Central banks – Data dependency
Central banks are gradually moving from an inflation fighting attitude to a data-dependent approach. Last week, the Fed opened to a more accommodative stance suggesting inflation and labor market data to soften over the coming months. The message came across very different from June, where Powell took a hard line against inflation. This week, the Reserve Bank of Australia, the Bank of England and the Central Bank of Brazil followed suit. The RBA and the BOE hiked 50bp and turned to data dependent mode for the next hikes. The BOE, in particular, issued new forecasts that makes it harder to keep a hawkish tilt. While inflation is expected to continue climbing this year and peak at 13%, the central bank is projecting a large recession for 2023, implicitly suggesting that any stabilization in inflation would lead to an easier stance. BCB hiked 50bp too and signaled a last 25bp hike for September before stopping its cycle, after having hiked rates by 12% since the start of 2021. We think central banks will still need to hike, as inflationary pressures remain strong. Still, data are slowing down, especially outside the US, and commodity prices have started easing since June. Inflation prints over the next two months may thus provide some relief, which will help slower pace of hikes after the summer acceleration. The attitude towards the end of the year and in 2023 remains more uncertain and will be key to see if inflation expectations will continue to weigh on core even in presence of some relief on the supply and commodity side. The new data-dependent attitude does not have a clear implication for the direction of rates, but will certainly bring to more volatility, as the intra-week volatility in US Treasuries show us over the past months.

US data – Strong jobs while waiting for inflation
The US jobs report for July came very strong across the board. Non-farm payrolls came in at 528k, vs 250k consensus and 325k high in the survey. June figures were revised up, hourly earnings surprised on the upside, and the unemployment rate continued to inch lower, now at 3.5%. Job gains were broad based, across all sectors and both in private and public jobs. Overall, the report points to a solid labor market, and an economic picture stronger than what markets are pricing and what was suggested by Powell dovish comments at the July Fed meeting last week. The report suggests the Fed may need to do more to cool labor markets, and as a result rates have re-priced sharply. The market now prices good chances of a 75bp hike in September, and a terminal rate of 3.6% to be reached in March 2023, up some 35bp from the lows reached post Fed meeting. The next key print for markets is July US CPI inflation, due on Wednesday. Weaker commodity means headline inflation will moderate and may even be flat month on month. Core pressures should remain relatively high and will be the market focus. Post strong jobs, any print that fails to convince markets that the peak is in sight will trigger further adjustment in US and core rates.

Algebris Investments’ Global Credit Team