The dollar put in a mixed performance against the majors. AUD, NZD, and NOK outperformed while EUR, CHF, and CAD underperformed. The U.S. data last week came in on the soft side, leading to some dollar weakness that reversed sharply Friday after the jobs data. While there was a little something for both hawks and doves in that report, the market eventually recognized that the underlying details support further Fed tightening. U.S. rates and the dollar ended the week near recent highs and that uptrend should continue this week.
The jobs report Friday had a little bit for everyone. The headline NFP of 187k was solid, but downward revisions totaling -110k for the prior two months and unemployment rising to 3.8% fed into the dovish Fed narrative. However, a look at the details led to a quick reversal across all markets. For one thing, BLS suggested that the Yellow bankruptcy eliminated 37k jobs while the Hollywood strike lopped off another 17k, which means the headline would otherwise be closer to 241k. Furthermore, the jump in unemployment seems to have been a real quirk, as the household survey showed 222k jobs created even as the labor force rose 736k and unemployment rose 514k. Bottom line: the labor market appears to be as tight as ever.
We saw a very impressive recovery in the dollar and U.S. yields, especially at the long end. We believe the U.S. economy remains far too robust for current policy settings to get inflation back to target and so more needs to be done, period. This is unlikely September 20, as the data support a skip with WIRP showing only 5% odds. More likely, we will see the next hike November 1. By that November meeting, we will get one more jobs report and two each of CPI, PPI, retail sales, and PCE. If things go the way we expect for the U.S., the current 40% odds of a hike then are too low.
The Fed releases its Beige Book report Wednesday for the September 19-20 FOMC meeting. Since the last Beige Book released July 12, data suggest the labor market has softened slightly. JOLTS suggest fewer job openings and less churn, but weekly jobless claims remain near the lows and so the labor market remains tight overall. GDP growth appears to have picked up in Q3 on the back of strong consumption, but slowing income growth warns of caution ahead. Most measures of inflation have continued to fall but the pace has slowed, with some signs of a pickup in price pressures in July. Bottom line: the Beige Book report should paint a mixed picture that sets the table for a skip this month. Collins and Logan speak Wednesday. Harker, Goolsbee, Williams, Bostic, Bowman, and Logan all speak Thursday. Barr 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 September 20.
The data highlight is August ISM services PMI Wednesday. Headline is expected to fall two ticks to 52.5. Keep an eye on employment and prices paid. Last week, ISM manufacturing PMI jumped to 47.6 and both of these components rose sharply.
Otherwise, it’s a lot of minor data out of the U.S. July factory orders will be reported Tuesday and are expected at -2.5% m/m vs. 2.3% in June. July trade data will be reported Wednesday and a deficit of -$68.0 bln is expected vs. -$65.5 bln in June. Final Q2 productivity and Unit Labor Costs and weekly jobless claims will be reported Thursday. July wholesale trade sales and inventories, consumer credit, and Q2 change in household net worth will be reported Friday.
Bank of Canada meets Wednesday and is expected to keep rates steady at 5.0%. At the last meeting July 12, the bank hiked rates 25 bp for the second straight meeting and said it was concerned that progress towards meeting its inflation target 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. Since that meeting, inflation has fallen and growth has slowed. Indeed, GDP contracted -0.2% q/q in Q2, with household consumption the weakest since Q2 2021. Looking ahead, WIRP suggests only 20% odds of another hike in this cycle next month.
Canada reports August jobs data Friday. Consensus sees 15.0k jobs created vs. -6.4k in July, with the unemployment rate expected to rise a tick to 5.6%. If so, it would be the fourth straight rise in the rate to the highest since January 2022. Other minor data will be reported. July trade and Q2 labor productivity will be reported Wednesday. July building permits and August Ivey PMI will be reported Thursday.
Eurozone has a quiet week. July PPI and final August services and composite PMIs will be reported Tuesday. PPI is expected at -7.6% y/y vs. -3.4% in June. For the PMIs, Italy and Spain report for the first time and their composite readings are expected at 48.1 and 51.0, respectively. July retail sales will be reported Wednesday and is expected at -0.1% m/m vs. -0.3% in June. Final Q2 GDP data will be reported Thursday.
Germany reports key data for July. Trade data will be reported Monday. Exports are expected at -1.5% m/m vs. 0.4% in June while imports are expected at 0.5% m/m vs. -3.2% in June. Factory orders will be reported Wednesday and are expected at -4.0% m/m vs. 7.0% in June. IP will be reported Thursday and is expected at -0.5% vs. -1.5% in June. Elsewhere, Italy reports July retail sales Thursday while France and Spain report July IP Friday.
ECB reports July inflation expectations Tuesday. Expectations have been falling for several months, which is just what the ECB wants to see. The account of the July meeting show the bank tilted quite dovish then. WIRP suggest odds of a 25 bp hike stand near 25% September 14, rise to 45% October 26 and top out near 60% December 14. These odds will rise and fall with the data but what’s very interesting to us is that these odds have actually fallen since the start of last week, meaning that neither the higher than expected August CPI data nor hawkish ECB comments had the usual impact on ECB expectations. If this dynamic is sustained, it would be a game-changer for the euro. Elderson, Nagel, Lagarde, and Panetta speak Monday. Schnabel and Visco speak Tuesday. Wunsch, Holzman, Villeroy, Knot, and Elderson speak Thursday.
The U.K. has another quiet week. Final August services and composite PMIs will be reported Tuesday. Construction PMI will be reported Wednesday.
Results of the August Bank of England decision maker panel inflation survey will be reported Thursday. Tightening expectations have steadied. WIRP suggests a 25 bp hike September 21 is largely priced in, followed by another 25 bp hike December 2 that would see the base rate peak near 5.75%. However, the first cut is not priced in until H2 2024.
Japan reports July household spending Tuesday. Spending is expected at -2.5% y/y vs. -4.2% in June. This really isn’t any surprise given the ongoing drop in real wages (see below). Final August services and composite PMIs will also be reported Tuesday.
July cash earnings Friday will be very important. Nominal earnings are expected to pick up a tick to 2.4% y/y, while real earning are expected to pick up two ticks to -1.4% y/y. The Bank of Japan wants to see higher wages before it feels comfortable removing accommodation, but so far, there has been little progress. Given the surprise increase in the unemployment rate, we fear that wage pressures are likely to fizzle out. For now, the BOJ remains on hold and no change is expected at the September 20-21 meeting. Board member Takata speaks Wednesday, followed by his colleague Nakagawa Thursday.
Final Q2 GDP data will also be reported Friday. Consensus sees headline revised down a tick to 1.4% q/q, driven by an expected -0.7% q/q drop in business spending after last week’s weak Q2 capital spending data.
July current account data Friday will be of interest. An adjusted surplus of JPY2.18 trln is expected vs. JPY2.35 trln in June. However, the investment flows will be of more interest. The June data showed that Japan investors were net buyers of U.S. bonds (JPY1.8 trln) for the second straight month and five of the past six months. Japan investors remained net buyers (JPY43 bln) of Australian bonds for the fourth straight month after eight straight months of net selling, and became net buyers of Canadian bonds (JPY103 bln) after five straight months of selling. Investors turned net buyers of Italian bonds (JPY113 bln) again and have been for thee of the past four months. Overall, Japan investors were total net buyers of foreign bonds (JPY2.37 trln) for the second straight month and five of the past six 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.
Reserve Bank of Australia meets Tuesday and is expected to keep rates steady at 4.10%. The bank kept rates steady in July and August after delivering a hawkish surprises in June with a 25 bp hike. At the last policy meeting, Governor Lowe said “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data.” Testifying before parliament later, Lowe said “We’re kind of in a world where we’re just making I hope small adjustments to calibrate policy.” This will be Lowe’s last meeting September 5 as Deputy Governor Michele Bullock takes over September 18 for a seven-year as Governor. She will chair her first meeting October 3. WIRP suggest virtually no odds of a hike at either meeting, but then rise modestly to top out near 20% in Q1. Governor Lowe speaks Thursday.
Key data will also be reported. Q2 current account data and final August services and composite PMIs will be reported Tuesday. Q2 GDP data will be reported Wednesday, with growth expected at 0.3% q/q vs. 0.2% in Q1. In y/y terms, growth is expected at 1.8% vs. 2.3% in Q1 and would be the slowest since Q2 2019. July trade data will be reported Thursday.