NAB Morning Call

US Core PCE deflator. Why you need to look at the second decimal place.

Friday 28th June 2024

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There wasn’t a lot of data of significance around overnight, but the combination of a range of weak data prints fuelled some hope that the fed will cut sooner than markets had been moved towards. NAB’s Ray Attrill says a slight overnight rally on Australian bonds was likely to be a response to what the RBA’s Andrew Hauser has been saying, suggesting a partial CPI print for one month was hardly enough to base rate expectations on, and there’s a lot more data before the August meeting. The key number today is the US Core PC deflator, the Fed’s preferred measure of inflation. Markets will be very sensitive to this number, with Ray suggesting its important to look to the second decimal place because, on an annual basis, that can make all the difference.

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Duration:: 17m
Broadcast on:: 27 Jun 2024
Audio Format:: mp3

Well, the big news today is the US core PCE deflator, the Fed's preferred inflation measure, but it is only one month of course, whatever it comes out with, and that is pretty much what Andrew Houser said about the inflation print in Australia this week, Andrew Houser from the RBA, it's just one month, and we start to get drip fairly European inflation numbers today and into next week as well, and very soon the Trump Biden debate, two old men arguing it out, other than the sheer entertainment value, and even that's questionable. Is it likely to have any market influence? It's Friday, it's the 28th of June, 2024, it's the morning call from now, good morning. Well, the US dollar is down a little today, the Aussie is flat, still about 66.4 US cents, though, we're seeing a quarter percent rising in the Euro, not much happening with the yen today, 10-year treasury yields are down four basis points to 4.29%, Canadian yields also down, just one basis point today, but yields are up four basis points for France, three in Italy, and no movement in Germany or the UK, though, but Aussie 10-year yields yesterday up 10 basis points, up to 4.41%, but down six basis points on futures overnight, and shares pretty flat at the close in the United States, the Nasdaq has managed to climb almost 0.3%, and the S&P spent a lot of the session in the red, but managed to claw its way back into the green just before the close, same story for the Dow, which finished just about 0.1% up, the Russell 2000, though, down yesterday up 1% today. Big falls in Europe, the FTSE 100 closed down almost 0.6%, 0.3% off the Eurostocks 50, a chunk of that will be the 1% fall in the Cat Caron, because the DAX is actually up 0.3%, still a big France-German yield spread as well on the bond markets, as you might expect, and oil is up 100.25% for WTI, 1.4% for Brent, which is well above 86, a bow on almost 86.50, so a bit more interest in Treasuries today. Why? Well, here's Navsrai Atrel, some wondering whether it's just the numbers that we've been seeing ahead of the core PCE, the deflated number that the Fed likes to use for its inflation measure. We've been seeing signs of an economic slowdown, haven't we? Is that being translated into a prediction that maybe the Fed will make cuts earlier than we thought? We start to see more weakness in the economy. Now that is Morningfell, and all very much second tier, and I'd say a pretty meager appetizer for the main event tonight, which is, of course, those PCE deflated numbers. But yeah, go through a whole running through. We had a, within the final Q1 GDP number, which was 1.4 actually revised up, but we actually had the personal consumption expenditure item within that revised down to 1.5% from 2%. Weekly jobless claims were pretty much as expected, 233k. But if you look at continuing claims, which I think is more relevant from the sort of unemployment rate point of view, that's ticked up to its highest level since, I think, late 2021. And then durable goods orders, which were, they'd be the expectations on the headline at 0.1, at 0.5% fall was expected. But if you look at the underlying risk transfer, it's minus 0.1 against 0.2 expected. You take out the sort of X defense X aircraft, which really takes those volatiles out, it's minus 0.6 against 0.1 expected, and shipments on the same basis, down 0.5 against 0.2 expected, and the significance of the latter is that that's the sort of component that actually feeds into the one of the GDP components. And then we have pending themselves, down 2.1%, and the Kansas Fed manufacturing activity was minus 8 from minus 2. So everywhere you looked, I think, if you're scrapped below the headline numbers, and I think that's why we've seen a bit of a retracement of that. Obviously, we saw treasury yields significantly higher on Wednesday night, and obviously talking to Canon. To some extent, we're all having to make up stories as to why yields went up the way they did. But I certainly think you could point to the combined impact of those numbers as being responsible for that rally that we've seen across the U.S. curve. So we're in see what happens to the core PC today. Obviously, that's going to have an influence on all of that. But I mean, obviously, that weak data means that there's a slowdown happening. We presume if you put all of that together, and so that presumably will subdue prices. But so we'll find out later today. But the Q1 prices, because we're all going to already got those, haven't we? And then they're up. So from 1.8% growth in prices in Q4 to 3.4%, which is more than expected. Yeah, 3.7 actually. I've got 3.7 for that. So how is that not a concern? Well, it's because it's Q1, and we're at the end of kids that remember it's the last day of Q2 today. And just go back, I mean, all that's doing is just reminding us that inflation in the first quarter of this year exceeded expectations, and that's been the proximate cause for the unwinding of FEDIs in bets. But obviously, the numbers that we've had for April core PCE was down to 0.2. And obviously, today, there's a bit of a split in the market, but roughly 2/3 of the market thinks it's going to be 0.1. 1/3 of the market thinks it's going to be 0.2. And one pending at one potential hero is saying it's going to be zero today. So they'll be cracking open the champagne if they're right. So that's the point. If we've had a 0.2 in April, if we get a 0.1 today, and if that sort of we're flipping between 0.1s and 0.2s between now and the September meeting, that will be the confirmation that inflation is heading back down to the target. That's what underpins those people like now who still got that expectation for a commencement of a FEDIs in cycle in September. And hanging on to that. And yet, inflation is coming down. We've still got this expectation that personal income and personal spending are going to rise. I mean, that's presumably going to battle against falling prices. Well, at the moment, I think there's not enough Q2 data that's really come out. I mean, you can look at the things like the Atlanta Feds now cast estimates, the so-called GDP now. And last, I look, they were sort of knocking on the door of 3%, but very, very unreliable at this stage in the quarter. Remember, we're only just sort of getting into the main numbers effectively. And at the moment, our sense is still that the economy slowed to something a little below trending Q1, and we're not looking for anything better than trending Q2. So if inflation is coming down, then I think the Feds will take the view of what policy doesn't need to be as restrictive. If the economy is clearly slowing and there's problems on inflation, then ditto. But I really think it's the inflation progress that is dominating the FED equation just at the moment. Well, we had Andrew Hauser, the deputy governor of the RBA, talking overnight. And also, Ozzy Bond rally overnight, more so than the United States. So are those two things linked? Well, I think it's more to do with housing, not that I necessarily agree with the strength of the rally. So if I look at the three-year Bond futures, since Hauser started speaking, they're down about nine basis points. And that compares with what seven basis points for two-year treasuries over the same period. So clearly, there was some tailwinds there coming from the US treasuries. But the speech itself from the deputy governor was clearly not market moving. He was really talking about the drivers of Australian prosperity, basically, overground, underground, and beyond the seas, and talking about, bringing up the political legal and institutional structures that's conducive to foreign investment. But in the Q&A, obviously, the question is quickly honed in on the inflation report and what that meant. And while not dismissing it, Mr. Hauser was very quick to say, "Look, this is just one number. It's a very partial number." He said, "Look, I've come from the UK. I'm not used to this environment where you've got a monthly CPI number, and now you contain some of the elements of inflation so that clearly we need to see the Q2 inflation numbers." But also, he said, "We've got two measures of retail sales coming up between now and the August meeting. We've got a labor market number. We've got a business survey to the Mad Monthly Business Survey. For example, he said it would be a bad mistake to set policy based on one number." Now, I don't think that I think that is fully consistent with the prevailing RBA narrative, basically, that nothing is being ruled in or out. And that's sort of vigilant word that is crept into the commentary that we've had from them. But it was enough for the market to say, "Well, maybe we're a little bit overpriced for the risk of an August move now." And that's shown up in those three-year futures. But anyway, I thought it was an interesting Q&A. He's a very engaging speaker, and what's not to like about a fellow pawn, basically, having seen it roll at the RBA. I thought he was very entertaining, very open. I think we should stop this straight away. Look, we also get from Australia housing sector credit data, private sector credit data, as well, today. And we're talking about housing credit. We're going to be talking about house prices next week on the weekend edition as well. But just going back to the core PC in the United States today, I'm not sure whether we said what was expected and what could be the market reaction, if it sways even just a little bit from expectations. Yeah. But anyway, I don't want to bore you with the importance of the second decimal place on this one, as important as it will be, because that's why I clearly, economists do forecast that the number to two decimal places. And if I look at the Bloomberg survey, it's all to one decimal place. And it's, as I say, I think I got 39 or 54 analysts up point one and 14 up point two, basically. So if it is point, whether it's point one or point two, if it's a low point two or a high point one or even a low point one, I do think that the market will turn on that, because it is right to be, to be annualising these numbers and annualise point two and it's two and a half percent annualised point one. And it's barely over 1%. So the differences are pretty big there. So that's why I think the market will turn on that second decimal place in this particular release. Right. So we'll go straight to the second decimal place. That's where we'll start there today. So Canada, their GDP today, it's bad news either way, isn't it? I mean, if it's bad, it's bad, if it's good, then it's bad because the Bank of Canada won't be in a hurry to move again. So what do we want, mediocre? Is that what we're looking for? Oh, maybe a bit Goldilocks, I suppose anyway. But obviously, it's that upside inflation surprise has really sort of put the market off the scent of a quick follow-up cut from the Bank of Canada. I mean, these numbers are April, so a little bit dated, but it's in one of the few countries, like the UK, that does have a monthly GDP print and 0.3, I think, is the consensus up from, I think it was 0 in March, wasn't it basically? And that will show the year-on-year rate increase. So I think that would play with the grain of the view that the Bank of Canada is not going to be rushing into a second rate cut. So Europe, well, we got the Ricksbank yesterday, they stayed on hold, no surprise there, we start to get the inflation numbers. It's a bit strange this time, isn't it? Because we get France, Italy and Spain today. We'll go to wait till next week till we get the interesting ones, Germany and the Pan-European number. Yeah, that's right. So, yes, France, Spain, Italy, isn't it? Yes. So Germany, Monday, I think, and then Eurozone on Tuesday next week. And we'll also have Mr. Villaroy, the Bong de France, Chief and ECB Government Council members speaking as well. And also, so we get final Q1 GDP numbers, but they'll be pretty dated. The other thing I would mention is we do get the... And we will have an election as well. Of course, that's right. I mean, the other thing, in terms of this morning, which will come out as we're all sort of sitting there, tuning the TVs to watch the Biden-Trump debate is they will get the Tokyo CPI numbers. I think they will be important because, you know, Dolly ends in extra will rise, has continued. Obviously, it's sort of pulled back a little bit overnight, but, you know, this yen weakness is clearly part of the reason that we're seeing the Chinese authorities allowing the rim nimbita to creep lower. And that's, you know, one of the reasons, I think, that the Aussie dollar is struggling to poke its head back above that sort of 67 level is because you've got the pull up from, you know, heightened expectations of RBA easing on the plus side, but you've got this sort of drag from what's been happening in the yen and how that's fed into the Chinese currency, which historically is it's a drag on the Aussie dollar. So it's a very, but push me, pull you, state of affairs, as far as the Aussie's consent. So we want to see this number rise, then. We want to see this, of course, CPI, because it was last month, it was 2.2% year-on-year, wasn't it? So if we could get that was the headline, right? If we could get it going up a bit, that would be good. That's right. And I think 2% from 1.9 for the core, the ex-fetch, fresh food measure is the official targeted measure. So if we get the headline creeping up and that core measure up to 2, I think that will embolden expectations, which is also our own view, that we are going to see a rate hike alongside, you know, a plan to reduce the pace of QE, JGB buying when the BOJ meets at the end of July. So will that have much currency impacted they do that? Is it going to solve the problem? Well, I think it's probably pretty close to being discounted. And there has been a bit of a break between yield differentials between the US and Japan of late, and then there's lots of work we're trying to do to understand that in terms of, for example, the strength of Japanese households buying US equities, for example, and then having to purchase dollars to do that. But that said, if we are going to see, if the data flow does mean that market confidence in Fed easing does bolster a little bit. And we do see, you know, action from the bank of Japan, who have obviously been sort of perennial underachievers when it comes to meeting expectations on data policy, we do think in time that it's going to bring about a, you know, a week and dollar end rate. And I think that will take some of the pressure off the Chinese currency and would be a positive factor for the Aussie dollar. Chicago PMI and the final university meeting and sentiment survey today as well. And you mentioned the Trump Biden debate. When is it? It's not long, is it? I don't think it's 11, 11, last morning. It's the standard time. That's 90 minutes of entertainment, obviously, with the microphones being muted by one person speaking, it might not quite heart have quite the entertainment value. But at least it might be the debate where we actually are able to better differentiate on policy prescriptions. And so, you know, all sorts of presumably things like immigration, abortion. We sort of know the position, we know the divide on this. I mean, is there anything there that's going to move markets? Could anything happen other than one of them? I think it's really going to be, it's going to be about, you know, the market sense of just, you know, whether this, you know, this guy in his late 70s and this guy in his early 80s are really up for the job. So in that sense, I think that, you know, how they conduct themselves, you know, how lucid they are, you know, whether, you know, Trump still can't resist, you know, shouting over Mr Biden, President Biden, even though his microphone switched off these sorts of things, I think will play into, you know, the markets thinking about, you know, who is better suited to be president or whether it's going to be enough to persuade anybody that they might change their allegiance when it comes to the ballot box. You know, it's a little bit doubtful, I suppose. But, but let's say, so there's certainly a lot riding on it. And, you know, I think both of them have been prepping. And, you know, my guess is that the demeanors are going to be a little calmer, perhaps, than we had in September 2020, when I wouldn't care to remember, because kept on shouting over Biden and analysis. Microphone's 10 office is going to have to shout louder. Anyway, we'll see. I mean, look, there was the UK had a televised debate yesterday, and I think the one question for the audience was somebody said, you know, how did we end up with such a poor choice between you two, looking at the opposition leader and the Prime Minister, I think that's politics the world over the moment. Anyway, we'll leave it for now. Good to see you. Have a great weekend. Thanks for coming on. Well, thanks for all. And I'm back this afternoon with Emma Lawson from Janice Henderson, her take on fixed income and where we go with central banks. And, in fact, you know, she made an interesting point, really, which goes to what Andrea has and has been saying about, you know, there's no straight line when it comes to managing inflation. She's got some interesting things to say. That's this afternoon. Join me for that. And then back on Monday, of course, for the next week, the edition of the morning call as well. I'm Phil W for now. Have a terrific weekend, and I'll see you either this afternoon or on Monday. Hopefully both. Thanks for listening.