• U.S. yields are making new highs; FOMC minutes are worth discussing; U.S. financial conditions continue to loosen; regional Fed surveys for August will continue rolling out; weekly jobless claims will be important
  
• Noted ECB hawk Kazaks sounded dovish; U.K reports August GfK consumer confidence; Norges Bank hiked rates 25 bp to 4.0%, as expected
  
• Japan reported soft July trade data; Australia reported soft July jobs data; RBNZ Governor Orr said a mild recession is needed to get inflation back to target; troubled private wealth manager Zhongzhi is reportedly planning to restructure its debt; reports suggest policymakers asked state banks to escalate FX intervention to support the yuan; Philippines kept rates steady at 6.25%, as expected

The dollar is consolidating despite higher U.S. yields. DXY is trading flat near 103.367 after four straight up days that saw it trade at a new high near 103.598. Clean break above the July 6 near 103.572 sets up a test of the May 31 high near 104.699. The euro is trading flat near $1.0885 but remains on track to test the July low near $1.0835. Sterling is trading slightly higher near $1.2750 but remains on track to test the late June low near $1.2590. USD/JPY is trading lower near 146 after it traded at a new high for this move near 146.55 earlier today. The pair remains on track to test the 150 area. We believe the relative fundamental story continues to move in favor of the greenback. As we expected, the recent FOMC, ECB, and BOJ decisions as well as the ongoing economic data underscore the divergence theme and so further dollar gains seem likely.

AMERICAS

U.S. yields are making new highs. The 10-year yield traded near 4.31% after ending last week near 4.15%. This is a new high for this move and sets up a test of the October cycle high near 4.34%. Elsewhere, the 30-year yield traded near 4.41% after ending last week near 4.26%. This is also a new high for this move and sets up a test of the October cycle high near 4.42%. Even the 2-year yield is taking part as it traded near 5.02% this week after ending the week near 4.90% and sets up a test of the 5.12% cycle high from July 6.

FOMC minutes are worth discussing. At the July 25-26 meeting, the Fed hiked rates 25 bp and the minutes showed that most officials saw “significant” upside risks to inflation and that those risks could require further tightening. Furthermore, only two favored holding rates steady then but did not officially dissent. That's a hawkish surprise because recently, at least five (Williams, Harker, Goolsbee, Barkin, and Bostic by our count) on the FOMC have been talking recently about no more hikes. We believe the September Dot Plots take on greater importance as we try to gauge Fed appetite for another hike after November (assuming the Fed skips in September and then hikes). The market sees this as a possibility as WIRP suggests 10% odds of a hike in September and rising to nearly 45% in November, up slightly from 40% at the start of last week.

U.S. financial conditions continue to loosen. The Chicago Fed’s weekly financial conditions index fell again to the loosest since early March, which is before the Fed started hiking rates on March 16. Let that sink in. And then realize that the Fed has to do more in order to rein in the red hot US economy. How hot? The Atlanta Fed's GDPNow model is now tracking Q3 growth at 5.8% SAAR. Next model update comes next Thursday.

Regional Fed surveys for August will continue rolling out. Philly Fed survey is expected at -10.2 vs. -13.5 in July. So far this week, Empire survey kicks things off Tuesday and came in at -19.0 vs.-1.0 expected and 1.1 in July while the New York Fed services index came in at 0.6 vs. 0.0 in July. July leading index will also be reported and is expected at -0.4% m/m vs. -0.7% in June. July leading index will also be reported and is expected at -0.4% m/m vs. -0.7% in June.

Weekly jobless claims will be important. That’s because initial claims will be for the BLS survey week containing the 12th of the month. Those are expected at 240k vs. 248k last week. Continuing claims are reported with a one-week lag and are expected at 1.7 mln vs. 1.684 mln last week.

EUROPE/MIDDLE EAST/AFRICA

Noted ECB hawk Kazaks sounded dovish. He said he is undecided about September but added that any further rate hikes would be limited by noting “On interest rates, the big rise is behind us. If we look at the coming months, if there’ll be increases in interest rates then they’ll be really very small.” Market expectations for ECB policy remain subdued. WIRP suggest odds of a 25 bp hike stand near 60% September 14, rise to 80% October 26 and top out near 90% 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 U.K reports August GfK consumer confidence. It is expected at -29 vs. -30 in July. July retail sales will be reported tomorrow. Headline is expected at -0.5% m/m vs. 0.7% in June, while sales ex-auto fuel are expected at -0.6% m/m vs. 0.8% in June. The June GDP and IP data reported last week were strong but the July retail sales data are likely to show a weaker picture as Q3 started.

Norges Bank hiked rates 25 bp to 4.0%, as expected. It said rates “will most likely be raised further in September” but gave no further forward guidance. Updated macro forecasts and rate path won’t come until the September 21 meeting but we noted that in the June set, the expected rate path was shifted higher to a peak of 4.25% this year. We take Norges Bank at its word and look for a September hike but the swaps market sees a more dovish path and is pricing in a peak policy rate peak near 4.0% over the next six months before easing begins over the subsequent six months.

ASIA

Japan reported soft July trade data. Exports came in at -0.3% y/y vs. -0.2% expected and 1.5% in June, while imports came in at -13.5% y/y vs. -15.2% expected and -12.9% in June. It was the first contraction in exports since February 2021 and the deepest contraction in imports since September 2020. Recall that Q2 growth was driven largely by net exports, as weak July data suggests that trick will be hard to pull off again in q3.

Australia reported soft July jobs data. A total of -14.6k jobs were lost vs. 15.0k expected and a revised 31.6k (was 32.6k in June), while the unemployment rate rose a tick more than expected to 3.7% vs. 3.5% in June. Despite the rise, the unemployment rate has barely budged from the all-time low of 3.4% from last October. The mix of jobs was not good, with -24.2k full-time jobs lost and 9.6k part-time jobs gained. With the labor market remaining relatively tight, the RBA will be on the alert for greater wage pressures.

RBA tightening expectations remain subdued. The RBA has kept rates steady for two straight meetings and Lowe will chair his last meeting September 5. Deputy Governor Michele Bullock takes over September 18 for a seven-year term as Governor and she will chair her first meeting October 3. WIRP suggest virtually no odds of a hike at either meeting, but then rise modestly to 30% November 7 and top out near 65% in Q1. AUD traded at a new 2023 low today near .6365. Clean break below the November 10 low near 0.6385 sets up a test of the November 3 low near .6270 and then the October cycle low near 0.6170.

Reserve Bank of New Zealand Governor Orr said a mild recession is needed to get inflation back to target. Specifically, Orr said “It’s the bare minimum we need to see because without doubt demand has been well outstripping the pace of the supply capacity” of the economy. He added “We need to see subdued consumer spending, business investment and government constraints on spending, these are a critical part of the inflation process.” We note that GDP has contracted two straight quarters and so Governor Orr will likely get his wish. It remains to be seen whether the RBNZ is eventually forced to restart the tightening cycle but for now, WIRP suggests around 5% odds of a hike October 4, rising to 40% November 29 and then topping out around 60% February 28. NZD tested a key retracement level today near .5905 and clean break below sets up a test of the October cycle low near 0.5510. An intermediate target is the November 3 low near 0.5740.

Troubled private wealth manager Zhongzhi is reportedly planning to restructure its debt. The firm hired KPMG back in late July to conduct an audit of its balance sheet. Reports suggest the company then plans to restructure its debt and sell off assets after the KPMG review in order to repay investors. This is exactly the adjustment process that is needed for many of China’s debt-laden firms. However, it is a painful process for all involved and it remains to be seen if policymakers have the stomach for widespread debt restructurings across the property and financial sectors. Stay tuned.

Reports suggest policymakers asked state banks to escalate FX intervention to support the yuan this week. Reports also suggest officials are also considering the use of other measures to support the currency, such as cutting commercial banks FX reserve requirements. Yet as we’ve stressed many times before, the yuan is likely to continue weakening as long as monetary policy divergences are widening. Interest rate differentials continue to move in the dollar’s favor and until that reveres, FX intervention can slow the move, not reverse it.

Philippine central bank kept rates steady at 6.25%, as expected. New Governor Remolona stressed that the bank is “ready to tighten” if needed, ruled out a rate cut at next month’s meeting, and said that it is unlikely to reduce reserve requirements while it’s still in tightening mode. The bank raised its inflation forecast for 2023 to 5.6% vs. 5.4% previously, for 2024 to 3.3% vs. 2.9% previously, and for 2025 to 3.4% vs. 3.2% previously. The swaps market is pricing in the start of an easing cycle over the next three months, which seems too soon given the hawkish bias at this meeting.