• In FX, it’s all about the relative view; June retail sales will be the data highlight; regional Fed surveys for July started rolling out; Canada highlight will be June CPI data
  
• The ECB hawks have blinked; market research suggests U.K. food price inflation may have peaked; ECB and BOE tightening expectations have ebbed
  
• The RBA released its minutes; China released a plan to boost household consumption that was light on details

The dollar remains soft ahead of retail sales data. DXY is trading slightly lower near 99.722 and the clean break below 100 sets up a test of the late March 2022 low near 97.685. The euro traded at a new high for this move near $1.1275 and is on track to test the February 2022 high near $1.15. However, ECB comments suggest a top may be near. Sterling is lagging a bit and is trading just above $1.31 after trading Friday at the highest since April 2022 near $1.3140. Still, it remains on track to test its March 2022 high near $1.33. USD/JPY remains heavy near 138 after it traded Friday at the lowest since May near 137.25. Clean break below 138 sets up a test of the mid-May low near 133.75. We remain frustrated with this ongoing dollar weakness, which we view as being at odds with the underlying fundamental story. The bearish momentum remains too strong right now and so further near-term losses are likely. However, we believe cracks are widening in the rest of the world and markets will eventually take note.

AMERICAS

In FX, it’s all about the relative view. Relative interest rate differentials and reIative growth rates are the two most important ones for the market. We believe both still favor the dollar but it has suffered from a massive drop in the 2-year yield even as markets embrace the soft landing scenario. In keeping with the relative view, if one is negative on the dollar, one must be positive on another currency. The euro and sterling are two of the top three performing majors year to date. Yet we are beginning to see larger cracks form in these two currencies (see below), as well as in the rest of the world. This week, comments from two leading ECB hawks suggest the tightening cycle may end sooner than expected. In the U.K., stubbornly high inflation is likely to lead to an aggressive BOE tightening cycle that tips the economy into a deep recession. To us, the relative view doesn’t look as good for the euro and sterling as it used to.

Here, tightening expectations remain steady but we think markets continue to underestimate the Fed. A 25 bp hike July 26 is still largely priced in, while the odds of a second 25 bp hike are still hovering around 25%. Lastly, the first cut is not priced in until next March. We do not think this weakness was warranted given the underlying fundamental story and yet here we are. We continue to see underlying strength in the U.S. economy that may warrant another hike after next week’s. The economy continues to grow at or above trend at a time when the Fed wants below trend growth to fight inflation.

June retail sales will be the data highlight. Headline is expected to come in at 0.5% m/m, ex-auto at 0.3%, and the so-called control group used for GDP calculations at 0.3%. We note that markets should not just rely on retail sales data to gauge the strength of the consumer, as it only covers goods. Personal spending covers services as well and gives a much fuller picture, but the June reading won’t be reported until July 28 along with PCE data. Last week, Michigan consumer sentiment came in much stronger than expected at 72.6 vs. 64.4 in June and was the highest since September 2021. This suggests consumption is likely to remain robust as we move into H2.

Regional Fed surveys for July started rolling out. Empire manufacturing survey kicked things off yesterday and came in 1.1 vs. -3.5 expected and 6.6 in June. New York Fed services survey will be reported today and stood at -5.2 in June. Philly Fed survey will be reported Thursday and is expected at -10.0 vs. -13.7 in June. We know manufacturing is likely to remain soft, as services continue to be the driver of growth here in the U.S. Of note, the Atlanta Fed’s GDPNow model is currently tracking Q2 growth of 2.3% SAAR. Next model update comes today after the data.

Other minor data will be reported. July NAHB housing market index is expected at 56 vs. 55 in June. June IP, May business inventories, and May TIC data will also be reported. IP is expected flat m/m vs. -0.2% in May, while inventories are expected to remain steady at 0.2% m/m.

Canada highlight will be June CPI data. Headline is expected at 3.0% y/y vs. 3.4% in May, while both core median and trim are expected to fall two ticks to 3.7% y/y and 3.6% y/y, respectively. If so, headline would be the lowest since March 2021 but still above the 2% target. Bank of Canada just hiked rates 25 bp to 5.0% last week and said it now sees inflation returning to the 2% target by mid-2025 vs. end-2024 previously, adding that it is concerned progress towards it could stall. Later, Governor Macklem said the bank discussed holding rates and awaiting more data but decided that the cost of delay exceeded the benefit of waiting. He said the bank is prepared to hike again if needed but that it would assess rates on a decision-by-decision basis. Looking ahead, WIRP suggests 25% odds of a hike September 6 and then rise to top out near 60% for October 25. Whether there is another hike will all come down to the data.

EUROPE/MIDDLE EAST/AFRICA

The ECB hawks have blinked. Regarding hikes, leading hawk Knot said “For July I think it is a necessity, for anything beyond July it would at most be a possibility but by no means a certainty.” He added that “From July onward, I think we have to carefully watch what the data tells us on the distribution of risks surrounding the baseline.” Yesterday, noted hawk Nagel said “We have to hike next time and I expect another 25 bp hike for the July meeting. For the September meeting, we will see what the data will tell us.” The comments are noteworthy coming ahead of next Thursday’s meeting, where WIRP suggests a 25 bp hike is priced in. Odds of another 25 bp hike stand near 55% September 14 and top out near 80% December 14 after being fully priced in at the start of this week. If other hawks fall into line, a terminal rate of 3.75% becomes a real possibility and that is negative for the euro.

Market research suggests U.K. food price inflation may have peaked. Research firm Kantar reported grocery price inflation at 14.9% in the four weeks ended July 9, down 1.6 percentage points from the previous reading. It has fallen four straight months since the record high of 17.5% in March. This report comes a day ahead of the June CPI data, where headline is expected at 8.2% y/y vs. 8.7% in May, core is expected to remain steady at 7.1% y/y, and CPIH is expected at 7.5% y/y vs. 7.9% in May. If so, headline would be the lowest since March 2022 but still well above the 2% target.

BOE tightening expectations have ebbed. WIRP suggests another 50 bp hike is largely priced in for August 3, followed by 25 bp hikes September 21 and November 2. After that, one last 25 bp hike in December is no longer priced in. Instead, the odds top out in Q1 at around 55%. This would still represent the most aggressive tightening cycle in the majors so far in terms of absolute magnitude. As a result, a deep recession remains likely after some earlier optimism that one might be avoided. Updated macro forecasts will come at the August meeting and will have to acknowledge the worsening backdrop.

ASIA

The Reserve Bank of Australia released its minutes. At the July meeting, the bank left rates steady at 4.10% but debated hiking again. Minutes show that “The board recognized the strength of both sets of arguments but judged the case to hold the cash rate unchanged at this meeting was the stronger one. Noting both the uncertainty around the outlook and the significant increase in interest rates to date, members agreed to hold the cash rate steady and reassess the situation at the August meeting.” In justifying the pause, the bank highlighted that monetary policy had already been tightened “considerably and rapidly over the prior year” and that the current level of the cash rate is “clearly restrictive.” On the other hand, inflation was forecast to remain above the RBA’s 2-3% target band until mid-2025 and that “there was a risk that this timeframe would be extended without further monetary policy tightening.” WIRP suggests 25% odds of a 25 bp hike August 1, which rise to 50% September 5, 65% October 3 before becoming nearly priced in for November 7. A second hike is no longer priced in. Updated macro forecasts will be released at the August 1 meeting.

China released a plan to boost household consumption that was light on details. Local authorities were encouraged to help residents refurbish their homes even as consumers were to get better access to credit for such purchases. Commerce Vice Minister Sheng Qiuping said that relatively weak spending this year on home appliances, furniture, and decorative materials this year prompted the plan. According to the Commerce Ministry, the 11-point plan is aimed at “unleashing the potential of household consumption.” Yet there were no details on how access to credit would be improved nor how demand would be boosted, with most of the emphasis put on the supply side. The plan comes a day after China reported weak GDP and retail sales data.