• U.S. yields and the dollar fell sharply after the JOLTS data; we get another look at the labor market when ADP reports its private sector jobs estimate; we get another revision to Q2 GDP; Banco de Mexico releases its quarterly inflation report
  
• Eurozone August CPI data started rolling out; ECB tightening expectations have picked up a bit; National Bank of Poland releases its minutes
  
• Japan’s ruling LDP called for the extension of gasoline subsidies through year-end; BOJ board member Naoki Tamura sees the bank meeting its inflation target next year; Australia reported soft July CPI data; RBNZ reported that it sold nearly NZD4 bln ($2.4 bln) in July

The dollar has stabilized ahead of ADP. Soft JOLTS data yesterday (see below) led to a more violent than usual impact on markets as U.S. yields and the dollar both came under downward pressure. DXY is trading flat near 103.528. The euro is trading slightly higher near$1.0885 and sterling is trading slightly higher near $1.2650. USD/JPY is trading higher near 146.40 despite hawkish comments from a BOJ board member (see below). Despite the JOLTS data, we believe the fundamental story remains in favor of the greenback. Friday’s speech by Powell confirms the Fed’s hawkish stance and we think another hike could be confirmed by firmer U.S. data this week. Since the Fed is in data dependent mode, so too is the market and so we have to be prepared for possible dislocations with every data point, both major and minor.

AMERICAS

U.S. yields and the dollar fell sharply after the JOLTS data yesterday. The 2-year yield, the most sensitive to changes in Fed expectation, fell from 5.10% to 4.87% yesterday and is currently trading near 4.91%. Elsewhere, the 10-year yield fell from 4.24% to 4.10% yesterday and is currently trading near 4.14% while the 30-year yield fell from 4.31% to 4.21% yesterday and is currently trading near 4.25%. The 2-year differentials, which had been moving in the dollar’s favor of late, fell accordingly and weighed on the dollar.

We can’t recall JOLTS data having such an outsized impact on markets in the past. It’s a relatively minor data point and so we suspect markets were just looking for an excuse to take profits ahead of Friday’s jobs report. Since the Fed is in data dependent mode, so too is the market and so we have to be prepared for possible dislocations with every data point, both major and minor. WIRP suggests odds 15% of a hike September 20, down from 15% at the start of this week, with odds rising to nearly 50% November 1 vs. 65% at the start of this week. More importantly, the first cut is back to May after having been pushed out to June at the start of this week.

July JOLTS report is worth discussing. Digging a bit deeper into the JOLTS data, quits fell to 3.549 mln, the lowest since February 2021, while hires fell to 5.77 mln, the lowest since January 2021. There just seems to be less churn than we've seen in the past. However, layoffs were pretty much steady at 1.555 mln and near the recent lows, which suggests that the labor market really isn't softening all that much. August Challenger job cuts and weekly jobless claims will be reported tomorrow. Initial claims are expected at 235k vs. 230k last week while continuing claims are expected at 1.705 mln vs. 1.702 mln last week.

We get another look at the labor market when ADP reports its private sector jobs estimate. Consensus sees 195k vs. 324k in July. While ADP’s big miss in June , it is still an indicator that can and will impact markets. For Friday, consensus sees 170k for NFP vs. 187k in July, while the unemployment rate is seen steady at 3.5% and average hourly earnings are seen falling a tick to 4.3% y/y. Of note, Bloomberg’s whisper number stands at 168k. Of note, the preliminary benchmark revisions to the establishment survey released last week had no significant implications for the labor market, which we believe remains relatively tight. July advance trade balance (-$90.0 bln expected), wholesale/retail inventories, and pending home sales (-1.0% m/m expected) will also be reported.

We get another revision to Q2 GDP. However, this is very old news as we are about to enter the last month of Q3. In that regard, the Atlanta Fed’s GDPNow model is tracking Q3 growth at 5.9 % SAAR vs. 2.4% in Q2. While this is likely to be revised down in the coming weeks, momentum clearly persists and we think it is likely to mark the fifth straight quarter of at or above trend growth at a time when the Fed is trying to engineer below trend growth. Next model update comes tomorrow after the data. Of note, Bloomberg consensus sees Q3 growth at 2.0% SAAR and Q4 at 0.4% SAAR.

August Conference Board consumer confidence came in very weak. Headline came in at 106.1 vs. 116.0 expected and a revised 114.0 (was 117.0) in July. This was the first drop in the headline since March and is the lowest since May. Both present situation and expectations dropped significantly from downwardly revised levels in July. Will this drop have an impact on consumption? We won’t really know until September 14, when the August data will be reported. We do know that consumption was firm in July, which should be underscored by the personal spending data tomorrow.

Banco de Mexico releases its quarterly inflation report. We expect a hawkish tone here after minutes from the last policy meeting August 10 show the bank is in no hurry to cut rates. Several policymakers said it was too soon to consider easing, with one noting that it could hold rates and one even warned of the potential need for further tightening. It was noted that the peso’s appreciation was helping ease price pressures, but the balance of inflation risks remain biased to the upside. Next policy meetings are September 28 and November 9 and no change is expected at either one as the swaps market sees steady rates over the next three months. However, 25 bp of easing is seen over the subsequent three months and so a cut at the December 14 meeting is possible.

EUROPE/MIDDLE EAST/AFRICA

Eurozone August CPI data started rolling out. Spain’s EU Harmonised inflation came in as expected at 2.4% y/y vs, 2.1% in July, while its core measure came in a tick higher than expected at 6.1% vs. 6.2% in July. Germany reports later today and its EU Harmonized inflation is expected at 6.3% y/y vs. 6.5% in July. However, state data already reported today point to upside risks to the national number. France and Italy report early tomorrow. France’s EU Harmonised inflation is expected at 5.4% y/y vs. 5.1% in July, while Italy’s is expected at 5.6% y/y vs. 6.3% in July. Eurozone then reports later tomorrow, with headline expected at 5.1% y/y vs. 5.3% in July and core expected at 5.3% y/y vs. 5.5% in July. If so, headline would be the lowest since January 2022 and core would be the lowest since May.

European Central Bank tightening expectations have picked up a bit. WIRP suggest odds of a 25 bp hike stand near 55% September 14, rise to nearly 80% October 26, and top out near 90% December 14. These odds will rise and fall with the data. 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.

National Bank of Poland releases its minutes. At that July 6 meeting, the bank kept rates steady at 6.75% but highlight a potential cut next month as Governor Glapinski said “If inflation will be in the single digits and if the projection for the nearest quarters and years shows, with a 90% certainty, that price growth will slow further, then it’s possible in September.” August CPI will be reported Thursday, with headline expected at 10.0% y/y vs. 10.8% in July. Next policy meeting is September 13 and a 25 bp cut then to 6.5% seems likely. The swaps market is pricing in 50 bp of easing over the next three months followed by another 75 bp over the subsequent three months. Such aggressive easing would likely take a toll on the currency.

ASIA

Japan’s ruling Liberal Democratic Party called for the extension of gasoline subsidies through year-end. According to the Trade Ministry, the price of gasoline rose to a record of JPY185.6 per liter even with existing subsidies. After meeting with Prime Minister Kishida, LDP policy chief Koichi Hagiuda said “It’s impossible to keep prices down for ever, but a price of under ¥180 is the limit of what the people can bear.” Kishida later said he would take new steps on gasoline prices after September 7. Reports suggest the LDP will also recommend extending electricity and natural gas subsidies beyond the scheduled September expiration. Headline and core (ex-fresh food) inflation has been falling largely to lower energy prices, with core ex-energy still making new highs. That is pinching household budgets ahead of possible elections and so Kishida will do what he can to extend the energy subsidies.

Bank of Japan board member Naoki Tamura sees the bank meeting its inflation target next year. Specifically, he said “The achievement is finally and clearly within sight after a decade of large-scale monetary easing aimed at attaining it.” Tamura later raised the possibility of liftoff, acknowledging that “Removing the negative rate would naturally be one of the options. As long as rates are kept very low, that’s still a continuation of monetary easing in my understanding.” Lastly, Tamura said he hopes to have a better grasp of the inflation outlook in Q1, adding that it’s important for policy to respond in a timely fashion if economic conditions warrant it. Tamura is one of the only hawks on the BOJ board. Until others start to share his optimism, we do not think the bank will remove accommodation anytime soon. Indeed, even Tamura’s optimistic timeline suggests liftoff in late Q1 or early Q2..

Australia reported soft July CPI data. Headline inflation came in at 4.9% y/y vs. 5.2% expected and 5.4% in June. It was the lowest since February 2022 but still well above the 2-3% target range. July building approvals were also soft. They came in at -8.1% m/m vs. -0.5% expected and a revised -7.9% (was -7.7%) in June. Yesterday, incoming RBA Governor Bullock said “We may have to raise interest rates again, but we’re watching the data very carefully. And we’ll be taking decisions for the time being until next year at least month by month.” WIRP suggests no change is priced in for either the September 5 (Lowe’s last) or October 3 (Bullock’s first) RBA meetings.

The Reserve Bank of New Zealand reported that it sold nearly NZD4 bln ($2.4 bln) in July. This was the largest sale dating back to 2004, when it started reporting this series. RBNZ spokesperson stressed “This is not intervention. It relates to the new foreign currency reserves framework announced in January.” Back then, the RBNZ said its level of foreign reserves had been largely unchanged since 2007 and needed to be increased. We are surprised that the amount was so concentrated in one month. If the RBNZ really didn’t want to impact the exchange rate, spreading the purchases out would have been more prudent.