And let's start with you. It is the onus is on the Fed to step on
the brakes even harder. Absolutely.
And you know it is it's tough for the Fed.
They met they made a huge area in perhaps buy into that transitory
argument that we heard all through last year.
And as a result there are they're up against it.
And they are to some extent the decisions are quite becoming quite easy.
75 cents five likely 75 again. But it's going to become tougher for
them than inflation. Know you said in your introduction that
we're supposed to peak to get it. The data still keeps coming in strong.
A lot of forces providing strength. And at the same time the economy is
starting to show some signs of weakening.
And so those decisions for the Fed to go forward starting next week could become
even tougher. It's almost the case that they could it
was easy to go hard when you ease off kind of ease off.
Seventy five percent of ISE some say it will take 100.
It is about the Fed's credibility and the dot plots in focus next week.
Yeah I completely agree. Look I think that probably part of the
reason why the market was lulled into an expectation that CPI would continue to
ease off is largely ran energy prices. You know oil prices have been under a
lot of pressure for a number of reasons partially because Russia has been
exporting a bit more oil to the market and Chinese demand for oil has been much
weaker because the growth recovery there has sort of been a bit disappointing so
far. I think this is the key risk now is for
the Fed is that core inflation is rising and we know that rents and etc.
in the US continue to rise housing stock in the US pretty tight.
But having said that the key risk now is and we think that oil prices go back to
around 125 for the time we get to the first half of next year.
That's a real acceleration of gasoline prices which slows down that decline in
headline inflation. So while it may seem like the Fed is
facing a lot of problems right now if those oil prices go back to where we
think they will well then gasoline prices etc will start to put upward
pressure on. As Nomura says that part of the reason
why inflation is so high is that expectations have gone higher and that
is a huge headache for the Fed. I've seen his show earlier that week.
Expectations actually come back down and that one was starting to celebrate that
into the report yesterday. Yeah there's this big concern about
expectations. New mirror the mirror.
We were right on 75 earlier in the season.
They got the timing wrong but they were right.
That's why it would eventually go. Larry Summers also talking about 100
basis points next week perhaps perhaps too soon but they moved to 75 from 50.
Whether that's a debate what we'll have to see.
This is a good question to Hang Seng that the red cord or in the blue corner
but Wayne's not wearing blue. But apart from Mr it is either that it's
a Mike Tyson there's a saying earlier and to carry on with the boxing
analogies that Wayne you know he said when you've got a plan but it exists to
get punched in the face. The thing is know we're looking at these
August figures but it is September could show a marked downshift with a lot of
the indicators suggesting that in CPI. You know what you make of that.
Do you agree. Yeah.
So I guess I allude to the answer before Rush actually.
So I think the direction of oil prices here is going to be key also to
expectations as you were just talking about before.
For us as we go into next year the supply side risks continue to be a real
issue in the energy market in particular.
And let's not just talk about the energy market.
Let's talk about agriculture. You know the USDA released their report
on Monday a significant downgrade to soybean production in the US.
Another downgrade to corn production in the US.
We have a La Nina event around the corner.
Again if we believe that the Bureau of Meteorology in Australia.
This tends to see food prices in grain prices tend to be higher in these events
not lower. And we already see the geopolitical risk
impacting from the ongoing war in Ukraine.
So food prices which again featured actually in the CPI last night food
prices wheat prices grain prices have been under pressure for the last few
months. If they begin to turn around well then
this could be a double whammy for central banks like the Fed speaking our
central bank. Simon how do emerging markets central
banks even keep up with the Fed. I mean add to that that strong dollar
environment. I mean major currencies will be under a
lot of pressure. Absolutely.
And you've seen actually the emerging markets Latin America Asia.
They were kind of quick on the uptake. They were raising some CAC in some
places faster than the Federal Reserve. And yet they still have that pressure
being imposed on them as you say through through the channel of the dollar.
Is that the old lady. No it's not.
It's our currency or problem. And so that's certainly the case for
several emerging markets some of whom and perhaps less that more the frontier
space. Yeah we're already seeing those
traditional phone calls to the IMF and the yen the yuan.
There are lines in the sand right there account the central bank's defend
levels. I think this is really is because
firstly the Bank of Japan has made it very clear that they're not going to
move from their current position at least over the next few meetings or at
least until Governor Kuroda hangs up the boots and passes on to somebody else.
So the yen is going to be primarily driven by the widening yield spread
between the US. And that is a lot depended on the Fed
not so much on the Bank of Japan. I think further CNY the key issue is
that there's going to have to be ongoing support not just from the fiscal side
but at least something from the monetary side.
And as I said earlier growth hasn't come back as quickly as we would've thought.
So it is a fairly weak picture for these currencies looking forward over the next
three months. I'll just pick up on something with
respect to emerging markets though and respect to Asia.
So we've seen for example the Indonesian currency holding up pretty well because
coal prices have been very very elevated.
And so that's been supporting their current account positions.
But of course if coal prices do start to come off the boil some of these
countries current account positions are going to start to look pretty difficult.
And that means that not just the central banks out here will be hiking because of
maybe a bit more inflation in the system.
But they may also have to move into defending the currency mode.
And so this interplay between the Fed and the central banks is going to be
really interesting over the next six months.
And certainly there are those countries which are further advanced in the hiking
scenario such as Korea where they're facing a lot of trade headwinds or
headwinds on the tech side. And not only that but if they now start
to get a little bit more balanced in their monetary policy view you could see
a bit of weakness on things like the one as well.
This went to the redcoat assignment. Looking at the end and a bit more detail
here. I mean it's like trying to face up to us
a runaway train the dollar but they keep doing the same thing.
And verbal intervention thus far has been well tepid and I'm being polite.
But perhaps in some quarters that's the accusation.
The thing is the currency everyone talks about the Plaza Accords and
interventions of days gone by. It's much tougher
environment for central banks. Bank of Japan even with more money in
its reserves to be able to to fight against Mr.
Market so to speak. And the challenge there will be if you
if you turn tougher with verbal intervention the question comes Will
what have you got behind it. So perhaps that's that's part of their
strategy. And if they come out tough verbally then
the pressure just comes on to put money where their mouth is.