Gaze Into The Data Long Enough…

By Benjamin Picton, Senior Market Strategist at Rabobank

Friday saw equities continue their recovery from steep selloffs early last week and the preceding Friday. The S&P500 and the NASDAQ both rose by around half a percentage point and the Treasury curve flattened. 10-year yields sank by 5bps, and 2-year yields rose marginally as markets continued to price out hysterical calls for large emergency rate cuts. Nevertheless, the futures curve still has 38bps of cuts to the Fed Funds rate priced in for the September meeting, so starting an easing cycle with a supersized cut is still very much on the minds of traders.

Michelle Bowman, perhaps the most hawkish of the Fed Governors, gave a speech to the Kansas Bankers Association over the weekend where she mentioned that she may not be ready to support any cut at all in September. Bowman said that recent progress in disinflation was a “welcome development” but cautioned that much of the past progress had come courtesy of supply side factors that are now largely behind us. Bowman warned that inflation still remains uncomfortably above the Fed’s 2% target, and that latent inflation risks from new supply side pressures and big fiscal deficits make the case for caution.

Bowman’s Fed colleague Tom Barkin also sent the message that the Fed shouldn’t be panicked into cutting too hard too fast. Barkin said that he is optimistic that future inflation readings will be “good”, and intimated that the Fed has “some time in a healthy economy” to normalize policy rates in a “steady, deliberate way.” The Boston Fed’s Susan Collins struck a similar tone, saying that it would be appropriate to begin cutting “soon”, and that the pace of easing will remain contingent on the flow of data. Market pricing suggests that traders remain nervous about the steady-as-she-goes assessment of policy rates, and the volatility of last week perhaps serves as a warning that we could be only one or two bad prints away from further turmoil.

Of course, this week will throw up a number of opportunities to upset the narrative and allow volatility to rear its ugly head again. The key focus for markets will be Wednesday’s release of the July CPI report for the USA, but we also have PPI the day before and both July retail sales and the weekly jobless claims figures on Thursday. Those weekly claims numbers are generally considered to be second-tier data, but they have taken on increased importance since the release of the July non-farm payrolls report the Friday before last. That softer-than-expected report triggered the ‘Sahm Rule’ recession indicator and became one of the catalysts for the sharp price action in the days following. So, expect markets to remain particularly sensitive to fresh hints pertaining to labour market conditions.

Elsewhere today we have the news that US Defence Secretary Lloyd Austin has ordered the USS Abraham Lincoln carrier strike group to hasten its transit to the Middle East, and has also ordered the Omaha-class ballistic missile submarine USS Georgia to deploy to the region. Austin’s press release says that the Lincoln strike group will add to the capabilities already provided by the USS Theodore Roosevelt, which seems to imply that it will not simply be relieving the Roosevelt as was previously reported. At least not straight away.

Having sold off in sympathy with equities last Monday, Brent crude futures have crept higher this morning after posting four-straight days of gains at the back end of last week. Latent nervousness about the timing and scale of Iranian (and allies) retaliation for Israel’s assassination of Hamas political leader Haniyeh and Hezbollah #2 Fuad Shukr remains, but in light of the soft demand outlook our energy analyst Joe DeLaura believes that a substantial move higher would require actual interruptions to the flow of energy supplies through the Persian Gulf.

Elsewhere this week we are expecting UK CPI, Aussie labour market figures for July, and a policy rate meeting from the Reserve Bank of New Zealand. That meeting is a coin toss as to whether the RBNZ cuts its policy rate or not. Rabobank had held a forecast of an August 2024 rate cut since all the way back in November of 2023, but we recently pushed that back by one meeting to October after non-tradeable inflation in Q2 printed a little higher than expected.

Like the Fed, the RBNZ won’t want to leave it too long to easy policy. Central bankers continue to stress their data-dependence when making policy decisions, but it’s a game that does require some degree of forward projection. To borrow from Nietzsche: If you gaze too long into the data, the data also gazes into you.