US EARLY MORNING: Quiet start to the week; thin calendar today, but key US inflation data out later this week

US PRE-MARKETS: It was a slow weekend for news. US equity futures are trading higher, with the NDX leading the upside after four days off losses (capped off by a disappointing earnings report from Apple). Treasury yields are widening, with the short-end underperforming; the Treasury will be issuing upsized 3s, 10s and 30s this week, and inflation data towards the end of the week is also coming into focus. The Dollar Index is a little above flat. Today's highlights include employment trends for July, consumer credit for June, and Manheim's auto index; Fed's Bostic (2024) will deliver remarks again, as will Fed Governor Bowman (voter) who on the weekend said that more rate hikes will likely be needed, and that the Fed should remain willing to raise rates at a future meeting if data indicates progress on inflation has stalled. Earnings reports are today due from HSIC, VTRS, TSN, PARA, SWKS, LCID, CTRA, OKE, CE.

WHAT'S NEXT IN GLOBAL MACRO: Morgan Stanley notes that the pandemic recession in early 2020 marked a shift toward fiscal policy dominance, where government spending played a big role. It predicted that this approach, including measures like "helicopter money" during emergencies, would cause higher inflation. This strategy helped the economy during lockdowns, leading to more government spending in 2021 and record money supply growth. Inflation finally appeared due to money flowing into the real economy. The Federal Reserve reacted by tightening policy, but this dependence on fiscal policy is a concern. The note suggests that the economy grew faster than expected due to fiscal policies, reducing recession risks. Yet, concerns have arisen over high government spending, which could impact bond markets, equity valuations, and potentially lead to resumed earnings declines. Last week, Fitch downgraded the US credit ratings citing fiscal deterioration over the coming three years, as well as repeated down-the-wire debt ceiling negotiations that threaten the government's ability to pay its bills. Last week, we also saw the US Treasury announce increased coupon sizes at upcoming auctions this quarter, triggering a spike higher in yields, and this week's sale of upsized 3s, 10s, and 30s may provide some insight about how investor concerns over fiscal dynamics and larger issuance is being digested.

CPI DATA THIS WEEK: For the most part, Fed officials have continued to threaten further rate hikes if inflation does not show continued progress towards its policy target. This week, US CPI data (Thursday) and PPI data (Friday) will offer a progress report. The consensus view looks for US consumer prices to rise +0.2% M/M in July (prev. +0.2%), though the annual rate is seen ticking up to 3.2% Y/Y from 3.0%. The core rate of inflation is also expected to rise +0.2% M/M, matching the pace seen in June, with the annual rate of ore inflation seen unchanged at 4.8% Y/Y. Credit Suisse says the rise in annual headline inflation will likely be driven by unfavourable base effects and modestly higher gas prices, but services inflation should continue to decline. "Shelter inflation now appears to be easing with the expected 12-month lag from measures of new rents and house prices," the bank notes, adding that it expects a further gradual decline, with hotel prices contributing negatively; that said, it still sees the monthly run rate of shelter prices to remain above target nonetheless. Ex-shelter, it expects services inflation of +0.3% M/M. Used auto prices are also seen falling for a second straight month, as alluded to in the recent Manheim data, which CS says typically leads used autos CPI by a couple of months. "A reading in-line with our expectations would represent the second consecutive month that monthly core inflation has been broadly in-line with the Fed’s target," Credit Suisse writes, "to some extent, negative contributions from volatile components are still driving the decline, but these could reverse higher later in the year." The bank thinks that after this print, CPI inflation is likely to look increasingly encouraging for the Fed. 

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07 Aug 2023 - 09:30- Fixed IncomeData- Source: Newsquawk

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