07 Aug: Are we done with disinflation psychology?
• It is US employment report Friday, and the excitement of economists is palpable. The Fed's focus on data dependency means that market volatility is likely to be higher than under forward guidance (because the data itself is more volatile). A strong report is not necessary to produce a September hike – a weak report is needed to stop a September hike.
• The Bank of England's transparent Thursday turned out to be a little opaque. Inflation is up, rate hikes are coming, but not yet (probably) – we have shifted our hike call out three months to February 2016 (November remains the risk case). Meanwhile Australia's RBA moved further away from an easing bias.
• The trio of Anglo-Saxon banks give a somewhat more hawkish tone – even with the Bank of England shift, the assumption of rising inflation and rising rates was clear. The Fed's position on rates seems to have strengthened this week, and the RBA has definitely shifted its bias. The disinflation psychology of markets may be outdated.
• And then there is Greece. Greek CPI is due and Greek inflation will be deflation (and genuine deflation, not Draghi's pretend deflation). There is a question as to what price one measures – anecdotal reports (which no economist would dream of using) suggests a 30-40% discount for payments in small denomination Euro notes.