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The Jackson Hole annual conference of central bankers delivered few surprises. The Federal Reserve is less convinced than martes appear to be that inflation has been beaten, and rates are likely to remain at or above 5% for an extended period of time. By contrast, the ECB is caught between a stone and a hard place: leading economic indicators are weakening, and there are few signs yet in the key core inflation indicator of a meaningful disinflationary trend. The dollar continues to rebound against European currencies, but emerging markets and commodity currencies had a better week on the back of increasing commodity prices.

Next week’s data-packed calendar on both sides of the Atlantic should shake any remaining summer torpor off currency markets. On Thursday there are two crucial inflation numbers: the August flash CPI report in the Eurozone, and the somewhat lagged but still important July PCE inflation report out of the US. Then on Friday it is payrolls day in the US, with all eyes on the wage growth print. 


The PMI indices of business activity came out considerably worse than expected and are now consistent with an actual contraction. We note that recent hard data numbers have not been nearly as dire as these surveys indicate, but the surveys are more timely and a reason for concern. Market pricing still assigns a near certainty to another hike in September and expects almost three hikes more before the end of the cycle. These are the highest rates in the G10 and explain why Sterling is still the second best performing currency in the G10 so far in 2023.  We remain cautiously optimistic on the Pound but are really looking closely to see whether economic data validates the plunge seen in business confidence over the next few weeks.


The PMIs business for August were even more dire in the Eurozone than in the UK, and increased the pressure on the ECB to wrap up its hiking cycle before there are any signs that core inflation is on its way down. President Lagarde scrupulously avoided any precommitment for the September meeting at the Jackson Hole conference. Markets remain split almost 50/50 on the possibility of a September hike. This week’s crucial inflation report for August will probably seal the deal one way or the other, and the impact on Euro trading should be significant.


The US economy seems to be diverging sharply from those across the Atlantic, experiencing a late cycle acceleration instead of slowing down. Retail sales are surging, as is industrial production, and the labor market has barely weakened at all. The Federal Reserve continues to sound rather hawkish, and while we may be one hike away from the end of the cycle, we expect that it will be a long time before we see any monetary easing, particularly given the absence of any prospects for fiscal easing. The labor market report this week should continue to show an economy at full employment that is finally delivering meaningful real wage increases to workers.


Author EFI

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