Despite the dollar selloff Friday, it was still broadly firmer against the majors last week. NOK, EUR, and SEK outperformed while the dollar bloc underperformed. The jobs report was mixed and while we did not think it moved the needle on Fed policy, the market took it as an excuse to take profits on long dollar positions. This week brings CPI and PPI data that may put Fed tightening back on the table and that should help the dollar outlook.

AMERICAS

We get the sense that the doves on the FOMC are getting too confident. They were out in full force last week, with Goolsbee noting promising inflation numbers and saying the Fed should start thinking about how long to hold rates. Bostic said he was comfortable, while Barkin is talking about a soft landing. Do these Fed officials really think it's going to be this easy? Sure, a soft landing is possible and inflation might somehow return to target without any further hiking but really, aren't we a little old for fairy tales? Our base case remains an eventual recession. Bostic and Bowman speak Monday. Harker speaks Tuesday. Bostic and Harker speak again Thursday.

Yet it’s clear why the doves are getting a bit cocky. The U.S. economy remains robust and price pressures are easing. The Atlanta Fed’s GDPNow model is currently tracking Q3 growth at 3.9% SAAR vs. 2.4% in Q2. Of course, that rate is likely to come down as the data come in but the momentum is undeniable. Next model update comes Tuesday. Even as the economy remains robust, inflation has come down significantly. However, as we’ve pointed out before, the easy part is getting from 8% to 4%; the hard part is getting it from 4% to 2%. Because of this, we believe the markets continue to underestimate the Fed’s capacity to tighten. WIRP suggests odds of a hike September 20 are around 15% but we think this should be much higher. Those odds top out near 30% November 1 but should move higher if the data remain firm.

U.S. Treasury yields should continue to rise at the long end. Last week brought a perfect storm of bond-negative news: the U.S. Treasury boosted its estimates for Q3 issuance to $1 trln vs. $733 bln seen back in May, Fitch downgraded the U.S. to AA+, the BOJ tweaked Yield Curve Control, and data out of the U.S. remained strong. On their own, each of these drivers might have had a little impact but taken together, the floodgates opened. The supply will remain relentless, as Treasury estimates Q4 issuance of $852 bln and so it’s hard to make a case for lower yields.

Against this backdrop of elevated yields, the U.S. Treasury holds its quarterly refunding this week. The total of $103 bln will be sold and saw the first increase in over two years. It begins Tuesday with a $42 bln sale of 3-year notes. At the previous auction, indirect bidders took 69.4% and the bid to cover ratio was 2.88. It continues with a $38 bln sale of 10-year notes Wednesday. At the previous auction, indirect bidders took 67.7% and the bid to cover ratio was 2.53. It concludes with a $23 bln sale of 30-year bonds Thursday. At the previous auction, indirect bidders took 69.0% and the bid to cover ratio was 2.43.

July inflation data take center stage. CPI will be reported Thursday. Consensus sees headline and core both coming in at 0.2% m/m, same as in June. In y/y terms, headline is seen at 3.3% vs. 3.0% in June and core is seen steady at 4.8%. Of note, the Cleveland Fed’s Nowcast model sees both headline and core coming in at 0.4% m/m while in y/y terms, headline is seen at 3.4% and core is seen at 4.9%. As such, there are some upside risks to the data. PPI will be reported Friday. Consensus sees headline and core both coming in at 0.2% m/m vs. 0.1% in June. In y/y terms, headline is seen at 0.7% vs. 0.1% in June and core is seen falling a tick to 2.3%.

University of Michigan reports preliminary August consumer sentiment Friday. Headline is expected at 71.5 vs. 71.6 in July. Current conditions are expected to rise to 76.8 but offset by an expected drop in expectations to 66.5. Consumption has held up relatively well, with full employment and strong consumer confidence fueling it. Job growth is slowing, albeit modestly, while unemployment at 3.5% is just a tick above the cycle low from earlier this year.

Other minor data will be reported. June consumer credit will be reported Monday and is expected at $13.55 bln vs. 7.24 bln in May. June trade and wholesale trade sales and inventories will be reported Tuesday. Weekly jobless claims and July budget statement will be reported Thursday. Initial claims are expected at 230k vs. 227k last week. While many are hailing the 187k jobs number Friday as signs of a cooling labor market, the 3.5% unemployment rate says otherwise.

EUROPE/MIDDLE EAST/AFRICA

Eurozone has a quiet data week. Germany reports June IP Monday and is expected at -0.5% m/m vs. -0.2% in May. The y/y rate is expected at -0.2% vs. 0.7% and would be the first negative reading since January. Eurozone IP won’t be reported until August 16. Germany reports June current account data Friday.

Market expectations for ECB policy remain subdued. WIRP suggest odds of a 25 bp hike stand near 35% September 14, rise to 55% October 26 and top out near 70% December 14. These odds will rise and fall with the data but Madame Lagarde clearly accentuated the negative last week and that’s what markets should focus on. 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.

The monthly U.K. data dump begins Friday. GDP, IP, services, construction output, and trade will all be reported. GDP is expected at 0.2% m/m vs. -0.1% in May, IP is expected at 0.2% m/m vs. -0.6% in May, services is expected at 0.2% m/m vs. 0.0% in May, and construction is expected at 0.0% m/m vs. -0.2% in May. While the economy has been resilient, we believe this small bounce is unlikely to be sustained.

U.K. also reports Q2 GDP Friday. GDP is expected at 0.0% q/q vs. 0.1% in Q1, while the y/y rate is expected to remain steady at 0.2%. The latest BOE forecasts continue to show no recession but we believe this is unlikely given the tightening cycle.

Bank of England expectations remain subdued after last week’s 25 bp hike. WIRP suggests 75% odds of a 25 bp hike September 21, while a 25 bp hike December 14 is priced in with some odds of a third hike that top out near 30% in Q1. This would see the bank rate peak near 5.75% vs. 6.5% at the start of last month. However, the swaps market sees the rate staying at 5.75% over the next twelve months before rate cuts begin in the subsequent twelve months as Bailey said it was “far too soon to speculate on when we might see a cut.” Chief Economist Pill speaks Monday.

Norway reports July CPI Thursday. Headline is expected at 5.9% y/y vs. 6.4% in June, while underlying is expected at 6.4% y/y vs. 7.0% in June. If so, headline would be the lowest since December but still well above the 2% target. At the last meeting June 22, Norges Bank delivered a hawkish surprise and hiked rates 50 bp to 3.75% vs. 25 bp expected and said rates will “most likely be raised further in August.” Updated macro forecasts were released and the expected rate path was shifted higher to a peak of 4.25% this year. Next meeting is August 17 and a 25 bp hike is expected then. The swaps market views Norges Bank as more dovish and is pricing in a peak policy rate peak near 4.0% over the next six months.

ASIA

Bank of Japan releases its summary of opinion for the July meeting Monday. At that meeting, the bank surprised the markets with a tweak to Yield Curve Control. Yet the tweak was opaque, with no clear indication of what the bank really wanted to accomplish. The summary will be scoured for clues to its reasoning for the tweak as well as possible bond-buying parameters for that 10-year JGB yield as it moves above the 0.5% ceiling and towards the 1.0% level that the bank is defending. Until there is more clarity, we expect the market to continue testing the BOJ by pushing yields higher. July PPI will be reported Thursday and is expected at 3.5% y/y vs. 4.1% in June.

Japan highlight will be June cash earnings and household spending reported Tuesday. Nominal earnings are expected to pick up a tick to 3.0% y/y while real earnings are expected to remain steady at -0.9% y/y. If so, it would be disappointingly weak given the wage deals announced so far. With real wages still falling, it’s no surprise then that household spending is expected at -3.8% y/y vs. -4.0% in May.

June current account data will also be reported Tuesday. An adjusted surplus of JPY2.2 trln is expected vs. JPY1.7 trln in May. However, the investment flows will be of more interest. The May data showed that Japan investors were net buyers of U.S. bonds (JPY3.0 trln) again and for four of the past five months. Japan investors remained net buyers (JPY213 bln) of Australian bonds for the third straight month after eight straight months of net selling, and also remained net sellers of Canadian bonds (-JPY32 bln) for the fifth straight month and for fifteen of the past sixteen months. Investors turned net sellers of Italian bonds (-JPY271 bln) after two months of net buying. Overall, Japan investors were total net buyers of foreign bonds (JPY3.16 trln) again and for four of the past five months. With signs growing that the BOJ is likely to keep yields low, we expect investors to continue chasing higher yields abroad and that’s negative for the yen.

July machine tool orders Wednesday will be important. Orders have contracted y/y for six straight months and eight of the past nine. What’s worrisome is that domestic orders are contracting even faster than foreign orders. We know that slowing global growth would weigh on the external sector but there are growing signs that domestic activity is also slowing. No wonder the BOJ remains so dovish.