Dollar Firm Ahead of Jackson Hole

August 24, 2023
  • All eyes are on the Kansas City Fed’s Jackson Hole Symposium; U.S. financial conditions remain too loose; July Chicago Fed National Activity Index will be key; weekly jobless claims will be reported; Mexico reports mid-August CPI
  • U.K. CBI reported a very weak August distributive trades survey; BOE tightening expectations have ebbed; Turkey is expected to hike rates 250 bp to 20.0%
  • RBA staff have rejected the proposed pay increase that unions called inadequate; Korea kept rates steady at 3.5%, as expected; Indonesia kept rates steady at 5.75%, as expected

The dollar continues to gain. DXY is trading higher today near 103.565 after it traded at a new high for this move yesterday near 103.981 before weak PMIs led to some profit-taking. DXY remains on track to test the May 31 high near 104.699. The euro is trading lower near $1.0855 after recovering from the new low for this move yesterday near $1.0805. It remains on track to test the May low near $1.0635. Of note, the 200-day moving average comes in near $1.08 today and may continue to provide some near-term support. Sterling is trading lower near $1.2680 after recovering from the new low for this move yesterday near $1.2615. It is on track to test the late June low near $1.2590 and break below sets up a test of the early June low near $1.2370. USD/JPY is trading higher near 145.45 as the new 145-150 trading range holds. We look for further upside in this pair. 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.


All eyes are on the Kansas City Fed’s Jackson Hole Symposium. It begins tonight and ends Saturday. This year’s topic is “Structural Shifts in the Global Economy” and the full agenda will be made available at at 6 PM MT/8 PM ET tonight. Please see our preview here. Bottom line: we expect a hawkish tone to emerge from Jackson Hole. Harker speaks today and twice again tomorrow.

U.S. financial conditions remain too loose. The Chicago Fed’s measure of financial conditions is the loosest since early March 2022, before the Fed started hiking. Until financial conditions tighten, there’s unlikely to be any landing whatsoever as growth remains at or above trend. Indeed, the Atlanta Fed’s GDPNow model is currently tracking Q3 growth at 5.8% SAAR. Next model update comes today after the data.

S&P Global reported soft preliminary August PMIs yesterday. Manufacturing came in at 47.0 vs. 49.0 expected and actual in July, services came in at 51.0 vs. 52.2 expected and 52.3 in July, and the composite came in at 50.4 vs. 51.5 expected and 52.0 in July. This composite is the lowest since February. Yet as we know about FX, it's all about the relative story and the U.S. still remains on top compared to eurozone and U.K. ISM PMIs are more widely watched and will be reported next week.

July Chicago Fed National Activity Index will be key. The headline is expected at -0.22 vs. -0.32 in June. If so, the 3-month moving average would come in at -0.27 vs. -0.16 in June and would be the lowest since December 2022. Recall that the recession signal comes when the 3-month moving average hits -0.7 and we are still far from that. This series has taken on greater significance given that the 3-month to 10-year curve remains deeply inverted. The continued resilience in the economy is noteworthy and suggests the Fed still has more work to do in getting to the desired sub-trend growth.

Regional Fed August surveys will continue to roll out. Kansas City Fed manufacturing index is expected at -9 vs. -11 in July. Its services index will be reported tomorrow. July durable goods orders will also be reported today and are expected at -4.0% m/m vs. 4.6% in June.

Preliminary benchmark revisions to the establishment survey are worth discussing. From the BLS website: “The preliminary estimate of the benchmark revision indicates a downward adjustment to March 2023 total nonfarm employment of −306,000 (−0.2 percent). Preliminary benchmark revisions are calculated only for the month of March 2023 for the major industry sectors in table 1. The existing employment series are not updated with the release of the preliminary benchmark estimate. The data for all CES series will be updated when the final benchmark revision is issued.” The final revision will come in early February along with the January jobs report. Note that the revisions will only impact NFP and not the unemployment rate, which is derived from the household survey. Bottom line: we don’t think the revision materially changes the tight labor market narrative that’s currently in place.

Weekly jobless claims will be reported. Initial claims are expected at 240k vs. 239k last week. Continuing claims are reported with a one week lag and this week’s data will be for the BLS survey week containing the 12th of the month. These are expected at 1.705 mln vs. 1.716 mln last week. Bloomberg consensus for August NFP has started out at 160k vs. 187k in July, while the unemployment rate is expected to remain steady at 3.5%.

Mexico reports mid-August CPI. Headline is expected at 4.66% y/y vs. 4.78% previously and core is expected at 6.24% y/y vs. 6.52% previously. Banco de Mexico releases its minutes Thursday too. At that August 10 meeting, the bank kept rates steady at 11.25% and Governor Rodriguez said that the current rate would be maintained “for a period that’s sufficiently long to see that the inflation panorama has advanced.” In the past, she and other bank officials have hinted at no change in policy through Q3 at least, which leaves November 9 and December 14 as possibilities for a rate cut. The swaps market is pricing in steady rates over the next three months followed by 25 bp of easing over the subsequent three months, which would make it much more cautious than Brazil or Chile.


U.K. CBI reported a very weak August distributive trades survey. Retailing reported sales came in at -44 vs. -15 expected and -25 in July, while total reported sales came in at -26 vs. -17 in July. This bodes ill for August retail sales data after weaker than expected sales were reported for July.

Bank of England tightening expectations have ebbed. WIRP suggests only 5% odds of a 50 bp hike September 21, while a 25 bp hike November 2 is largely priced in. After that, the odds of a third hike top out around 40% February 1 and so the bank rate would peak between 5.75-6.0% vs. 6.0% at the start of this week and 6.5% at the start of last month. Broadbent speaks Saturday at Jackson Hole.

Turkey central bank is expected to hike rates 250 bp to 20.0%. However, market expectations are all over the place. Of the 25 analysts polled by Bloomberg, 1 sees 50 bp, 1 sees 100 bp, 2 see 150 bp, 5 see 200 bp, 15 see 250 bp, and 1 sees 300 bp. The bank has delivered two dovish surprises in a row with a 650 bp hike in June and a 250 bp hike in July. The swaps market is pricing in a peak policy rate around 27.5% over the next twelve months, which would not be enough to bring inflation down and stabilize the lira.


Reserve Bank of Australia staff have rejected the proposed pay increase that unions called inadequate. Under the proposed deal, RBA junior and mid-level staff would receive a 4% pay rise this year, 3.5% in 2024, and 3% in 2025. The proposal was rejected by 57% of RBA employees. Head of RBA human resources said “We will spend some time considering the results and return to the bargaining table, to continue bargaining, in due course.” This is quite an embarrassing situation for incoming Governor Bullock as she told staff that “As I have said, I think that the bank’s offer is fair and reasonable. It means that pay at the RBA is increasing at the same rate as it is across the broader community. I therefore hope this proposal gets your support.” Wages have not kept up with inflation and so it’s quite understandable why RBA staff are fighting to make up lost ground.

Bank of Korea kept rates steady at 3.5%, as expected. It has kept rates on hold since the last 25 bp hike in January. Governor Rhee said “It’s quite a dilemma for us if the Federal Reserve maintains a tight policy for a considerable period of time and it starts to affect our monetary policy.” He also noted that China poses risks to Korea’s economy. As in past meetings, all six members of the board remain open to another hike if needed. However, we think the tightening cycle has ended as growth slows and inflation falls towards the 2% target. Of note, the swaps market is pricing in one more 25 bp hike over the next six months.

Bank Indonesia kept rates steady at 5.75%, as expected. As in past meetings, Governor Warjiyo said that the policy focus remains on maintaining rupiah stability. He added that Bank Indonesia won’t hike rates further if the Fed hikes but will continue to allow short-term bond yields to rise to support the rupiah, noting “What matters is not the policy rate but government bond yields. Inflows respond to government bond yields, that’s why we do Operation Twist.” The bank also announced it would issue Bank Indonesia Rupiah Securities to attract foreign inflows. The paper will have maturities of 6, 9, and 12-months and the bank will set attractive rates with variable rate tenders. Bloomberg consensus sees the start of an easing cycle with 25 bp in Q1 followed by 25 bp in Q2 and Q3. Even this may be too aggressive; with the Fed expected to maintain tight policy, we believe that Bank Indonesia has very little cushion to cut rates without weighing on the rupiah.

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