- The U.S. economy remains the last man standing; key August PMI readings will be reported; all eyes are on the Kansas City Fed’s Jackson Hole Symposium; financial conditions remain too loose; Canada highlight will be June retail sales data
- Eurozone and the U.K. reported very weak preliminary August PMIs; ECB and BOE tightening expectations have fallen back a bit; Poland central bank minutes will be published
- Japan Prime Minister Kishida is looking into new relief measures for higher energy prices; Japan reported firm preliminary August PMIs; Australia reported soft preliminary August PMIs; New Zealand reported soft Q2 real retail sales
The dollar continues to power higher. Yesterday, DXY recorded an outside up day that points to further gains. True to form, DXY traded at a new high for this move near 103.92 and is on track to test the May 31 high near 104.699. The euro recorded an outside down day yesterday and so far is weakening today. It broke below the July low near $1.0835 and is on track to test the May low near $1.0635. Of note, the 200-day moving average comes in near $1.08 today and may provide some near-term support. Sterling is trading lower near $1.2640 and is nearing a test of the late June low near $1.2590. Break below sets up a test of the early June low near $1.2370. USD/JPY is not participating in the broad dollar rally and is trading lower near 145.50. However, it remains on track to eventually test the 150 area. The relative fundamental story continues to move in favor of the greenback. As we expected, the recent FOMC, ECB, and BOJ decisions as well as the ongoing economic data underscore the divergence theme and so further dollar gains seem likely.
The U.S. economy remains the last man standing. PMI readings out of Asia and Europe were mostly much weaker than expected (see below), highlighting our ongoing belief that economic divergences will continue to widen and so too will monetary policy divergences. Tightening expectations for the ECB and BOE have fallen, 2-year interest rate differentials have moved in the dollar’s favor, and that has helped boost the dollar to new highs for this move. U.S. data today should show activity holding up relatively better here.
Key August PMI readings will be reported. S&P Global reports its preliminary PMIs. Manufacturing is expected to remain steady at 49.0, services is expected to fall a tick to 52.2, and the composite is expected to fall half a point to 51.5. If so, this composite would be the lowest since February. Readings from around the world suggest some downside risk to the U.S. numbers today, while ISM PMI readings won’t be seen until next week. The Atlanta Fed’s GDPNow model is currently tracking Q3 growth at 5.8 % SAAR. Next model update comes tomorrow.
All eyes are on the Kansas City Fed’s Jackson Hole Symposium this week. It begins tomorrow and ends Saturday. This year’s topic is ““Structural Shifts in the Global Economy” and the full agenda is usually made available at www.kansascityfed.org tomorrow evening. While some may be looking for any hints on policy, we do not think any decisions will be made until the actual September 19-20 FOMC meeting given the Fed’s data-dependency mode. However, we expect Chair Powell to underscore the Fed’s commitment to meeting the 2% inflation target in his opening speech Friday morning. As such, a hawkish tone should emerge from the symposium. We will be sending out Jackson Hole preview later today.
Financial conditions remain too loose. Some of the Fed doves have been talking up the potential for a soft landing without acknowledging why the economy has so far avoided a hard landing. The Chicago Fed’s measure of financial conditions is the loosest since early March 2022, before the Fed started hiking. Until financial conditions tighten, there’s unlikely to be any landing whatsoever as growth remains at or above trend. The Chicago Fed’s weekly reading will be out today.
Housing data will be of interest. New home sales are expected at 1.0% m/m vs. -2.5% in June. July existing home sales were reported yesterday at -2.2% m/m vs. -0.2% expected and -3.3% in June, while the y/y rate improved slightly to -16.6% vs. -18.9% in June.
Preliminary benchmark revisions to the establishment survey will be released. From the BLS website: “Each year, the establishment survey estimates are benchmarked to comprehensive counts of employment from the Quarterly Census of Employment and Wages (QCEW) for the month of March. These counts are derived from state unemployment insurance (UI) tax records that nearly all employers are required to file.” Bloomberg consensus for August NFP has started out at 160k vs. 187k in July, while the unemployment rate is expected to remain steady at 3.5%.
Canada highlight will be June retail sales data. Headline is expected at 0.0% m/m vs. 0.2% in May while ex-autos is expected at 0.3% m/m vs. 0.0% in May. The real sector data have come in soft recently but headline inflation accelerated to 3.3% y/y in July and so the Bank of Canada will remain on alert. WIRP suggests 33% odds of a hike September 6, rising to 65% October 25 and topping out near 90% January 24.
Eurozone reported weak preliminary August PMIs. Headline manufacturing came in at 43.7 vs. 42.7 expected and actual in July, services came at 48.3 vs. 50.5 expected and 50.9, and the composite came in at 47.0 vs. 48.5 expected and 48.6 in July. The headline composite has come in below 50 for three straight months and is the lowest since October 2020. Looking at the country breakdown, the German composite came in at 44.7 vs. 48.3 expected and 48.5 in July while the French composite came in at 46.6 vs. 47.1 expected and 46.6 in July. Italy and Spain will be reported with the final PMI readings in early September.
European Central Bank tightening expectations remain subdued. WIRP suggest odds of a 25 bp hike stand just below 40% September 14, rise to 55% October 26 and top out near 60% December 14. These odds will rise and fall with the data but Madame Lagarde clearly accentuated the negative at the last ECB meting and that’s what seems to be unfolding now. What’s very interesting to us is that the ECB may stop hiking before the Fed does and we don't think the markets have priced this risk in yet. Lagarde speaks Saturday at Jackson Hole.
U.K. reported very weak preliminary August PMIs. Headline manufacturing came in at 42.5 vs. 45.0 expected and 45.3 in July, services came in at 48.7 vs. 51.0 expected and 51.5 in July, and the composite came in at 47.9 vs. 50.4 expected and 50.8 in July. This was the first sub-50 composite reading since January and the lowest since January 2021. A recession now looks to be inevitable.
Bank of England tightening expectations have fallen back a bit. WIRP suggests less than 10% odds of a 50 bp hike September 21, while odds of a 25 bp hike November 2 are around 85% vs. fully priced in before. Furthermore, the odds of a third hike February 1 have fallen to 55% vs. fully priced in before. Broadbent speaks Saturday at Jackson Hole.
Poland central bank minutes will be published. At that July 6 meeting, the bank kept rates steady at 6.75% but highlight a potential cut next month as Governor Glapinski said “If inflation will be in the single digits and if the projection for the nearest quarters and years shows, with a 90% certainty, that price growth will slow further, then it’s possible in September.” Next policy meeting is September 13 and a 25 bp cut then to 6.5% seems likely. The swaps market is pricing in 50 bp of easing over the next three months followed by another 75 bp over the subsequent three months.
Japan Prime Minister Kishida is looking into new relief measures for higher energy prices. He said “This summer I have heard the voices of various people who have been suffering as a result of rising gasoline and other fuel prices. We’ll first thoroughly consider measures for that this month, and then thoroughly discuss overall economic measures next month.” Of note, many of the existing fuel subsidies are due to expire at the end of September and so Kishida is hoping to avoid a huge hit to household budgets that could stall the recovery. To get an idea of how much fuel subsidies have helped, note that CPI ex-fresh food and energy rose 4.3% y/y in July and is still rising. On the other hand, core (ex-fresh food) inflation of 3.1% y/y is the lowest since March and should fall further in August. This would support the Bank of Japan’s wait-and-see stance as the most recent forecasts show core falling back below the 2% target in both FY24 and FY25. Next policy meeting is September 21-22 and no change is expected then.
Japan reported firm preliminary August PMIs. Manufacturing rose a tick to 49.7, services rose half a point to 54.3, and the composite rose four ticks to 52.6. The composite PMI has risen two straight months to the highest since May and has remained well above 50 all year despite recent hard data suggesting the economy is softening.
Australia reported soft preliminary August PMIs. Manufacturing fell two ticks to 49.4, services fell over a point to 46.7, and the composite fell over a point to 47.1. The composite PMI has fallen four straight months to the lowest since January 2021. With China slowing, we expect the composite PMI to continue falling and is likely to remain below 50 in the coming months. The RBA has warned that further hikes may be needed but WIRP suggests no odds of a hike September 5 or October 3, rising to 25% November 7 and then topping out around 40% in Q1.
New Zealand reported soft Q2 real retail sales. Sales came in at -1.0% q/q vs. -0.4% expected and a revised -1.6% (was -1.4%) in Q1. This does not bode well for Q2 GDP, which already contracted q/q in both Q4 and Q1. The RBNZ has warned that further hikes may be needed but WIRP suggests less than 10% odds of a hike October 4, rising to 40% November 29 and then topping out around 55% February 28.