• July retail sales ran hot; Fed easing expectations have ebbed a bit; Fed officials remain on message; University of Michigan reports preliminary August consumer sentiment; the labor market and growth remain solid; Chile central bank minutes will be released
  
• U.K. July retail sales recovered; the weak krone is becoming a political issue
  
• RBA Governor Bullock spoke; RBNZ Assistant Governor Silk spoke; Thailand has a new Prime Minister; iron ore prices fell to the lowest since November 2022

The dollar is trading soft ahead of the weekend. DXY is trading lower near 102.808 as the retail sales bounce ran out of steam. The yen is outperforming and trading near 148.50, sterling is trading higher near $1.29 after solid retail sales data (see below), and the euro is trading higher near $1.0990. While the Fed is widely expected to cut rates in September, we continue to believe that markets are overly pessimistic about the U.S. economy. Indeed, retail sales data showed that the primary driver of growth remains on firm footing (see below). Looking at the totality of the data, the economy is still growing above trend and suggests the market is once again getting carried away with its pricing for aggressive easing (see below). We continue to believe that the divergence story remains in place and should continue to support the dollar. However, it will likely take weeks for the current market narrative to run its course. This week’s data provided a good start.

AMERICAS

July retail sales ran hot. Headline came in at 1.0% m/m vs. 0.4% expected and a revised -0.2% (was flat) in June, while ex-autos came in at 0.4% m/m vs. 0.1% expected and a revised 0.5% (was 0.4%) in June. The so-called control group used for GDP calculations came in at 0.3% m/m vs. 0.1% expected and 0.9% in June. In y/y terms, headline sales rose 2.7% vs. 2.0% in June, ex-autos rose 3.1% vs. 3.3% in June, and the control group rose 3.7% vs. 4.0% in June. Think this should set us up for a solid personal spending reading. There have been some signs of softening in consumption, but we note that personal consumption accelerated in Q2 to 2.3% SAAR vs. 1.5% in Q1. As long as jobs are being created, we believe strength in consumption will carry over into Q3 and Q4.

Fed easing expectations have ebbed a bit. With regards to a 50 bp cut in September, Fed funds futures are pricing in 35% odds vs. 60% after the PPI while OIS are pricing in 20% odds vs. 45% after the PPI data. We’re still leaning towards 25 bp but it really will depend on the data. We get one more each of jobs, CPI, PPI, retail sales, and PCE/personal spending before that FOMC meeting. Still, nearly 100 bp of easing by year-end is priced in, with 175-200 bp total easing seen over the next 12 months. We think it's very important to differentiate between "insurance cuts" vs. an aggressive easing cycle due to recession. Right now, we think it's going to be the former and not the latter.

Fed officials remain on message. St. Louis Fed President Musalem said “From my perspective, the risk to both sides of the mandate seem more balanced. Accordingly, the time may be nearing when an adjustment to moderately restrictive policy may be appropriate as we approach future meetings.” He added that he views the labor market as having “normalized” in recent weeks but is still showing signs of being “rather strong.” Lastly, he said “I don’t see us falling into recession over the next few quarters.” We think this is pretty much Fed consensus right now and to be honest, we think this is the correct view. Goolsbee speaks today.

University of Michigan reports preliminary August consumer sentiment. Headline is expected at 66.9 vs. 66.4 in July, with current conditions seen rising and expectations seen falling. These readings would be consistent with somewhat softer household spending activity. 1-year inflation expectations are expected to fall a tick to 2.8%, while 5- to 10-year expectations are expected to fall a tick to 2.9%. The Fed would be happy to see expectations continue to fall but as they remain well above the 2% target, it should keep the Fed cautious. July building permits and housing starts will also be reported.

Weekly jobless claims suggest the labor market remains solid. Initial claims came in at 227k vs. 235k expected and a revised 234k (was 233k) last week. The 4-week moving average for initial claims fell to 236.5k vs. 241k last week. Next week’s claims data will be key as the initial claims reading will be for the BLS survey week containing the 12th of the month. Continuing claims are reported with a 1-week lag and came in at 1.864mln vs. 1.870 mln expected and a revised 1.871 mln (was 1.875 mln) last week.

Growth also remains solid. The Atlanta Fed’s GDPNow model is now tracking Q3 growth at 2.4% SAAR and will be updated today after the data. The New York Fed’s Nowcast model is tracking Q3 growth at 2.2% SAAR and will also be updated today, while its first estimate for Q4 will come at the end of August.

Regional Fed surveys for August continue rolling out. New York Fed services survey will be reported and stood at -4.5 in July. Yesterday, Empire manufacturing came in at -4.7 vs. -6.0 expected and -6.6 in July and Philly Fed manufacturing came in at -7.0 vs. 5.2 expected and. 13.9 in July.

Chile central bank minutes will be released. At the July 31 meeting, the bank delivered a hawkish surprise and kept rates steady at 5.75% vs. an expected 25 bp cut. The vote was unanimous, and the bank said it plans to “continue reducing the key rate during the horizon of monetary policy at a rhythm that takes into account macro-economic trends and their implication for inflation.” Since that decision, July CPI accelerated for the fifth straight month to 4.6% vs. 4.4% expected and 4.2% in June, the highest since November and further above the 2-4% target range. Next policy meeting is September 3, and we expect another hold then. The swaps market is still pricing in 125 bp of total easing over the next 12 months that would see the policy rate bottom near 4.5%.

EUROPE/MIDDLE EAST/AFRICA

U.K. July retail sales recovered. Total retail sales volume came in a tick lower than expected at 0.5% m/m vs. a revised -0.9% (was -1.2%) in June, while the y/y rate came in as expected at 1.4% vs. a revised -0.3% (was -0.2%) in June. The pick-up in retail sales was consistent with the July improvement in the BRC same store sales. The recovery in sales marks a good start to Q3. While Q2 GDP data came in firm, the monthly June data reported at the same time suggested a loss of momentum as the quarter closed out. Bottom line: the data suggest the BOE will continue cutting rates.

The weak krone is becoming a political issue. Two opposition parties have proposed setting up a committee to investigate the causes and possible remedies for the weak currency. Norges Bank Governor Bache pushed back by stressing that “If they were to appoint such a committee, it is extremely important that the mandate for such a committee is very explicit, and also sufficiently narrow. In the current situation, there would be few benefits from having market participants doubting the objectives of monetary policy.” Prime Minister Store weighed in and said “I heard the central bank chief today. She talks properly. But simply put, she meant: don’t gamble with my mandate!” We concur.

ASIA

RBA Governor Bullock spoke. She said that “The board remains vigilant to upside risks to inflation. It is premature to be thinking about rate cuts.” Bullock added that “Circumstances may change, of course, and the outlook is uncertain. But based on what the board knows at present, it does not expect that it will be in a position to cut rates in the near term.” She also noted that many other countries have higher policy rates than Australia, adding We’re at our peak, which is 4.35%.” A rate cut by year-end is now around 90% priced in.

RBNZ Assistant Governor Silk spoke. She said “We continue to see that decline in price setting and wage setting behavior. That’s really important. If that corrects itself more quickly, then obviously there’s an opportunity for us to think about cutting rates on a path that’s different. Likewise, it could do the reverse as well.” Silk reiterated that the RBNZ is taking a “measured approach” and will remain data dependent. Of note, Q2 private wages including overtime came in a tick higher than expected at 0.9% q/q vs. 0.8% in Q1, while the y/y rate eased two ticks to 3.6%, the lowest since Q2 2022. The market is pricing in 75 bp of easing by year-end.

Thailand has a new Prime Minister. Paetongtarn Shinawatra won the support of 319 lawmakers in the 500-seat parliament. She is the daughter of Thaksin Shinawatra and at 37 becomes the youngest Thai Prime Minister ever. While several members of the Thaksin family have been ousted before, her ascension today keeps its relative new alliance with the conservative and military-backed parties intact. The most important news to emerge are reports that Thaksin told her and his Pheu Thai Party to scrap the controversial cash handouts that former Prime Minister Thavisin enacted. If so, the Bank of Thailand is likely to tilt more dovish, as it has been very concerned about the inflationary impact of the estimated $14 bln program.

COMMODITIES

Iron ore prices fell to the lowest since November 2022. That’s before China officially reopened in December 2022. Prices have fallen nearly 10% just this week alone, as China steelmaker warned of a crisis in the sector. Of course, this is all being driven by the burst property bubble in China, which in turn is weighing on the entire mainland economy. Note that coal prices are also slumping, while oil and copper are holding up better. Since iron ore and coal are Australia’s two biggest exports to China, we remain surprised that AUD has held up fairly well. At some point, however, the terms of trade shock will catch up and the currency should weaken significantly.