» The Global Markets Weekly – 10/5/18 Decision Economics

The Global Markets Weekly – 10/5/18

Posted October 6, 2018 by rvillareal

Growth Expectations Now, Inflation Later?

Ex-weather impacts and taking into account meaningful upward revisions, September data show no breakdown in average payroll growth. Coupled with historically-strong ISM surveys and some comments by Fed Chair Powell, nominal yields are sharply higher over the last week. However, so are TIPS yields, which suggests it’s still largely growth expectations, not inflation, behind that rise. A check on the latter this week is likely to show further deceleration in CPI inflation in September. Inflation breakevens have tilted only marginally higher, still below levels reached early this year.

However…there are inklings that wage growth will look peppier in coming months in y/y comparisons, and DE believes upside inflation risks will start to materialize as well, at least relative to the Fed’s expectation of a steady-state 2% outturn in each of the next three years.

As the economy moves more deeply into a range of tight capacity and stronger-than-consensus growth, implications for bond yields are to the upside over time, even after the clear jump in recent days. We continue to expect three Fed hikes in 2019 after one more in December, subject to developments on the inflation or inflation expectations fronts.

DE continues to think there is little chance of recession until 2020-2021. Perhaps not quite as upbeat as Fed Chair Powell’s quip that conditions can persist “effectively indefinitely”, but expecting meaningfully above-consensus performance this year and next.

Coming Week’s Key Indicators and Events

  Release DE / Consensus Comment
U.S. Sep CPI (Th)

 

Core CPI

 

0.1% / 0.2%

(2.4%/ 2.3% y/y)

0.2% / 0.2%

(2.2%/ 2.3% y/y)

Price inflation begins decelerating into year-end, core in focus, run rate there holding around 2%.
Euro ECB Minutes (Th)   Growth softer, inflation moderate, Italy a risk, but outlook broadly intact.
China Cxn Svc PMI (Mo)

Loan/M2 Data (TBD)

+0.2 to 51.7/-0.1

 

Confrontation increasing with U.S. on multiple fronts including U.S. trade and more recent hardware hacking revelations.
Japan Core Mach. Orders (We) -4.2% / -3.7%  
Brazil Election   Little likely settled, but eying results ahead of likely runoff in late October.

 

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