Trading with point and figure

- All eyes on FOMC statement, 'dot plot' and Yellen presser; Japan Trade to
digest, UK Retail Sales, Sth Africa CPI and US Existing Home Sales;
OPEC technical committee meeting & EIA Inventories; new German 30 yr

- UK Retail Sales: marginal rise expected, risk of correction in Food
sales and inflation pressures imply some downside risks

- South Africa CPI: core CPI seen dipping modestly, allowing further
SARB rate cut tomorrow

- FOMC meeting: focus on 'dot plot' rate trajectory, statement likely to
leave Dec rate hike 'on the table', and announce balance sheet reduction

- Yellen press conference: inflation outlook in focus, plenty of questions
likely on potential debt ceiling disruption to QT, also on Fischer
resignation and reappointment

- Charts: FOMC rate expectations by meeting, June vs. March 'dot plot',
German 30 yr Bund yield

..........................................................................

********************
** EVENTS PREVIEW **
********************

A quite heavily anticipated FOMC meeting takes centre stage today, though the data schedule is eminently not without its highlights, from the overnight better than expected Japan Trade through UK Retail Sales and South African CPI to US Existing Home Sales and tonight's Q2 NZ GDP. The OPEC technical committee meeting will probably trot out the same rather tired old lines about the production cut agreement, and compliance, which will may well fall on sceptical and deaf ears in the oil trading community after a smaller than expected build in API crude inventories, as the EIA version is awaited this afternoon. While markets have displayed a huge insensitivity to the natural disasters that have dominated the news over the past month, a close will be kept on the prospective path of Hurricane Maria, as well as the tragic loss of life in the Mexico City earthquake. In the fixed income space, Germany launches a new 30-yr Bund with a modest EUR 2.0 Bln sale, most remarkable for the fact that this will be the first new 30-yr since February 2014, 'grey market' indications suggest a spread to the 2046 of +4 bps, ca 1.29% in nominal yield terms.

** South Africa - August CPI **
- Today's CPI data is primarily of interest given the expectation that the SARB will cut rates by 25 bps to 6.5% tomorrow, predicated on the assumption that core CPI will see a further dip to 4.6% y/y (July 4.7%), even though energy prices are seen pushing headline CPI back up to 4.9% from a a 20-month low of 4.6% in July. Indeed one might argue that the SARB's view that inflation is under control (ostensibly) is debatable, given the perennial and currently heightened political risks to the ZAR remain high, and on the other side of the equation, that rate cuts are likely to be of little, if any benefit to any economy, which is and has for some time crying out for major structural reforms.

** U.K. - August Retail Sales **
- The consensus looks for a 0.2% m/m rise in headline sales, with the ex-Auto Fuel measure seen up just 0.1% vs. somewhat stronger than expected gains of 0.3% and 0.5% respectively in July, both of which were boosted by an outsized gain in Food Sales (1.5% m/m) and a boost from Household Goods (0.9%), with all other major categories on the month. That of course was in a month in which falling inflation provided something of a boost, given that the official data (in contrast to the BRC measure) are a volume not a value measure. The risks relative to forecasts appear to be to the downside, not only due to the broad based rise in non-discretionary elements of CPI (notably clothing and household goods), but also some risk of a correction to last month's outsized gain in Food sales, which alternatively could be revised lower. As ever, the 3-mth/3-mth change in sales (last 0.6% q/q) is a much better gauge of underlying trends in spending than the often rather 'noisy' mth/mth changes. It is perhaps worth recalling that one of the reasons that the very dovishly inclined Mr Vlieghe offered on Friday for a possible rate hike in 'coming months' was 'tentative signs' of a pick-up in consumer spending; a weak reading today may well militate against his support for such a move.

** U.S.A. - FOMC meeting **
- As is well discounted, markets expect that the Fed will keep rates unchanged (with a December rate hike now seen as 50/50) at today's meeting, but announce that it will commence balance sheet reduction at a pace of $10 Bln per month in Q4. The statement will doubtless keep the option of a December rate hike clearly on the table, but markets will as ever hone in on the 'dot plot', with many expecting the likes of Brainard to perhaps adjust their trajectory lower. That said, as the attached chart highlights, it will require more than just a few FOMC members to shift their position for 2017 to shift the median estimate of another rate cut this year, while the 2018 estimates already vary enormously. The FOMC will doubtless note that the impact of the hurricanes will make incoming data over the next couple of months somewhat more difficult to interpret, but the focus will be on any changes (likely to be tweaks) to its inflation forecasts, and the statement language (for July statement see https://www.federalreserve.gov/newsevents/pressreleases/monetary20170726a.htm ). At her semi-annual testimony in July, Yellen was somewhat equivocal on the topic of whether the recent dip in inflation would actually prove to be transitory, and she will doubtless face a number of questions about that, though the more interesting aspect will be whether she echoes Dudley's more recent comments that it would probably be another six months before the FOMC could judge whether that is or is not the case. More interestingly he implied that some of the disinflation may in fact be structural, and potentially a positive, above all in terms of assumptions about NAIRU, and at the same time making clear his support for the current median rate trajectory. One very under-discussed emergent theme in speeches by Dudley, Williams and others has been references to where the near-term cap for the Funds rate might be, with opinion seemingly coalescing around 2.5%, which as Mr Williams has noted is not that far away. Other topics likely to feature in the press conference will be whether Yellen would accept a re-nomination as Fed chair, if she is asked, and her thoughts on Fischer's decision to stand down as vice chair. She will doubtless offer a fulsome eulogy for Fischer, while batting away questions on her future as being in the provenance of the President, though if she really does not want a second term, then she may well choose to confirm that she will be standing down. Eminently the debt ceiling will also feature, specifically in reference to how it might impact the balance sheet reduction programme, and it would be not be surprising if there were questions about a co-ordinated G7 exit from extreme policy accommodation, which will doubtless garner a response along the lines that each central bank will formulate policy according to the specific needs of their economies.

from Marc Ostwald
 
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