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Ex-Fed New York President Dudley says the Fed is fighting the last war on inflation

  
  Analysis
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Says excess dovishness at the Federal Open Market Committee increases the risk of a major policy error at the Fed.

Bill Dudley is a past resident of the Federal Reserve Bank of New York (2009 to 2018) and is now at Princeton University’s Center for Economic Policy Studies.
Says Fed officials:
  • anticipate that inflation will fall back close to 2% in 2022 … even as supply chain disruptions, energy costs and rising rents threaten to make the current price surge bigger and longer lasting than expected. 
  • And they expect inflation to keep decelerating in 2023 and 2024
  • if inflation proves more persistent than anticipated and even accelerates as the economy pushes beyond full employment, they’ll have to tighten much more aggressively than they expect. 
  • The result could more resemble what happened from 2004 to 2006 – when the Fed raised its short-term interest-rate target by 4.25 percentage points, to 5.25% from 1%, with quarter-percentage-point increases in 17 consecutive policy-making meetings – than what they currently have pencilled in. 
Here is the link to the Bloomberg piece (may be gated)  for much more.
Dudley, Yellen and Fischer, all since departed from the Fed:
Says excess dovishness at the Federal Open Market Committee increases the risk of a major policy error at the Fed. 

Bank of Japan quarterly Tankan report

  
  Analysis
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The BOJ’s Tanki Keizai Kansoku Chousa (Tankan) reports on the Short-Term Economic Survey of Enterprises in Japan

Full report can be found from the Bank of Japan website here.
Headlines via Reuters:

 

  •  September big manufacturers index +18(Reuters poll: 13)
  • December big manufacturers index seen at +14(Reuters poll: 15)
  • September big non-manufacturers index +2(Reuters poll: 0)
  • December big non-manufacturers index seen at +3(Reuters poll: 5)
  • September small manufacturers index -3(Reuters poll: -9)
  • December small manufacturers index seen at -4(Reuters poll: -6)
  • September small non-manufacturers index -10(Reuters poll: -11)
  • December small non-manufacturers index seen at -13(Reuters poll: -9)
  • Japan all firms see dollar averaging 107.64 yen for fy2021/22
  • Japan all firms see euro averaging 126.50 yen for fy2021/22
  • Japan big manufacturers see dollar averaging 106.72 yen for fy2021/22
  • September all firms employment index -17
  • September all firms financial condition index +11 vs june +11
  • September big manufacturers’ production capacity index +1 vs june +1
  • Japan big manufacturers see fy2021/22 recurring profits +12.7%
  • Japan big firms see fy2021/22 capex +10.1% (Reuters poll: 9.1%)
  • Japan small firms see fy2021/22 capex +4.7% (Reuters poll: 1.6%)
  • BOJ September tankan corporate price expectations survey: Japan firms expect consumer prices to rise 0.7% a year from now vs +0.6% in prev survey
  • Japan firms expect consumer prices to rise an annual 1% 3 years from now vs +0.9% in prev survey
  • Japan firms expect consumer prices to rise an annual 1.1% 5 years from now vs +1.1% in prev survey

Vale (iron ore producers) say they expect supply to increase, demand lower

  
  Analysis
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Iron ore is a huge Australian export to China. Vale with their outlook for iron ore

  • Going forward on the year, on the supply side, volumes shall increase compared to 2H20 
  • while iron ore demand might be impacted by production cuts due to environmental restrictions in China

FOMC responses coming in – “no surprises” #AnirudhSethi

  
  Analysis
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A summary of the main point Lloyds make about Wednesday’s Federal Open Market Committee

  • policy update contained no surprises.
  • left interest rates and its asset purchase target unchanged
  •  The Fed continues to promise that it stands ready to offer more support to the economy if warranted but there seems to be growing confidence that more action may not be needed. Nevertheless. any tightenng in monetary policy is still probably a very long way away and markets don’t expect an interest rate hike until 2024. 
More:
  • Recent US economic data has actually been mixed
  • the signs are that the vaccine rollout is increasing the Fed’s confidence that economic conditions will improve significantly later this year
  • Hopes of further fiscal stimulus from the Biden Administration probably have provided a further boost
On the ‘tapering’ of QE question, which some officials at the Fed have indicated may commence in 2021, Lloyds remind that Powell has been quick to “stamp on this idea” and reiterated the point again at his presser.
A summary of the main point Lloyds make about Wednesday's Federal Open Market Committee 

Reasons for the sliding oil price pile up

  
Analysis, Crude
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  • Crude oil prices collapsed, with Brent crude closing under USD40/bbl for the first time since June
  • risk-off tone across markets 
  • stronger USD headwinds
  • tone was set earlier this week after Saudi Aramco cut its prices to Asian refiners, suggesting demand is weak
  • Bloomberg survey showed that only four out of ten Asian refiners would be subsequently trying to buy more Saudi crude
  • Abu Dhabi National Oil Co also cut its prices on Tuesday
  • US refiners are also cutting output, as the summer driving season ends and inventories remain high
  • rising COVID-19 infections across the globe doesn’t bode well for demand in the short term
  • futures markets widening in the contango for both Brent and WTI to their widest levels since May

AstraZeneca Covid-19 vaccine – study put on hold due to suspected adverse reaction in trial participant

  
  Analysis
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The Phase 3 study testing the AstraZeneca and the University of Oxford COVID-19 vaccine has been put on hold due to a suspected serious adverse reaction in a participant in the United Kingdom.

Spokesperson for AstraZeneca
  • standard review process triggered a pause to vaccination to allow review of safety data
  • “a routine action which has to happen whenever there is a potentially unexplained illness in one of the trials, while it is investigated, ensuring we maintain the integrity of the trials.”
Risk negative, but so far little response. Eyes on the tech rout still. Globex equity index future trade reopens at the top of this hour.
coronavirus

US election outcome poses potential downside risks to US equities

  
  Analysis
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Via HSBC, beginning with where we are at:
  • latest national opinion polls show Senator Joe Biden maintaining a healthy lead over President Trump
  • although lower than the double-digit gap reached in late June
  • Biden’s strong polling performance has coincided with a period of high US unemployment as the country grapples with the Covid-19 pandemic and a period of heightened social tensions earlier this summer
But, that could change:
  • A number of factors could materially shift either candidate’s standing in the coming weeks. 
  • Positive for Trump would be developments that lead to a faster economic recovery. This may include the potential for the pandemic to subside or further progress to be made with treatments and/or vaccines. Congress passing a new stimulus package that includes an extension to the unemployment insurance top-up will also be considered important. 
  • Other factors complicate the picture. There is uncertainty about the impact of increased mail-in voting due to the pandemic. Meanwhile, the US Electoral College system places greater importance on ‘battleground states’ to the final result, making national polls a less useful predictor. In the majority of these states, Biden is forecast to do worse than at the national level.
For markets:
  • The outcome of the election poses some potential downside risks to US equity markets. 
  • These include the possibility of a divided government and “deadlock” over fiscal policy support, while Biden may implement higher corporate taxes. 
  • For the time being, we maintain our overweight view on US equities as the “swoosh” economic recovery remains in play.”

FT report: China cautious on hitting back at US companies after Huawei sanctions

  
  Analysis
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The Financial Times writes that despite mounting political pressure to unveil commensurate restrictions on US businesses in China, Beijing has historically been reluctant to retaliate. 

Analysts think officials will continue to hold back, as they are reluctant to upset the economic benefits and innovation US companies bring to China.
The US administrations targeting of China’s biggest technology groups incldueds moves against:
  • ByteDance
  • Tencent
  • as well as Huawei
Link to FT is here (may be gated).  The FT cite analysts (named in the piece) for the opinions.
If they are right perhaps US-China relations will not chill much further after all.
The Financial Times writes that despite mounting political pressure to unveil commensurate restrictions on US businesses in China, Beijing has historically been reluctant to retaliate. 

Why the US dollar continues to rebound and what’s next

  
  Analysis
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The pressure is on

Dollar
The US dollar has extended its gains as market participants get caught wrong-footed in a rebound after multi-month lows.
The dollar looked to be breaking down yesterday and today but stabled itself and is making a move to the upside. There are two near term factors to watch:
1) The 20-year auction
The US is selling $25B in 20-year bonds at the top of the hour. Last week there was a strong 10-year sale and a very weak 30-year sale so the bond market is off balance. A higher-than-anticipted yield could boost the dollar further.
2) The FOMC minutes
The Fed is a below-the-radar risk at the moment. The strong belief in markets is that they’re creeping towards doing more for the economy but an improvement in US virus cases, decent economic data, higher inflation and the stock market at record highs might make them slow their roll. If so, the dollar could climb further
Overall, this looks like a position-squaring squeeze in a quiet mid-August market to me but you can’t take anything for granted. If it spills over into a broad risk-off move, then the dollar could have a lot of room to run.
The EUR/USD chart to me looks like a retest of the range break before a further breakout but a close over 1.19 today would add confidence.
EURUSD chart

US weekly oil inventories -1632K vs -2850K expected

  
Analysis, Crude
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Weekly US petroleum inventory data

  • Prior was -4512K
  • Gasoline -3322K vs -1000K expected
  • Distillates +152K vs -1200K expected
  • Refinery utilization -0.1% vs +0.3% expected
  • Production unchanged at 10.7 mbpd
API data late yesterday:
  • Crude -4264K
  • Gasoline +4991K
  • Distillates -964K
Crude rose about 20 cents on the headlines to $42.79 per barrel. The headline isn’t as bullish as anticipated but the gasoline drawdown was larger.
US weekly oil inventories
The OPEC JMMC meeting is also taking place right now with Russia’s Novak stressing the need for full compliance.
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