The dollar saw broad-based weakness against the majors last week. GBP, AUD, and NOK outperformed while JPY, CHF, and CAD underperformed. The U.S. data last week confirmed what we already knew; that is, disinflation continues slowly even as the economy remains relatively robust. All eyes are on the Jackson Hole Symposium, where Chair Powell is expected to set the table for a September cut while pushing back against the need for an aggressive easing cycle. Global PMI readings for August are also expected to reinforce the divergence theme that favors the dollar.
AMERICAS
The market turmoil at the start of the month is a distant memory. No one is clamoring for an intra-meeting cut by the Fed, with the S&P 500 and the Nikkei both close to where they were trading on July 31. However, U.S. yields and the dollar have hardly recovered at all as markets continue to price in aggressive Fed easing. We are sticking with our constructive view on the U.S. economy. Yes, there is enough progress on inflation to begin what we view as a “mid-cycle adjustment.” We do not see imminent recession, which is what would be needed to get the Fed to cut as much as the market is pricing in. While the odds of a 50 bp cut in September have fallen (30% for Fed Funds futures, 15% for OIS), nearly 100 bp of total easing by year-end is still priced in, along with 175-200 bp of total easing over the next 12 months. This mispricing should eventually correct.
The Fed’s Jackson Hole Symposium starts Thursday and ends Saturday. This year’s topic is "Reassessing the Effectiveness and Transmission of Monetary Policy." Chair Powell will give opening remarks Friday morning. Judging by recent Fed official comments, the consensus seems prepared to begin the easing cycle in September but continue to see a relatively strong labor market. We expect Powell to stress the data-dependent nature of the Fed’s monetary policy decisions and to push back against any sort of pre-commitment to an aggressive easing path. Powell has already pulled off a mid-cycle adjustment back in 2019 and so he can draw on that experience.
FOMC minutes will be released Wednesday. The statement from the July 30-31 meeting reiterated that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.” The Fed noted that inflation made some progress but remains “somewhat” elevated. On the other hand, it’s also very clear that the Fed is increasingly concerned about the labor market, as the statement emphasized it “is attentive to the risks to both sides of its dual mandate; the June FOMC statement noted it was “highly attentive to inflation risks.” Chair Powell’s press conference provided the dovish goods. To wit, Powell said that “a reduction in our policy rate could be on the table as soon as the next meeting in September.” For emphasis, he added that “there was a real discussion back and forth of what the case would be for moving at this meeting.”
BLS releases its preliminary annual payrolls benchmark revisions Wednesday. This is typically not a market-mover. Note that the revisions will only impact NFP and not the unemployment rate, which is derived from the household survey. Last year’s revisions had little market impact. 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. At 10:00 a.m. ET on August 21, 2024, the Bureau of Labor Statistics (BLS) will release the preliminary estimate of the upcoming annual benchmark revision to the establishment survey data. The final benchmark revision will be issued with the publication of the January 2025 Employment Situation news release in February 2025.
The data highlight will be S&P Global preliminary August PMIs Thursday. Manufacturing is expected to rise two ticks to 49.8, services is expected to fall a full point to 54.0, and the composite is expected to fall a full point to 53.3. If so, this would be the second straight drop to the lowest since April. ISM PMIs won’t be reported until the first week of September.
Weekly jobless claims Thursday will be of interest. That’s because the initial claims data will be for the BLS survey week containing the 12th of the month and are expected at 231k vs. 227k last week. Continuing claims are reported with a 1-week lag and are expected at 1.860 mln vs. 1.864 mln last week. Bloomberg consensus for August NFP sees 155k vs. 114k in July, while its whisper number currently comes in at 133k.
Chicago Fed reports July National Activity Index Thursday. Headline was 0.05 in June. Most importantly, the 3-month moving average was -0.01, which is far from the -0.7 threshold that signals recession.
Housing data will be of interest. July existing home sales will be reported Thursday and expected at 1.0% m/m vs. -5.4% in June. New home sales will be reported Friday and expected at 1.1% m/m vs. -0.6% in June. Last week, the NAHB housing market index for August came in at 39 vs. 43 expected and a revised 41 (was 42) in July. This was the fourth straight drop and the lowest since December, suggesting that the housing market remains under pressure despite the recent drop in yields.
The Democratic National Convention will be held Monday-Thursday in Chicago. As candidates usually see a polling bump after their conventions, one can expect Vice President Harris to widen her lead over former President Trump. As things stand now, Harris has already overtaken Trump in some national and swing state polls. As a result, the betting markets now have her as the favorite to win in November. We will be putting out an election primer in early September that discusses Trumponomics vs. Kamalanomics.
Canada highlight will be July CPI data Tuesday. Headline is expected at 2.5% y/y vs. 2.7% in June, core median is expected at 2.5% y/y vs. 2.6% in June, and core trim is expected at 2.8% y/y vs. 2.9% in June. If so, it would be the second straight deceleration in headline to the lowest since March 2021. We believe it would also cement a 25 bp cut at the next BOC meeting September 4.
June retail sales data Friday will also be of interest. Headline is expected at -0.3% m/m vs. -0.8% in May, while ex-autos is expected at -0.3% m/m vs. -1.3% in May. With the labor market continuing to soften in July, we expect consumption to also remain soft.
EUROPE/MIDDLE EAST/AFRICA
European Central Bank publishes the account of its July decision Thursday. At the July 18 meeting, the bank kept rates steady and noted “The incoming information broadly supports the Governing Council’s previous assessment of the medium-term inflation outlook. At the same time, domestic price pressures are still high, services inflation is elevated, and headline inflation is likely to remain above the target well into next year.” In her press conference, President Lagarde said “The question of September and what we do in September is wide open and will be determined on the basis of all the data that we will be receiving.” Afterward, the usual leaks emerged as the hawks said that the bank may only be able to cut rates one more time this year. Rehn speaks Monday, Panetta speaks Wednesday, and Lane speaks Saturday at Jackson Hole.
European Central Bank also publishes Q2 negotiated wage settlements Thursday. Recall that negotiated wage growth picked up to 4.7% y/y in Q1 vs. 4.5% in Q4 and matched the record high set in Q3 2023. The data were disappointing and led to greater uncertainty on how quickly the ECB could cut rates. However, we note that the forward-looking ECB wage growth tracker and other leading indicators for wage pressures suggest that negotiated wage pressures are moderating.
ECB reports July inflation expectations Friday. 3-year expectations are expected to remain steady at 2.3%. Elsewhere, 1-year expectations have been slowly falling but remain stuck above the 2% target.
Eurozone data highlight will be preliminary August PMIs Thursday. Headline manufacturing is expected to remain steady at 45.8, services is expected to fall two ticks to 51.7, and the composite is expected to fall a tick to 50.1. With Germany still looking quite sickly, we see risks that the composite falls below the 50 boom/bust level. Looking at the country breakdown, the German composite is expected to rise two ticks to 49.4 and the French composite is expected to fall a tick to 49.0. Italy and Spain will be reported with the final PMI readings in early September.
U.K. highlight will be preliminary August PMIs Thursday. Manufacturing is expected to remain steady at 52.1, services is expected to rise three ticks to 52.8, and the composite is expected to rise a tick to 52.9. If so, it would be the second straight rise and supportive of the U.K. recovery story.
U.K. CBI also reports its August industrial trends survey Thursday. Total orders are expected at -23 vs. -32 in July, while selling prices are expected at 5 vs. 2 in July. Its distributive trades survey will be reported next week.
Bank of England Governor Bailey speaks at the Jackson Hole Symposium Friday. The data dump last week showed that the economic recovery continues even as the inflation outlook remains mixed. Recall that the vote to cut August 1 was 5-4, with Bailey voting with the majority. Alan Taylor will replace Jonathan Haskel (who voted to keep rates steady this month) as an external member of the MPC, starting September 2. That means Taylor will vote at the September 19 meeting.
Riksbank meets Tuesday and is expected to cut rates 25 bp to 3.5%. The market sees nearly 30% odds of a larger 50 bp move. Last week, July CPI data came in slightly higher than expected but still tracked the Riksbank’s forecasts. As a result, we believe the bank will reiterate its guidance from the June meeting that it will cut the policy rate “two or three times during the second half of the year.” The market is even more dovish and sees 100 bp of easing by year-end. Updated macro forecasts will come at the September 25 meeting.
ASIA
Japan highlight will be July national CPI data Friday. Headline is expected to fall a tick to 2.7% y/y, core (ex-fresh food) is expected to pick up a tick to 2.7% y/y, and core ex-energy is expected to fall three ticks to 1.9% y/y. If so, core would accelerate for the fourth straight month and move further above the 2% target. While this would justify the BOJ’s hawkish hike last month, the bank has since executed a dovish pivot that has pushed out market expectations for the next hike well into 2025. We do not believe the CPI data will do anything to change that.
Preliminary August PMIs will be reported Thursday. The composite PMI bounced back to 52.5 in July after falling below 50 in June. We think it will be hard to sustain this bounce in light of rising JGB yield and the stronger yen.
July trade data will be reported Wednesday. Export growth is expected at 11.4% y/y vs. 5.4% in June, while import growth is expected at 14.6% y/y vs. 3.2% in June. Much of the improvement will be due to low base effects.
Reserve Bank of Australia releases its minutes Tuesday. At the August 6 meeting, the bank delivered a hawkish hold. It kept rates steady at 4.35% and reiterated that “the Board is not ruling anything in or out” and “that it will be some time yet before inflation is sustainably in the target range.” The RBA also warned again of “the need to remain vigilant to upside risks to inflation.” Governor Bullock pointed out during her press conference that “the Board did consider a rate rise” and that rate cuts are “not in the agenda in the near-term.” Bullock added that expectations for rate cuts are “a little ahead of themselves.” Despite this pushback, the market still sees close to 90% odds of a cut in December.
Preliminary August PMIs Thursday will be closely watched. The composite PMI fell below 50 in July for the first time since January. With the mainland economy still struggling, we suspect the composite PMI will remain below 50 over the near-term.
New Zealand highlight will be Q2 real retail sales Friday. Sales are expected at -0.5% q/q vs. 0.5% in Q1. If so, this would be consistent with RBNZ forecasts from last week’s meeting of GDP contracting -0.5% q/q in Q2 and -0.2% q/q in Q3. This would be followed by modest recovery of 0.1% q/q growth forecast for Q4.
RBNZ Deputy Governor Hawkesby speaks Tuesday. Last Friday, Assistant Governor Silk seemed to push back against aggressive market easing bets by stressing that the RBNZ is taking a “measured approach” and will remain data dependent. However, with the dovish message delivered with last week’s 25 bp cut, the market is pricing in 75 bp of easing by year end, with nearly 45% odds of a 50 bp cut at the next meeting October 9.
