightening. I wish we think is going to leave the Fed very focused on realized inflation when they come up to the Euro September meetings. Yeah, I mean, you've done the segue for me perfectly there, Jeremy. It does seem that the Fed themselves aren't super focused on the employment books. They're not necessarily seeing the wage pressures push inflation up. But inflation is being driven by all of other things. And we've got another print to come on Friday, a week from now. But what are you guys thinking about that inflation print? Yeah, so we're expecting pretty much a sideways core CPI inflation reading from last month, so 0.224. When we kind of go through all the details, our core PCE tracking estimate is around 0.205. And most Fed officials we've seen have been highlighting that kind of monthly core PCE momentum as the main input into their near-term decisions. We think that a number in line with our expectation is kind of good enough that most centrist officials will see it as signs of continuing different inflation. So while you're not at 2% in annualized terms, that would require you fall all the way to kind of 16 or 17 basis points, we think things like the three-month, six-month average are going to continue to trend in the right direction. And officials who are optimistic about disinflation in the first place are likely to kind of see that as sufficient sign of progress. Yeah, I mean, I think that's a really key point because it does seem in the last few weeks. We've had a number of contrasting viewpoints from some of the FOMC. I mean, we've had comments from obviously Jackson Hole from Chair Walsh. We then had comments from New York Fed President Williams. We've had Governor Waller speaking. It does seem like Walsh kind of gave quite a hawkish message and then some of these other governors have given slightly more dovish messages. Is there any consensus on the Fed? You know, how do we really put all this together? Yeah, so from a high level, it certainly seems like Walsh is getting his good family fight, which he asked for. You know, when we looked at the Jackson Hole speech, you know, we thought it was hawkish, but certainly leaving some room to remain dovish if the inflation data continued to cool. You know, I think the subsequent Fed speak we saw this week from Williams and Waller went further than that and kind of switched the hold to be more the default position. So, you know, Waller in particular took a very optimistic read of recent inflation data. You know, he focused on the three-month average run rate, which has been improving. He also wanted to exclude non-market services. So, you know, portfolio management financial service prices have been driving a lot of inflation pressure recently. He indicated some willingness to kind of exclude those from his view on underlying inflation. So, you know, those two moves alone, kind of, you can talk yourself into the underlying inflation trend, getting down into the neighborhood of the low twos. And it seemed like, you know, while Worsh was potentially talking tough, maybe trying to atone for the July press conference, which the market didn't take very well and kind of make a bid for more inflation credibility. We think the majority of officials on the FMC and particularly majority of voters are probably comfortable remaining on hold if the inflation data is good enough. So, you know, we didn't change our call after Jackson Hole. We continued to think that the median voter on the FMC was comfortable staying on hold. If you realize something like our inflation forecast, yeah, I think getting that confirmation from Williams and Waller is helpful. But again, I think just shows that Worsh is still finding his sea legs a little bit in the new role. Yeah, I mean, a lot of scope for volatility and just looking here, you know, still 15 basis points priced in sort of thing for September. So, you know, if you guys end up being right with that no change view, that there could be quite a bit of movement in the front end of the curve for sure. So, we look forward to that from the markets perspective. Jeremy, great to have you on and thank you as always for your clarity and views. Well, we're going to move over to Europe now, where we've got JC Anderson, one of our European economists joining us. JC, thanks a lot for coming on as always. We just spoke about the Fed and the sort of challenges in terms of looking at the outlook there. The ECB seems a bit more certain rate hike on the 10th of September looks like it's a done deal. How are you guys thinking about that? Yeah, thanks, Simon. Thanks for having me on. So, as you said, yeah, we're expecting a 25 basis point increase from the ECB next Thursday. That would lift the depot rate to 2.5%, which is around the top edge of the neutral rate. So neither kind of stimulating or plating too much downwards pressure on economic activity in the euro area, but it's lifting it to the top of the ECB's estimate of that range. And of course, it's all due to the Iran war rising price pressures and also the euro's air is economic resilience. And that is what contributes to us thinking this hike is a done deal. And indeed, it's fully priced in by markets. So it's very much consensus for you. The ECB will provide new forecasts at this meeting and it's been producing a range of forecast scenarios. The last couple of forecast reports because of the Iran war and we expect this hike to be robust under all of its scenarios, including the milder one as was the case at the last hike in June. But we do expect the new forecasts are likely to be slightly hawkish as they were last time as well, suggesting a resilient economy, despite a hike. And also potentially some core inflation stickiness further out in the forecast period. But despite what we expect for the forecast in terms of hawkishness, we think the regard will likely be non-committal in terms of her tone. potentially slightly dovish relative to market pricing as was the case in Jean. Yeah, thanks Joe. So I think it's an interesting sort of balance for some of these policy makers to strike where they kind of have to hike to some degree, but they don't want the market to get carried away. I do think one interesting thing with the ECB could be that the change in personnel coming through. We've heard some news reports. I think about Israel Schnabel stepping down from the from the governing council. Do you have any more sort of insights or thoughts on how personnel changes might impact the ECB going forward? Yeah, thanks. So next year's a big year for the executive board because three seats are potentially coming up for grabs. We already know Christine Lagarde is due to leave next year. There have been discussions about whether or not she could leave early. She did commit a recent meeting to seeing out this year, but certainly next year her seat Schnabel and also Lane's seat will all come up for grabs. And so decision makers will likely be thinking about all of these seats together. Is Bush Schnabel leaving slightly early? Is potentially not too much of a shock? It's likely that she could never have been president because of laws around the ECB and the fact that she's already had a stint on the executive board and not being able to have another one. So she was already likely looking for a new job. And if she's found one, she likes her leaving slightly early, isn't too much of a shock. But then of course, the question is who is going to be president? Will Schnabel leaving potentially make nargled the current head of the Bundesbank more likely to be president? We think not partly because of who's already been appointed as vice president recently is slightly hawkish. But yeah, there's lots to watch in terms of who potentially could fill these three seats. One important point to make is that in terms of legar leading and also Schnabel leading that the only two female members of the entire governing council at the moment. And so a female candidate is likely for at least one of those seats. Okay, so I mean to watch certainly going forward quite interesting in terms of how those things develop in 2027 for sure. But looking a little bit more closer into the near future, I guess a couple of other things in Europe to focus on one is inflation data out of Scandinavia, Norway Sweden. There's been a bit of sort of divergence recently. What are you thinking for this week? Yeah, so kind of in the first half of the year, we had Sweden not only looking soft in terms of its inflation, partly due to tax changes, but consistently surprising to the downside even after economists had incorporated those tax changes in Sweden. But then for the last couple of prints, it's surprised more to the outside still with low inflation, but a bit faster than expected. Well, in Norway has been the opposite story. It had had very sticky inflation and it's still looking sticky, but for the last couple of prints has surprised to the downside and that kind of ruled out what people previously thought might be a hike at the last meeting. In the end, they left rates unchanged, which in light of the change in inflation story was unsurprising at the time. So we've got more inflation data out from these two countries next week. We do expect, again, if we start in in Norway, inflation to be slightly lower than Norway's bank's June forecast. Again, that's partly due to the last couple of months of data we now have, but still we expect core inflation to be lower, as I said, than Norway's bank's forecast, but not rule out the possibility of another hike this year, whereas in Sweden, we do expect a slight pick-up in inflation and inflation to remain slightly above the Riksbank's own forecast, but we're not expecting at present a hike in Sweden this year. Great, thanks, Chelsea. And then finally, I think to cover off Jeremy some elections to think about anything particularly interesting there. Yeah, so on Sunday, this week, as we're recording this, there is a key state election in Saxony and Holt. And polling for this state and East Germany does look like the far-right AFD party could win an outright majority. It has over 40% support in polls. And due to election calculus there, with parties that see fewer than 5% of the votes not being included in government, then it could win an outright majority. And this would be the first state. It would win, indeed, the first time it would enter government. And of course, it can't take too much power at the national level, just governing one state. It could send a key signal determining a fate of Chancellor Mertz, who has become increasingly less popular in polls. And this would be a big blow to his chancellorship, should AFD win a majority. Okay, cool. So, any sign to watch there as well. So, lots of short-term things, lots of long-term things. Europe, definitely an interesting place to be at the moment. Thanks very much, Josie. Thanks, Tom. We're going to finish this week in Asia, where I'm joined by one of our economists for Asia-Extraban, CINGTO. It's CING's first time on the podcast, so thank you for joining us. It's great to have you here. Look, we're going to talk inflation first. It's a big focus, I guess, not just in the region, but globally, because of what happens to energy prices and various other things. This week we've got data out of China, Taiwan, and Thailand for inflation. What are you guys expecting from those data prints? Thanks, Tom, for having me. So, in China, we expect headline inflation to pick up, reflecting not just higher energy prices, but also higher prices of food and a few other commodities. That said, underlying inflation should remain subdued, which is consistent with our view of weak domestic demand, and that calls for more fiscal spending and a accommodative monetary policy in China. In Taiwan, inflation should stay elevated, with fuel and food prices adding pressure for low-wing recent typhoons, which have led to a reduction in agricultural supply. Co-inflation should also remain elevated, reflecting sticky services' prices, particularly for dining out food. And if we're right, this will be the fourth month in a row that both headline and call inflation exceeds the CBC's 2% target. And that supports our view that the central bank will deliver rate hikes in December this year and March next year. In Thailand, we expect headline inflation to rise pretty sharply, again due to supply side factors. On the contrary, we think call inflation will ease slightly, given domestic demand is still pretty soft. These gels with our view that the bill T is likely to remain firmly on hold. So overall, the key message here is that while inflation is picking up, it is still largely driven by supply side pressures, rather than broad-based domestic demand. Fantastic, really clear, actually, in the, yeah, I think that's quite interesting to see how much of a supply dynamic things are pushing things rather than demand. I think that's really super interesting. We also get some trade data I think out of China and Taiwan, and we've had some pretty big surpluses, you know, the AI trade, et cetera, all helping. And what are we expecting from the trade numbers this week? Yeah, so we think trade momentum should remain pretty strong, especially in the tech space. So for China, we expect export growth to remain in double digits, while import growth should pick up due to higher commodity and semiconductor prices. So overall, we should see the trade surplus narrowing just slightly in China. For Taiwan, export growth is likely to climb even further in August, supported by the AI app cycle and the rollout of new Vera Rubin GTUs. So this means the trade surplus is likely to widen. Okay, interesting. I think the tech story is, is something we'll be watching for the next few months, at least, then whether it's Taiwan, Korea, we've spoken about a lot and also the rest of those other countries producing chips. So definitely interesting there. Look, finally, I wanted to touch on Indonesia. You guys put a pretty big report on some of the risks and challenges coming out of Indonesia from a policy perspective. Can you just summarize the key thoughts for our listeners? Yeah, sure. So our special report looks at Indonesia's evolving policy framework and the implications for FDI. So the key pick away is that while the government is taking steps to improve the business environment, there have also been a lot of policy changes, particularly around trade and the resource sector. And that's creating uncertainty for foreign investors. So our economic trade model suggests that this uncertainty weighs significantly on FDI. And as such, we expect net FDI to slow to around 0.6% of GDP this year, from an average of about 1.1% over the past three years. And that matters because a weaker FDI alongside a wider current account deficit could keep pressure on Indonesia's balance of payments and ultimately the rupee. Yeah, I mean, I know our guys on the currents, you've certainly had a sort of less positive view for some time. Definitely been a challenging story. And I think that long-term theme around FDI and policy is definitely something to keep an eye on. So really interesting. And the report itself is really interesting. So if you have access to our research, I'd highly recommend reading it. That's from seeing and all the same. So thanks very much seeing. I'm super helpful to have you on and we look forward to you're making your next appearance soon. Thank you, Dan. Well, that's it for this week. We hope you enjoyed the Week-Head podcast, which was edited and produced as ever by John Dalton. You can like and subscribe to numerous podcasts on the usual channels, Apple, Spotify, SoundCloud and so on. And we'd also love to hear your feedback. So please do let us know what we can do better and what you want to hear more of by leaving a comment. We'd also love you to share the podcast far and wide with anyone you think may be interested. For more, you can log into NomuraConnects.com to keep up to date and to keep on listening. 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