• The narrative has shifted back in the dollar’s favor, at least for now; the U.S. economy is growing faster than its major trading partners; regional Fed surveys for July continue rolling out; housing data and weekly jobless claims will be closely watched
  
• Q1 eurozone GDP was revised up slightly; U.K. by-elections are being held today; BOE MPC member Ramsden sounded hawkish; South Africa is expected to hike rates 25 bp to 8.5%; Turkey is expected to hike rates 350 bp to 18.5%
  
• Japan reported soft June trade data; Australia reported firm June jobs data; China’s commercial banks kept their key 1- and 5-year LPRs steady; PBOC stepped up its support of the yuan; Taiwan reported weak June export orders

The dollar is consolidating its recent gains. DXY is trading slightly lower near 100.118 after two straight up days took it as high as 100.535 yesterday. The euro is trading lower flat $1.1215 while sterling is underperforming again and trading lower near $1.2915 after trading Friday at the highest since April 2022 near $1.3140. USD/JPY is trading lower near 139.40 after testing the 140 area yesterday. We had been frustrated with recent dollar weakness but the relative fundamental story seems to be shifting back in favor of the greenback (see below). Cracks are widening in the rest of the world and markets seem to be finally taking note. Further dollar gains seem likely after this current period of consolidation.

AMERICAS

The narrative has shifted back in the dollar’s favor, at least for now. What’s noteworthy is that the relative story has changed from both sides. Developments in the eurozone, U.K., and Japan have called the hawkish central bank outlooks there into question even as strong data here in the U.S. support the hawkish Fed outlook. This is manifested in rising 2-year interest rate differentials that favor the dollar.

Simply put, the U.S. economy is growing faster than its major trading partners. The eurozone and the U.K. are tipping into recession, Japan is slowing, and China reopening continues to disappoint. Of note, the Atlanta Fed’s GDPNow model is currently tracking Q2 growth of 2.4% SAAR, unchanged from the previous reading. The next and final model update comes next Wednesday. Next Thursday, actual Q2 GDP will be reported and consensus stands at 1.8% SAAR vs. 2.0% in Q2. The Atlanta Fed’s first estimate for Q3 growth will then be released next Friday.

Regional Fed surveys for July continue rolling out. Philly Fed survey is expected at -10.0 vs. -13.7 in June. Empire survey was the first to be reported and came in at 1.1 vs. -3.5 expected and 6.6 in June. June leading index will also be reported and is expected at -0.6% m/m vs. -0.7% in May.

Housing data will get some attention. June existing home sales are expected at -2.1% m/m vs. 0.2% in May. Are recent signs of strength just a fluke or something more sustainable? So far this week, July NAHB housing market index came in as expected at 56 vs. 55 in June, while June building permits and housing starts came in at -3.7% m/m and -8.0% m/m, respectively.

Weekly jobless claims will be closely watched. That‘s because initial claims will be for the BLS survey week containing the 12th of the month, and are expected at 240k vs. 237k last week. Continuing claims are reported with a one-week lag and are expected at 1.722 mln vs. 1.729 mln last week. Bloomberg consensus for July NFP currently stands at 175k vs. 209k in June.

EUROPE/MIDDLE EAST/AFRICA

Q1 eurozone GDP was revised up slightly. Output was flat q/q vs. -0.1% previously and -0.1% in Q4 and so the eurozone avoided consecutive quarters of contraction. Still, stagnation is hardly a reason to break out the champagne ahead of Q2 data July 31 that is expected to show lingering weakness. While the energy crisis proved to be less of a drag this winter, the eurozone is now facing greater headwinds from tighter monetary policy.

ECB tightening expectations remain steady ahead of next week’s meeting. WIRP suggests a 25 bp hike is priced in July 27. Odds of another 25 bp hike stand near 60% September 14 and is nearly priced in December 14. The messaging next week will be key. Does the ECB take hawkish line and commit to another hike or does it take a softer line? Even some of the leading hawks seem uncommitted to a September hike and so the usual hawk vs. dove dynamics have likely changed. We expect the ECB to take the middle ground and set forth a conditionally hawkish message that is much more data-dependent than its June statement.

U.K. by-elections are being held today. Three seats are up for grabs after Boris Johnson resigned and fellow Tory Nigel Adams also resigned in a show of support for Johnson. Polls suggest both of these seats will flip to Labour. A third seat is being contested due to the scandal-led resignation of Tory David Warburton and is likely to go to the Liberal Democrats. A governing party has not lost three by-elections in one day since 1968. The most recent YouGov poll shows Prime Minster Sunak’s popularity at the lowest since taking power last fall. Two more by-elections are expected in Tory-held seats in the coming weeks.

BOE MPC member Ramsden sounded hawkish. Yesterday, he said “If there is evidence of more persistent pressures, then further tightening in monetary policy would be required.” Ramsden also spoke about QT, noting “These factors support a carefully considered increase in the pace of reduction in the stock of gilts in the 12 months ahead. I emphasize careful; like the MPC I want QT to set a gradual and predictable pace for unwind and to let it operate in the background, after all.” BOE tightening expectations remain lower after the CPI data. WIRP suggests odds of a 50 bp hike August 3 have fallen to 45% after being largely priced in at the start of this week. Looking ahead, 25 bp hikes September 21 and November 2 are priced in but after that, the odds of one last 25 bp hike top out near 65% in February. This new expected rate path would see the bank rate peak between 5.75-6.0% vs. 6.25% at the start of this week and 6.5% at the start of last week. This is a huge downward adjustment that is taking a toll on sterling.

U.K. reports July GfK consumer confidence. It is expected at -25 vs. -24 in June. If so, it would be the first drop since January. Consumption has held up remarkably well but with interest rates still rising, it’s hard to see how it continues to hold up. Indeed, former BOE Governor Mervyn King warned that “If they carry on for the next six months or so, tightening monetary policy, it could well be that they generate both a recession as well as a sharp fall in inflation.”

The South African Reserve Bank is expected to hike rates 25 bp to 8.5%. However, a third of the 27 analysts polled by Bloomberg see steady rates. At the last meeting May 25, the bank hiked 50 bp to 8.25% and raised its inflation forecasts whilst warning of further rand weakness ahead. Looking ahead, the market is pricing in the start of an easing cycle in H1. Yesterday, South Africa reported soft June CPI data. Headline inflation came in a tick lower than expected at 5.4% y/y vs. 6.3% in May, while core also came in a tick lower than expected at 5.0% y/y vs. 5.2% in May. Headline was the lowest since October 2021 and back within the 3-6% target range for the first time since April 2022. We see some risks of a dovish surprise after the CPI data.

Turkey central bank is expected to hike rates 350 bp to 18.5%. However, market expectations are all over the place. Of the 23 analysts polled by Bloomberg, 1 sees 200 bp, 4 see 250 bp, 6 see 300 bp, 1 sees 350 bp, 5 see 400 bp, 1 sees 450 bp, and 5 see 500 bp. At the last meeting June 22, the bank delivered a dovish surprise and hiked rates 650 bp to 15.0% vs. 1150 bp expected. Since then, the lira has weakened another 12% despite some covert official support. The market is pricing in 1025 bp of tightening over the next three months followed by another 225 bp over the subsequent three months that would see the policy rate peak near 27.50%. With inflation running near 40%, this would not be enough to stabilize the lira.

ASIA

Japan reported soft June trade data. Exports came in at 1.5% y/y vs. 2.4% expected and 0.6% in May, while imports came in at -12.9% y/y vs. -11.3% expected and -9.8% in May. It was the first improvement in exports since February but growth remains quite weak. On the other hand, imports contracted at the fastest rate since October 2020 and so the unadjusted trade balance moved into surplus for the first time since July 2021. With exports still slowing, policymakers are depending on domestic activity to pick up the slack and that is why we do not think the BOJ will change policy next week.

Australia reported firm June jobs data. A total of 32.6k jobs were added vs. 15.0k jobs expected and a revised 76.5k (was 75.9k) in May, while the unemployment rate fell a tick to 3.5% vs. 3.6% expected. The details were good, as 39.3k full-time jobs were offset modestly by -6.7k part-time jobs. Continued strength in the labor market will be a big factor for monetary policy going forward, as low unemployment is likely to stoke wage pressures. As things stand, unemployment is half a percentage point below where the RBA sees it ending the year (4.0%). Updated macro forecasts will be released at the August 1 meeting.

Reserve Bank of Australia tightening expectations have picked up. WIRP suggests nearly 50% odds of a 25 bp hike August 1, up from 30% at the start of this week. Those odds rise to 80% September 5 vs. 55% at the start of this week and to nearly 100% October 3 vs. 75% at the start of this week. Odds of another 25 bp have returned to peak near 40% December 5.

China’s commercial banks kept their key 1- and 5-year Loan Prime Rates steady at 3.55% and 4.20%, respectively. No change was expected after the PBOC earlier this week left its key 1-year MLF rate steady at 2.65%. With deflationary impulses picking up and growth slowing, it seems like only a matter of time until monetary policy is eased again.

The PBOC stepped up its support of the yuan. Today’s fixing was much stronger than expected and the central bank tweaked some rules that would allow companies to boost overseas borrowing, which is meant to increase capital inflows. It made a similar move back in October. These measures could slow the move but until the monetary policy divergences stop widening, there is really not much China can do to reverse yuan weakness.

Taiwan reported weak June export orders. Orders came in at -24.9% y/y vs. -20.3% expected and -17.6% in May. This was the eighth straight month of double digit contraction and tenth straight of overall contraction. Elsewhere, Korea reports trade data for the first twenty days of July tomorrow. Korean export growth improved in June but this will be difficult to sustain given sluggish regional growth and activity.