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Futures Levitate Higher After China Vows To Accelerate Reopening

Futures Levitate Higher After China Vows To Accelerate Reopening

US futures were flat as the Fed minutes did not help resolve the uncertainty…



Futures Levitate Higher After China Vows To Accelerate Reopening

US futures were flat as the Fed minutes did not help resolve the uncertainty about the path of Federal Reserve monetary tightening, while fresh prospects about China’s economic reopening sent oil higher. Nasdaq 100 and S&P 500 futures were up 0.2% at 745am ET having recovered from an earlier loss, as traders assessed minutes from the Fed’s last meeting which noted that officials saw risks from tightening more than necessary even as they planned on hiking until inflation was on a steady downward slope, while President Xi Jinping’s comments that China will persist with opening up its economy were also in focus and boosted commodities. The dollar gave up gains, and Treasury yields dipped, reversing some of this week's sharp gains. Bitcoin traded in a tight range around $23,500.

In US premarket trading, Cisco Systems advanced after issuing an upbeat forecast for quarterly sales as chip-supply shortages ease and the company is able to fill more orders. Keep an eye on US building products stocks as Deutsche Bank initiates coverage on 22 names, saying the US housing market is in the midst of a “mid-cycle crisis,” but that this is likely to be different from the downturn seen in the mid-2000s. Here are some other notable premarket movers:

  • Bluebird Bio’s (BLUE) shares rise as much as 10% as analysts digest yesterday’s FDA clearance of its Zynteglo therapy, ahead of its launch call due later today.
  • BJ’s Wholesale (BJ) shares gain 6% after the warehouse club operator reported adjusted earnings per share for the second quarter that beat the average analyst estimate.
  • Cisco Systems (CSCO) rose 6% after issuing an upbeat forecast for quarterly sales as chip-supply shortages ease and the company is able to fill more orders.
  • Elanco Animal Health (ELAN) cut to equal-weight from overweight at Morgan Stanley as visibility on the firm’s outlook remains weak. Elanco shares fall 1.7% in US premarket trading.
  • Estee Lauder (EL) falls 1.3% after the beauty company’s forecasts for first quarter and the full year trailed consensus estimates. In Europe, shares of L’Oreal declined after EL’s release.
  • Five months after disclosing a stake in Bed Bath & Beyond Inc., (BBBY) activist shareholder Ryan Cohen wants out, sparking a selloff in the shares of the home goods retailer. Shares fall 13%.
  • Kohl’s (KSS) drops 7% after slashing its guidance for the year, including adjusted earnings per share, operating margin and net sales growth. Peer Macy’s (M), which reports Aug. 23, falls 3%.
  • Mattel (MAT) rises 0.8% after it was initiated with a buy rating at BofA, which said that the company has “successfully” completed its turnaround and is now in growth mode.
  • MoffettNathanson cut the recommendation on Verizon Communications Inc. (VZ) to underperform from market perform, as T-Mobile widens its competitive advantage in 5G and AT&T undercuts it with aggressive promotions. Verizon shares fall 0.8%.
  • NetEase (NTES) shares rise as much as 3% after the Chinese video-game giant’s 2Q revenue came in slightly above the consensus analyst estimate.
  • NuScale Power (SMR) was initiated with a recommendation of buy at Guggenheim Securities, as analyst Shahriar Pourreza says its “shares represent one of the only opportunities for public exposure to the next generation of nuclear.” Shares gain 4%.

While policy makers warned against over-tightening and signaled the potential for slower rate increases at some point, they also flagged the risk of inflation pressures becoming entrenched. The nuanced messaging wasn’t dovish enough for markets to sustain a risk-on stance into Thursday. Caution was the byword of the moment with further clues awaited at the Fed’s annual symposium in Jackson Hole, Wyoming next week.

“People are a little overly optimistic about how likely it is that we can solve the inflation problem quickly and in a way where we don’t have to include more policy and more rising rates,” Kathryn Kaminski, AlphaSimplex Group chief research strategist and portfolio manager, said on Bloomberg Television.

While most saw the FOMC minutes as dovish, others disagreed. According to Ipek Ozkardeskaya, a senior analyst at Swissquote, the Fed meeting minutes were more hawkish than what was needed to give another boost to US equities. “Investors quickly realized that there was no mention of cutting the rates in the foreseeable future. If anything, the Fed would continue lifting the rates, and keep them steady for a while.”

Equities had rallied in recent weeks as investors bet July’s softer inflation print would allow the Fed to rethink its aggressive pace of hiking rates. The Nasdaq 100 had led the advance amid relief at the prospect of easier policy, boosted by raging CTA buying, stock buybacks, a return of retail investors and hedge funds forced to FOMO-chase higher.

"This rally is over-extended in the technology sector,” said Freddie Lait, chief investment officer at Latitude Investment Management. “The relative valuation of most of those Nasdaq stocks compared to other stocks around the world has become extreme again, and positioning has become quite extreme again, and so I wouldn’t be surprised to see that rolling over into the end of the summer.” The Nasdaq 100 is now trading at 23.2 times forward earnings, above the average level of 20.2 times over the past decade.

In Europe, the Stoxx 600 index was 0.2% higher as the latest report of euro-area inflation met expectations, sparing traders of any ugly surprise. FTSE MIB outperforms, adding 0.4%, IBEX lags, dropping 0.2%. Autos, energy and chemicals are the strongest-performing sectors. Concerns of tightening monetary conditions increased after the European Central Bank’s Governing Council member Martins Kazaks said rate hikes will continue in the region. Thin trading exaggerated moves across markets. The Stoxx 600 witnessed a 33% drop in volumes relative to the 30-day average. Here are the biggest European movers:

  • Siegfried shares jump as much as 13%, the most since October 1998, after 1H results analysts say were a significant beat, also noting effective management of macro risks.
  • GN Store Nord shares rise as much as 10% after the Danish audio firm presented its latest earnings, which included a guidance cut that was less pessimistic than analysts expected.
  • Zur Rose shares rise as much as 14%, the most since May, after its latest earnings report, which includes a goal to be profitable in 2023, a plan Jefferies call “very positive.”
  • Nibe rise as much as 8.6% after the Swedish heat pump manufacturer published earnings. Analysts note solid results, which beat expectations, as well as a positive outlook.
  • Global Fashion Group shares rise as much as 31%, the most intraday on record, after reporting better-than-expected earnings for the second quarter, also offering some FY clarity.
  • Balfour Beatty shares rise as much as 3.8% after Peel Hunt further raised FY22 profit forecasts for the UK construction and engineering firm and saw scope for material share price upside.
  • Adyen shares tumble the most since 2018 as 1H Ebitda and net revenue missed consensus analyst forecasts. Analysts point out that accelerated hiring is also a cause of Ebitda miss.
  • AutoStore shares wipe out an earlier jump of 13% to fall as much as 6.8%. Analysts say results look strong, albeit they note a small miss on orders and guidance for more margin pressure in 2H.
  • shares drop as much as 12%, biggest decliner in the FTSE All-Share Index, after the online furniture seller said it’s considering “all options” to strengthen its balance sheet.

Earlier in the session, Asian stocks fell as disappointing results from some key Chinese firms and worries about the outlook for the region’s biggest economy weighed on investor sentiment. The MSCI Asia Pacific Index slipped as much as 0.7%, with benchmarks in the biggest markets of Japan and China down close to 1%. Risk appetite improved a smidge after President Xi Jinping said China will persist with opening up its economy, the comments coming in after the nation’s markets closed. China’s largest developer Country Garden Holdings, saw its stock slump after it warned that first-half earnings probably tumbled by as much as 70% amid an escalating property crisis. Tencent, the nation’s most-valuable company, logged its first-ever revenue drop though its shares -- which have fallen for three straight months -- advanced.

Thursday’s losses in Asia tracked declines in US shares overnight. Minutes of the Fed’s latest meeting showed that officials agreed on the need to eventually dial back the pace of interest-rate hikes but also wanted to gauge how their monetary tightening was working toward curbing US inflation.  The minutes “lacked fresh impetus needed to bring up the pricing of Fed’s rate hikes,” Saxo Capital Markets’ Asia-Pacific strategy team wrote in a note. “Chairman Powell’s speech at the Jackson Hole Symposium next week will be keenly watched for further inputs.” Meanwhile, consumer discretionary and technology were among the worst-performing sectors on the Asian benchmark. Goldman Sachs and Nomura further cut their forecasts for China’s economic growth, with a power supply crunch adding more uncertainty to the outlook.

Japanese stocks fell, following US peers lower after minutes from the Federal Reserve’s last meeting showed officials see risks from tightening more than necessary. The Topix fell 0.8% to close at 1,990.50, while the Nikkei declined 1% to 28,942.14. Toyota Motor Corp. contributed the most to the Topix decline, decreasing 1.8%. Out of 2,170 shares in the index, 565 rose and 1,503 fell, while 102 were unchanged.

Australia's S&P/ASX 200 index fell 0.2% to close at 7,112.80 as investors assessed a slew of corporate results and jobs data. Australian employment unexpectedly dropped in July, giving the Reserve Bank scope for more flexibility in its tightening cycle. Telix Pharma slumped after reporting a net loss for the first half. IPH was the top performer after saying it’s buying Canadian firm Smart & Biggar. In New Zealand, the S&P/NZX 50 index fell 0.3% to 11,814.34.

In FX, the Bloomberg Dollar Spot Index advanced a second day and the greenback rose versus most of its Group-of-10 peers, with Norway’s krone as the best performer. The euro traded in a narrow range against the dollar for a third consecutive day. Norway’s krone extended an advance versus the euro after Norges Bank raised the key interest rate to 1.75% from 1.25%, in line with what most economists in a Bloomberg survey had expected. The central bank also said the policy rate “will most likely be raised further in September.” The pound extended losses against the dollar, hitting the lowest since July 26, amid broad-based greenback strength.
The yen fell in a volatile session as traders mulled rising US yields and their negative impact on stocks. Japan’s government bond yields rose

In rates, Treasuries were slightly richer across the curve with gains led by long-end, having outperformed bunds and gilts during European morning. US yields richer by ~2bp across long-end of the curve with 5s30s spread flatter by ~1bp on the day; 10-year yields around 2.87% within narrow overnight range, outperforming bunds by 4bp in the sector. Front-end German yields lag after ECB’s Isabel Schnabel says the euro area’s inflation outlook has not changed fundamentally.  Bunds bear-flattened out to the 10-year sector as money markets added to ECB tightening bets after the ECB’s Schnabel said the euro area’s inflation outlook has not changed fundamentally, in an interview cited by Reuters, suggesting that another hike of similar magnitude may be coming next month.  Australia’s bond yields trimmed opening gains and the nation’s currency eased after employment contracted for the first time since October 2021.

In commodities, oil jumps to session high after Xi says China will persist with opening up its economy. WTI rises 1.5% to trade around $89. Spot gold rises roughly $4 to trade near $1,766/oz. Most base metals trade in the red; LME nickel falls 0.5%, underperforming peers. LME copper outperforms, adding 1%, after Xi’s comments

Looking at the day ahead, the FOMC minutes from July will be the main highlight, and the other central bank speaker will be Fed Governor Bowman. Otherwise, earnings releases include Target, Lowe’s and Cisco Systems, and data releases include US retail sales and UK CPI for July.

Market Snapshot

  • S&P 500 futures down 0.3% to 4,265.50
  • STOXX Europe 600 down 0.1% to 438.54
  • MXAP down 0.6% to 161.98
  • MXAPJ down 0.5% to 526.40
  • Nikkei down 1.0% to 28,942.14
  • Topix down 0.8% to 1,990.50
  • Hang Seng Index down 0.8% to 19,763.91
  • Shanghai Composite down 0.5% to 3,277.54
  • Sensex down 0.3% to 60,079.59
  • Australia S&P/ASX 200 down 0.2% to 7,112.78
  • Kospi down 0.3% to 2,508.05
  • German 10Y yield little changed at 1.11%
  • Euro down 0.1% to $1.0165
  • Gold spot up 0.1% to $1,763.18
  • U.S. Dollar Index up 0.20% to 106.79

Top Overnight News from Bloomberg

  • The US says it has commenced bilateral trade negotiations w/Taiwan, something Washington signaled was going to happen back in June. WSJ
  • A United Nations expert on slavery has found it “reasonable to conclude” that forced labour is taking place in the China’s far-western region of Xinjiang. SCMP
  • China’s state media said local governments could sell more than $229 billion of bonds to fund infrastructure investment and plug budget gaps, a further move by Beijing to shore up an economy hit by worsening coronavirus outbreaks and a property slump. BBG
  • More AMTD intrigue. The investment firm that stunned investors when its post-IPO stock soared 32,000% was probed by Hong Kong's watchdog even before its US listing, people familiar said. AMTD Group's office and the home of ex-UBS banker Calvin Choi were searched in February 2021. The regulator investigated its underwriting arrangements as recently as November, one person said. BBG
  • Norway hiked by 50 bps to 1.75% and flagged the potential for another increase of that magnitude next month. ECB official Martins Kazaks said euro-area rates will continue to go up, while his colleague Isabel Schnabel suggested another big hike may come in September. The Philippines raised by 50 bps as expected. Sri Lanka held. Turkey is expected to follow suit later. BBG
  • Tighter links between crypto and US stock prices are forcing digital asset hedge funds to consider buying expensive data from other markets. The influx of traditional trading firms into crypto, which already have the inputs needed to track what's up in stocks, is also adding pressure. Hedge fund bosses said crypto firms may see market data costs rise to $500,000 a month from near zero. BBG
  • Allen Weisselberg, a long-time executive for Donald Trump’s company, will plead guilty on Thurs and while he won’t implicate the former president or Trump’s family, his testimony could be used against the Trump Organization. NYT
  • The decision of 10 members of the House of Representatives to vote to impeach former President Trump has cost some of them their seats, including the most vocal critic, Rep. Liz Cheney, R-Wyo., who lost the state's primary Tuesday to Trump-backed candidate Harriet Hageman.  Trump has spent most of his post-presidency backing candidates who are running against the lawmakers he considers disloyal to him. Four of these 10 Republicans have lost the primaries, four have chosen not to seek reelection, and two made it through their primaries and are running in November’s general election to keep their seats. USA Today
  • AMZN is searching for a senior movie-studio executive to help lead its growing entertainment division, turning to rivals for a chance to poach an experienced Hollywood player. Amazon Studios has held conversations with several Hollywood leaders about the role, including NFLX's film head, Scott Stuber, one of the streamer’s most powerful and visible executives, according to people familiar with the matter. WSJ
  • The probability of a 75 bps rate hike in September, which was climbing on Wednesday morning, dropped below 50% after the FOMC minutes....

A more detailed look at global markets courtesy of Newsquawk

APAC stocks mostly declined following the weak handover from global counterparts which were pressured as yields climbed on the back of the red-hot UK inflation data and with only a brief reprieve seen after the FOMC Minutes noted many officials saw a risk the Fed could tighten more than necessary. ASX 200 was subdued as participants digested the latest influx of earnings releases and disappointing jobs data which showed a surprise contraction in headline Employment Change. Nikkei 225 slipped back beneath the 29,000 level in tandem with the overall downbeat sentiment. Hang Seng and Shanghai Comp conformed to the glum mood after both Goldman Sachs and Nomura cut their China GDP growth forecasts and with focus also on earnings releases including Tencent after it posted its first-ever decline in quarterly revenue although its shares were lifted and it had vowed a return to growth, while Country Garden led the declines after the developer issued a profit warning of as much as an 87% drop in H1 net.

Top Asian News

  • China may issue CNY 1.5tln in additional debt as part of an investment push, according to China Securities News.
  • China's COVID-19 cases rose to a 3-month high of 3,424 on Wednesday from 2,888 the day before.
  • Nomura cut its China 2022 GDP growth forecast to 2.8% from 3.3%.
  • China's MOFCOM says, re. US CHIPS act, some provisions restrict normal economic, trade and investment activities of relevant enterprises in China. Will, when necessary, take forceful measures to safeguard interests.
  • China's President Xi says they will persist with opening up the economy, via CCTV.
  • China's banking regulator is reportedly looking into the property sector loan portfolios of some local/foreign lenders to assess systemic risk, via Reuters citing sources.

European bourses began the session mixed/flat and are yet to gain any real traction in relatively limited newsflow, Euro Stoxx 50 +0.5%.  Though, it is worth pointing out DAX 40 +1.0% outperformance, after lagging on Wednesday, amid strength in their heavyweight industry names. Stateside, performance is similar ahead of a few corporate updates, data and Fed speak, ES +0.1%

Top European News

  • The FTSE 100’s Weirdly Good Run of Form Hits a Wall of Problems
  • Norway Raises Rates to Highest in Decade to Stem Inflation
  • Embracer CEO Eyes IP Windfall After Buying ‘Lord of the Rings’
  • PwC Raises UK Partner Pay to £1 Million for First Time
  • ‘Enough Is Enough’ Rally Pulls UK Crowds as Rail Strike Begins
  • Truss Planning Review of Regulators in City of London Shakeup


  • Buck bounces after brief post-FOMC minutes dip on dovish elements, DXY touches Fib at 106.960 from 106.500 low.
  • Euro derives more support from rising EGB yields amidst hawkish ECB commentary, EUR/USD holds around 1.0150 amidst raft of option expiries extending beyond 1.0200.
  • Norwegian Krona underpinned by another half point hike from Norges Bank and signal for further tightening in September, EUR/NOK towards base of 9.8550-9.9150 range.
  • Aussie finds support at psychological level against Greenback after mixed jobs data, but Kiwi cautious ahead of NZ trade, AUD/USD nearer 0.6950 than 0.6900, NZD/USD closer to 0.6250 than 0.6300.
  • Sterling still stunned by double digit UK CPI and economic ramifications, Cable ducks under 1.2000, albeit fractionally and briefly.
  • Loonie gleans some traction from firmer oil prices pre-Canadian PPI, USD/CAD closer to 1.2900 than 1.2950.
  • Yuan retreats amidst reports of property loan portfolio probes and PBoC LPR cuts, USD/CNY 6.7900+ and USD/CNH 6.8000+.

Fixed Income

  • EGBs and Gilts regain some poise after extended and heavy declines on hawkish ECB rhetoric.
  • Bunds back up near 154.00 within 154.47-153.24 range, UK benchmark 114.00+ between 114.41-113.63 parameters.
  • US Treasuries idling post-FOMC minutes and pre-busy agenda - 10 year T-note flat at 118.24+ vs 119-01+ high and 118-18 low.


  • WTI and Brent were bolstered by rhetoric from the Russian Defence Ministry re. Zaporizhia and as China's President Xi spoke
  • Currently, the benchmarks are in proximity to their respective highs of USD 89.56/bbl and USD 95.44/bbl.
  • Spot gold experienced a marginal haven bid bringing the yellow metal to an incremental new session peak of USD 1767/oz and eclipsing the 21-DMA at USD 1764/oz.
  • Broader metal space is mixed and features essentially unchanged action for Aluminium, after Wednesday’s noted rally, while LME Copper has climbed back towards a test of the USD 8k handle

Central Banks

  • ECB's Schnabel says a recession alone would not be enough to control inflation, growth is going to slow and a technical EZ recession is possible. Inflation concerns from before the July hike have not alleviated, outlook is unchanged. Number of indicators point to a de-anchoring of inflation expectations. Short-term inflation could still accelerate. Re. fragmentation: markets are more stable now, but volatility is elevated and liquidity is low.
  • Norwegian Key Policy Rate 1.75% vs. Exp. 1.75% (Prev. 1.25%) via a unanimous decision; policy rate will most likely be raised further in September. Click here for reaction & newsquawk analysis.
  • BoE will aim to unwind the full stock of Corporate Bond Purchase Scheme (CBPS) holdings at end-2023/early-2024, subject to market conditions.
  • Turkey's central bank shocked markets when it unexpectedly cut rates by 100bps to 13% from 14%. All 21 economists polled by Bloomberg had expected an unchanged print.

DB's Tim Wessel concludes the overnight wrap

Starting in Europe, where the looming energy crisis remains at the forefront. An update from our team, who just published the fourth edition of their indispensable gas monitor (link here), where they note the surprisingly fast rebuild of German gas storage, driven by reductions in industrial activity, reduces the risk that rationing may become reality this winter. Many more insights within, so do read the full piece for analysis spanning scenarios. Keep in mind, that while gas may be available, it is set to come at a higher clearing price, which manifest itself in markets yesterday where European natural gas futures rose a further +2.64% to €226 per megawatt-hour, just shy of their closing record at €227 in March. But, that’s still well beneath their intraday high from March, where at one point they traded at €345. Further, one-year German power futures increased +6.30%, breaching €500 for the first time, closing at €507. Germany is weighing consumer relief measures in light of climbing consumer prices and also announced that planned nuclear facility closures would be “temporarily” postponed.

The upward energy price pressure and attenuated (albeit, not eliminated) risk of rationing pushed European sovereign yields higher. 10yr German bunds climbed +7.1bps to 0.97%, while 10yr OATs kept the pace, increasing +7.4bps. 10yr BTPs increased +15.9bps, widening sovereign spreads, while high yield crossover spreads widened +10.2bps in the credit space.

Equities were resilient, however, with the STOXX 600 posting a +0.16% gain after flitting around a narrow range all day. Regional indices were also robust to climbing energy prices, with the DAX up +0.68% and the CAC +0.34% higher. In the States the S&P 500 registered a modest +0.19% gain, with the NASDAQ mirroring the index, falling -0.19%. Retail shares drove the S&P on the day, with the two consumer sectors both gaining more than +1%, following strong earnings reports from Wal Mart and Home Depot.

Treasury yields also climbed, but the story was the further flattening in the curve. 2yr yields were +7.5bps higher while 10yr yields managed to increase just +1.6bps, leaving 2s10s at its second most negative close of the cycle at -46bps. 10yr yields are another basis point higher this morning. A hodgepodge of data painted a mixed picture. Housing permits beat expectations (+1674k vs. +1640k) while starts (+1446k vs. +1527k) fell to their slowest pace since February 2021. However, under the hood, even permits weren’t necessarily as strong as first glance, as single family permits fell -4.3% with gains in multifamily pushing the aggregate higher. Indeed, year-over-year, single family permits have now fallen -11.7% while multifamily permits are +23.5% higher. So the single family housing market continues to feel the impact of Fed tightening. Meanwhile, industrial production climbed +0.6% month-over-month (vs. +0.3%), with capacity utilization hitting its highest level since 2008 at 80.3%.

Drifting north of the border, Canadian inflation slowed to 7.6% YoY in July in line with estimates, while the average of core measures climbed to a record 5.3%. Bank of Canada Governor Macklem penned an opinion piece saying that while it looks like inflation may have peaked, “the bad news is that inflation will likely remain too high for some time.” In turn, Canadian OIS rates by December climbed +16.2bps.

In other data, the expectations component of the German ZEW survey fell to -55.3, its lowest level since October 2008 at the depths of the GFC. In the UK, regular pay (excluding bonuses) fell by -3.0% in real terms over the year to April-June 2022, its fastest decline on record.

On the Iranian nuclear deal, EU negotiators reportedly found Iran’s response constructive, though Iran still had some concerns. Notably, Iran is looking for guarantees that if a future US administration withdraws from the JCPOA the US will "have to pay a price”, seeking insulation from the vagaries of representative democracy.

Asian equity markets are trading higher after Wall Street’s solid performance overnight. The Nikkei (+0.76%) is leading gains across the region with the Hang Seng (+0.57%), the Shanghai Composite (+0.23%) and the CSI (+0.51%) all rebounding from its opening losses this morning. US futures are struggling to gain traction this morning with the S&P 500 (-0.02%) and NASDAQ 100 (-0.09%) trading just below flat.

The Reserve Bank of New Zealand lifted its official cash rate (OCR) for the fourth consecutive time by an expected +50bps to 3%, a seven-year high, while bringing forward the estimate of future rate increases. The central bank expects the OCR will reach 3.69% at the end of this year and expects it to peak at 4.1% in March 2023, higher and sooner than previously forecast.

Early morning data coming out from Japan showed that exports rose +19.0% y/y in July (v/s +17.6% expected) posting 17 straight months of gains while imports advanced +47.2% (v/s +45.5% expected) driven by global fuel inflation and a weakening yen. With the imports outweighing exports, the nation reported trade deficit for the 14th consecutive month, swelling to -2.13 trillion yen in July (v/s -1.91 trillion yen expected) compared to a revised deficit of -1.95 trillion yen in June.

In terms of the day ahead, the FOMC minutes from July will be the main highlight, and the other central bank speaker will be Fed Governor Bowman. Otherwise, earnings releases include Target, Lowe’s and Cisco Systems, and data releases include US retail sales and UK CPI for July.

Tyler Durden Thu, 08/18/2022 - 08:18

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The New York Fed DSGE Model Forecast— September 2023

This post presents an update of the economic forecasts generated by the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (DSGE)…

This post presents an update of the economic forecasts generated by the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (DSGE) model. We describe very briefly our forecast and its change since June 2023. As usual, we wish to remind our readers that the DSGE model forecast is not an official New York Fed forecast, but only an input to the Research staff’s overall forecasting process. For more information about the model and variables discussed here, see our DSGE model Q & A.

The New York Fed model forecasts use data released through 2023:Q2, augmented for 2023:Q3 with the median forecasts for real GDP growth and core PCE inflation from the Survey of Professional Forecasters (SPF), as well as the yields on ten-year Treasury securities and Baa-rated corporate bonds based on 2023:Q3 averages up to August 30. Moreover, starting in 2021:Q4, the expected federal funds rate between one and six quarters into the future is restricted to equal the corresponding median point forecast from the latest available Survey of Primary Dealers (SPD) in the corresponding quarter. The current projection can be found here.

The change in the forecast relative to June reflects the fact that the economy remains resilient in spite of the increasingly restrictive stance of monetary policy. Output growth is projected to be almost 1 percentage point higher in 2023 than forecasted in June (1.9 versus 1.0 percent) and somewhat higher than June for the rest of the forecast horizon (1.1, 0.7, and 1.2 percent in 2024, 2025, and 2026, versus 0.7, 0.4, and 0.9 in June, respectively). The probability of a not-so-soft recession, as defined by four-quarter GDP growth dipping below -1 percent by the end of 2023, has become negligible at 4.6 percent, down from 26 percent in June. According to the model, much of the resilience in the economy so far stems from the surprising strength in the financial sector, which counteracts the effects of the tightening in monetary policy. Inflation projections are close to what they were in June: 3.7 percent for 2023 (unchanged from the previous forecast), 2.2 percent for 2024 (down from 2.5 percent), and 2.0 percent for both 2025 and 2026 (down from 2.2 and 2.1 percent, respectively). The model still sees inflation returning close to the FOMC’s longer-run goal by the end of next year.

The output gap is projected to be somewhat higher over the forecast horizon than it was in June, consistent with the fact that the surprising strength of the economy is mainly driven by demand factors such as financial shocks, as opposed to supply factors. As in the June forecast, the gap gradually declines from its current positive value to a slightly negative value by 2025. The real natural rate of interest is estimated at 2.5 percent for 2023 (up from 2.2 percent in June), declining to 2.2 percent in 2024, 1.9 percent in 2025, and 1.6 percent in 2026. 

Forecast Comparison

Forecast Period2023202420252026
Date of ForecastSep 23Jun 23Sep 24Jun 24Sep 25Jun 25Sep 26Jun 26
GDP growth
 (0.2, 3.6) 
 (-1.9, 4.0) 
 (-4.0, 6.3) 
 (-4.2, 5.7) 
 (-4.4, 5.8) 
 (-4.7, 5.5) 
 (-4.2, 6.6) 
 (-4.5, 6.3) 
Core PCE inflation
 (3.4, 3.9) 
 (3.3, 4.2) 
 (1.5, 3.0) 
 (1.6, 3.3) 
 (1.1, 2.9) 
 (1.2, 3.1) 
 (1.0, 3.0) 
 (1.1, 3.2) 
Real natural rate of interest
 (1.3, 3.7) 
 (1.0, 3.5) 
 (0.8, 3.7) 
 (0.3, 3.2) 
 (0.3, 3.4) 
 (-0.1, 3.0) 
 (-0.0, 3.3) 
 (-0.4, 3.0) 
Source: Authors’ calculations.
Notes: This table lists the forecasts of output growth, core PCE inflation, and the real natural rate of interest from the September 2023 and June 2023 forecasts. The numbers outside parentheses are the mean forecasts, and the numbers in parentheses are the 68 percent bands.

Forecasts of Output Growth

Source: Authors’ calculations.
Notes: These two panels depict output growth. In the top panel, the black line indicates actual data and the red line shows the model forecasts. The shaded areas mark the uncertainty associated with our forecasts at 50, 60, 70, 80, and 90 percent probability intervals. In the bottom panel, the blue line shows the current forecast (quarter-to-quarter, annualized), and the gray line shows the June 2023 forecast.

Forecasts of Inflation

Source: Authors’ calculations.
Notes: These two panels depict core personal consumption expenditures (PCE) inflation. In the top panel, the black line indicates actual data and the red line shows the model forecasts. The shaded areas mark the uncertainty associated with our forecasts at 50, 60, 70, 80, and 90 percent probability intervals. In the bottom panel, the blue line shows the current forecast (quarter-to-quarter, annualized), and the gray line shows the June 2023 forecast.

Real Natural Rate of Interest

Source: Authors’ calculations.
Notes: The black line shows the model’s mean estimate of the real natural rate of interest; the red line shows the model forecast of the real natural rate. The shaded area marks the uncertainty associated with the forecasts at 50, 60, 70, 80, and 90 percent probability intervals.

Marco Del Negro is an economic research advisor in Macroeconomic and Monetary Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.

photo of Gundam Pranay

Pranay Gundam is a research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.

Donggyu Lee is a research economist in Macroeconomic and Monetary Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.

Ramya Nallamotu is a research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.

photo of Brian Pacula

Brian Pacula is a research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.

How to cite this post:
Marco Del Negro, Pranay Gundam, Donggyu Lee, Ramya Nallamotu, and Brian Pacula, “The New York Fed DSGE Model Forecast— September 2023,” Federal Reserve Bank of New York Liberty Street Economics, September 22, 2023,

The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).

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The Big Picture of the housing market, and its almost complete bifurcation, in 3 easy graphs

  – by New Deal democratI want to spend some time commenting on the broader issue of why the public perceives that inflation is still rampant, even though…




 - by New Deal democrat

I want to spend some time commenting on the broader issue of why the public perceives that inflation is still rampant, even though almost all official measures show it rapidly decelerating, and even completely absent on a YoY basis currently by a few measures. A big part of that has to do with housing, and since I’ve discussed several facets of that issue in discussing the data releases this week, I wanted to pull that together into a “Big Picture” summary. I do that in 3 simple graphs below.

Graph #1: Active listing counts of existing homes (red, left scale) vs. new housing under construction (blue, right scale):

The average mortgage on an existing home is something like 3.5%. Huge numbers of people either bought or refinanced when mortgage rates were 3%, and now those people are locked in. For example, a $1000 monthly interest payment at 3% is a $2333 monthly interest payment at 7%. Those people are locked into their existing home for the foreseeable future.

As a result, the existing home market has collapsed. As I showed yesterday, sales are near 25 year lows. The active listing count above, which averaged 1.3 million in the years prior to the pandemic, even with a modest recovery in the past year is still only about 700,000, a -600,000 decline.

Meanwhile the number of new homes under construction has risen from about 1.125 million annualized in the years before the pandemic to about 1.725 annualized, a mirror image +600,000 increase.

In other words, the seizing up of the existing home market has diverted people to the new home market.

Graph #2: median price of existing (red) vs. new (blue) homes:

The NAR only lets FRED publish the last year of their price data, which is not seasonally adjusted, but that is fine for today’s purposes, so the above graph compares it with the not seasonally adjusted price data for new homes.

The lack of inventory of existing homes means that prices got bid up, and remain bid up. Builders responded by building lots of new units, and unlike existing homeowners, they can respond to market conditions by varying their price point, which the above graph shows they have done. The median price for a new home went down -$100,000, or 20%, a few months ago, and is still down about -15% from its peak last year.

Graph #3: Single vs. multi-family units under construction:

The Millennial generation and the first part of Gen Z are well into their home-buying years. But because they have been priced out of large parts of the market, due to both the aforesaid big rise in mortgage rates, but also the post-pandemic increase in prices, they have had to downsize their target from single family homes to the less expensive condos or apartments.

As part of their adjustment described above, apartments and condos are being built hand over fist, and builders are offering price or financing concessions. Single family houses under construction have declined by about 20% from summer 2022, while multi-family units soared to a new all-time record, about 20% higher than their level in summer 2022.

It’s the housing version of shrinkflation, since - although the data isn’t easily available - I think we can take notice of the fact that apartment and condo units are considerably less expensive on average than single family detached houses.

[As an aside, note that a very similar thing happened in the 1970s when the Baby Boom generation was well and truly into their first home-buying years. While the Millennial generation is slightly bigger numerically than the Boomers, since the total US population was only 50% of its current size back in the 1960s, proportionately the Boomers had an even bigger impact on the market.]

That’s the Big Picture of the almost complete bifurcation of the current housing market. The “shrinkflation” I’ve described above is very much a part of why the public continues to believe that inflation remains a big problem. 

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Canadian dollar edges higher as retail sales rebound

Canada retail sales climb 2% The Canadian dollar has posted losses on Friday. In the European session, USD/CAD is trading at 1.3446, down 0.28%. Canada’s…



  • Canada retail sales climb 2%

The Canadian dollar has posted losses on Friday. In the European session, USD/CAD is trading at 1.3446, down 0.28%.

Canada’s retail sales jump

Canada’s retail sales rebounded in impressive fashion on Friday. Retail sales in July jumped 2% y/y, following a -0.6% reading in June and beating the 0.5% consensus estimate. On a monthly basis, retail sales rose 0.3%, up from 0.1% in June but shy of the consensus estimate of 0.4%. The good news was tempered by the August estimate, which stands at -0.3% m/m and would be the first decline since March. The Canadian dollar showed little reaction to the retail sales release.

The Bank of Canada doesn’t meet again until October 25th and policy makers will have plenty of data to monitor in the meantime. The BoC has been walking a tightrope that will be familiar to most central banks, that of trying to balance the risks of over and under-tightening. The difficulty in finding the right balance was highlighted in the BoC summary of deliberations of the policy meeting earlier this month.

The BoC decided to hold the benchmark rate at 5.0% after concluding that earlier rate hikes were having an effect and slowing economic growth. The summary indicated that policy makers were concerned that a pause might send the wrong message that rate cuts might be on the way. With inflation still above the BOC’s target, the central bank is not looking at rate cuts and stressed at the September meeting that rate hikes were still on the table and that inflation remained too high.


USD/CAD Technical

  • USD/CAD is testing resistance at 1.3468. The next resistance line is 1.3553
  • 1.3408 and 1.3323 are the next support lines

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