Drivers for the Week of September 1, 2024

September 01, 2024

Win Thin

Here's a look at the main drivers in Developed Markets this week.

The dollar was mostly firmer against the majors last week. NZD and CAD were the exceptions and gained modestly, while NOK, EUR, and JPY underperformed. Key U.S. data this week will help determine whether the dollar recovery can continue. We remain constructive on the U.S. economic outlook and believe that the data will be dollar-supportive. If so, the greenback is likely to extend its gains.

AMERICAS

Data last week confirmed what we already knew. That is, the U.S. economic growth remains robust, driven by strong consumption, even as disinflation continues slowly but surely. We are in a Goldilocks moment right now and so we continue to believe the Fed will start cutting rates this month in a very gradual manner. The drop in U.S. yields appears to have run out of steam and this helped the dollar gain some traction. Elsewhere, equity markets continued to rally. We expect these investment trends to carry over into this week.

August jobs report Friday will be key. Bloomberg consensus for NFP stands at 165k vs. 114k in July, while its whisper number stands at 150k. The unemployment rate is expected to fall a tick to 4.2%, with the participation expected to remain steady at 62.7%. Average hourly earnings are expected to rise a tick to 3.7% in July, while the average workweek is expected to rise a tick to 34.3. Ahead of that, ADP private sector jobs estimate will be reported Thursday and is expected at 140k vs. 122k in July.

We see upside risk to August non-farm payrolls as some of the temporary factors that contributed to the soft July job report reverse. Fed Governor Bowman pointed out that “the rise in the unemployment rate in July was largely accounted for by workers who are experiencing a temporary layoff and are more likely to be rehired in coming months. Hurricane Beryl also likely contributed to weaker job gains, as the number of workers not working due to bad weather increased significantly last month.” Stay tuned.

The Fed releases its Beige Book report Wednesday. Attention will be on the District contacts’ view of the labor market. The July Beige Book showed most Districts reported employment was flat or up slightly, while a few Districts reported modest employment growth. Also watch out to see if more Districts are reporting weaker economic activity. For reference, the July Beige Book noted that a majority of Districts (7) reported some level of increase in activity. However, more Districts (5 vs. 2 previously) reported flat or declining activity than in the prior reporting period. This would be consistent with the economic data showing the labor market has softened a bit, which has likely translated into lower wage pressures and less pricing power for firms.

Fed easing expectations ended last week right where they began. The market still sees 100 bp of easing by year-end and 200 bp of easing over the next 12 months. The odds of a 50 bp cut in September are stuck around 25-30%. Williams and Waller speaks Friday. At midnight Friday, the media blackout goes into effect and there will be no Fed speakers until Powell’s post-decision press conference the afternoon of September 18.

July JOLTS data Wednesday will also be important. Job openings are expected at 8.1 mln vs. 8.184 mln in June. In June, the layoff rate dipped to 0.9%, matching the April 2022 low and indicating firms are managing headcount through attrition rather than layoffs. Moreover, the job openings rate is near pre-pandemic levels at 4.9% and well above the 4.5% threshold that typically signals a worrisome rise in the unemployment rate.

ISM PMIs will be closely watched. Manufacturing PMI will be reported Tuesday. Headline is expected at 47.5 vs. 46.8 in July. Risks are balanced judging from the already released regional Fed manufacturing surveys. Keep an eye on employment (43.4 in July) and prices paid (52.9 in July). Of note, the S&P Global manufacturing PMI fell to an 8-month low of 48.0 vs. 49.6 in July. Services PMI will be reported Thursday. Headline is expected at 51.1 vs. 51.4 in July. Headline is projected to dip to 51.1 vs. 51.4 in July. The already released regional Fed services business surveys point to downside risks. Here too, keep an eye on employment (51.1 in July) and prices paid (57.0 in July). Of note, the US S&P Global services PMI rose to a 2-month high at 55.2 vs. 55.0 in July.

Growth remains robust in Q3. The Atlanta Fed’s GDPNow model is tracking Q3 growth at 2.5% SAAR and will be updated Tuesday after the data. Elsewhere, the New York Fed’s Nowcast model is also tracking Q3 growth at 2.5% SAAR and will be updated Friday. It should also publish its first estimate for Q4 at the same time. While both model estimates are down from their earlier highs, growth remaining above trend is quite impressive in light of the Fed’s tightening.

Bank of Canada meets Wednesday and is expected to cut rates 25 bp to 4.25%. However, a handful of the 33 analysts polled by Bloomberg see no change. In July, the BOC delivered a widely anticipated 25 bp policy rate cut and signaled more easing was in the pipeline as “ongoing excess supply is lowering inflationary pressures.” The swaps market has more than fully priced in a 25 bp cut along with a small probability of a 50 bp cut. We would fade the risk of a jumbo cut and expect a 25 bp rate cut as inflation is currently tracking the BOC’s Q3 forecasts.

Canada data highlight will also be August jobs data Friday. Consensus sees 25.0k jobs added vs. -2.8k in July, while the unemployment rate is expected to rise a tick to 6.5%. Overall, Canada’s labor market has cooled significantly, and the Bank of Canada is particularly concerned with emerging slack in Canada’s labor market. The implication is the labor force survey will be a key driver of BOC interest rate expectations.

Canada August PMIs will also be important. S&P Global manufacturing PMI will be reported Tuesday. S&P Global services and composite PMIs will be reported Thursday. All three have been below 50 for the past two months. Ivey PMI will be reported Friday.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reports final PMIs. Manufacturing will be reported Monday. Spain and Italy report for the first time and are expected at 51.5 and 47.9, respectively. Services and composite PMIs will be reported Wednesday. Here too, Spain and Italy report for the first time and their services PMIs are expected at 54.9 and 52.5, respectively.

Eurozone reports July retail sales Thursday. Sales are expected at 0.2% y/y vs. -0.3% in June. Italy reports sales Friday. Activity in the eurozone remains sluggish and should persuade the ECB to continue cutting rates.

Eurozone countries report some key data. Germany reports July factory orders Thursday and are expected at -1.9% y/y vs. -11.8% in June. IP and trade data will be reported Friday. IP is expected at -3.5% y/y vs. -4.1% in June. Retail sales data have been delayed, with May data expected early this week. France reports July IP Friday and is expected at -0.8% y/y vs. -1.6% in June.

ECB easing expectations remain intact. A 25 bp cut this month is fully priced in. While another cut is also fully priced in, the odds of a third cut stand around 50%. Despite the ECB’s cautiousness, we believe the worsening growth outlook will eventually lead to more easing than what’s currently priced in. Nagel speaks Tuesday, Villeroy speaks Wednesday, and Holzmann speaks Thursday.

U.K. August Decision Maker Panel survey will be reported Thursday. 1-year expectations are seen steady at 2.5%. Both 1- and 3-year expectations fell to 2.5% in July, the lowest since this series began in 2022. Easing inflation expectations should give the BOE more confidence to continue cutting rates at a gradual pace.

The Bank of England is likely to continue cutting rates cautiously. MPC member Breeden speaks Tuesday. Recall that on August 1, Deputy Governor Breeden (at her second meeting on the MPC) voted for the 25 bp cut along with Deputy Governor Lombardelli (at her first meeting on the MPC), Governor Bailey, MPC external member Dhingra, and Deputy Governor Ramsden. The 5-4 margin then suggests the September 19 decision will also be a close call, with the market pricing in only 20% odds of a cut in favor of November 7.

Switzerland reports August CPI data Tuesday. Headline is expected to fall a tick to 1.2% y/y, while core is expected to remain steady at 1.1% y/y. If so, headline would be the lowest since March. Inflation is undershooting the Swiss National Bank’s (SNB) Q3 projection of 1.5% and remains well within the bank’s stability range of 0-2%. Bottom line: the SNB has scope to ease further. The swaps market has more than fully priced in a 25 bp cut at the September 26 meeting, along with 35% odds of a 50 bp cut. We would fade the risk of a jumbo SNB cut in September, as it would send the wrong signal to the market and suggest serious issues Switzerland’s economic/financial situation.

Switzerland reports other important data. August PMIs will be reported Monday. Q2 GDP data will be reported Tuesday. Growth is expected to remain steady at 0.5% q/q, while the y/y rate is expected at 1.5% vs. 0.6% in Q1. Forward-looking indicators are mixed. The KOF Economic Barometer points to continued moderate economic growth but the PMI data indicates condition in the manufacturing sector remain poor. For reference, the SNB anticipates GDP growth of around 1% this year.

Sweden reports August PMI readings. Manufacturing PMI will be reported Monday. Services and composite PMIs will be reported Wednesday.

ASIA

Japan highlight will be July cash earning data Thursday. Earnings are expected to ease after spiking in June due to the boost from the annual spring labor-management wage negotiations. Nominal earnings are expected at 3.0% y/y vs. 4.5% in June, while real earnings are expected at -0.4% y/y vs. 1.1% in June. Scheduled full-time pay is expected to rise a tick to 2.8% y/y. Japan’s modest wage improvement supports market pricing for just 25 bp of hikes in the next 12 months.

Bank of Japan is likely to remain cautious about tightening. The market does not price in the next hike until well into 2025, with only 25 bp of tightening seen over the next 12 months. Board member Takata speaks Thursday.

Australia highlight will be Q2 GDP data Wednesday. Growth is expected at 0.2% q/q vs. 0.1% in Q1, while the y/y rate is expected at 0.9% vs. 1.1% in Q1. However, the Q2 contraction in retail sales volume and private capital expenditures point to downside risk to GDP. The Q2 inventories data Monday and net exports data Tuesday will offer a clearer picture of the upcoming GDP figure. Q2 current account data will also be reported Tuesday. July trade data will be reported Thursday.

RBA Governor Bullock speaks Thursday. Bullock is expected to stick to the RBA’s hawkish guidance that “it was unlikely that the cash rate target would be reduced in the short term, and that it was not possible to either rule in or rule out future changes in the cash rate target.” Indeed, July CPI data showed inflation remained above the RBA’s 2-3% target range. Still, the market is pricing in around 80% odds of a rate cut in December.

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