In today’s briefing:
- China: August Activity Data
- Rate Cut Speculation Fuels WTI Crude Oil, But China Clouds Outlook
- Forecast Stability Doesn’t Ensure Success
- U.S. August Retail Sales Show Resilience
China: August Activity Data
- China August data was worse than expected and confirms the weak trend in H2, with retail sales a real worry.
- The government risks missing the 5% growth target for 2024 and targeted fiscal policy moves are likely, but need to be implemented quickly.
- 10bps cut in the 7 day reverse repo rate is also likely in the coming months, with two 25bps RRR cuts.
Rate Cut Speculation Fuels WTI Crude Oil, But China Clouds Outlook
- The CME FedWatch Tool shows a 65% probability of a 50 bps rate cut and a 35% chance of a 25 bps cut.
- Given the strong rate cut expectations since mid-August, the focus now shifts to the scale and depth of the cuts for the rest of the year.
- WTI options Put/Call volume ratio fell to 0.75 on 16/Sep from 1.09 on 10/Sep and its OI PCR slid to 0.76 from 0.77 during the same period.
Forecast Stability Doesn’t Ensure Success
- Inflation’s relative stability and predictability have reassured policymakers of their dovish forecasts, encouraging rate cuts despite some inconveniently resilient data.
- Historically, outcomes two years after slight surprises have still skewed higher. Below-target 2yr forecasts have been three times as likely to surprise higher than lower.
- Realising persistently above-target inflation would match our forecast and ultimately truncate easing cycles. Recent forecast stability only matters in the dovish short term.
U.S. August Retail Sales Show Resilience
- August retail sales have held up a little better than expected with a 0.1% increase though this is largely because autos were more resilient than industry data had suggested.
- Gains of 0.1% ex autos and 0.2% ex autos and gasoline were marginally softer than expected.
- Revisions were minimal with June revised down to -0.3% from -0.2% and July revised up to a 1.1% increase from 1.0%. Core rates were not revised at all.
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