• Markets continue to lean dovish in terms of Fed expectations; the jobs report will be the highlight; ISM manufacturing PMI will also be reported; July PCE readings are worth discussing; Canada highlight is Q2 GDP data
  
• The account of the July 21 ECB meeting was incredibly dovish; final eurozone and U.K. August manufacturing PMIs were reported; U.K. reported August nationwide house prices; Switzerland reported August CPI
  
• Japan reported soft Q2 capital spending and final August manufacturing PMI; Caixin reported firm August manufacturing PMI; China announced more steps to support the currency and the economy

The dollar is treading water ahead of the jobs reports. DXY is hanging on to most of yesterday’s gains and trading flat near 103.598. The euro is trading flat near $1.0845 while sterling is trading flat near $1.2675. USD/JPY continues to drift lower and is trading near 145.50. Despite the recent softish U.S. data, we believe the fundamental story remains in favor of the greenback. Last Friday’s speech by Powell emphasized the Fed’s hawkish stance and we think a strong jobs report today would confirm this. 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. Looking through the noise, the U.S. remains in a much strong position than the other major economies such as the eurozone or the U.K.

AMERICAS

Markets continue to lean dovish in terms of Fed expectations. After an outsized market reaction to JOLTS and other minor data, we got very little reaction to elevated PCE readings (see below). As it’s been this entire tightening cycle, the market sees everything through the lens of a dovish Fed. Because of this current stance, it will take a huge upside surprise in the jobs data to shake the market up. If the data come in at or below expectations, then this dovish take on the Fed will likely continue right into the September FOMC meeting.

Odds of a Fed hike in September are now back to 10% after hitting nearly 25% on Tuesday. The odds of a November hike are now back to around 50% after rising to over 70% on Tuesday. Obviously, this is all data dependent but if the data remain firm as we expect, these odds should continue to rise and underpin the dollar. Bostic and Mester speak today. It just so happens that of these speakers, Bostic is one of the most dovish while Mester is one of the most hawkish. As such, plan accordingly for their comments to reflect this.

The jobs report will be the highlight. 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 155k. Muddying the picture is the fact that trucking firm Yellow ceased operations July 28 and so its announced layoffs of 30k will show up in today’s data. This was underscored by Challenger data yesterday, which showed layoffs jumping to 75,151 in August vs. 23,697 in July. 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. Yesterday, initial claims came in at 228k vs. 235k expected and a revised 232k (was 230k) the previous week. This was the lowest since mid-July. Elsewhere, continuing claims came in at 1.725 mln vs. 1.706 mln expected and a revised 1.697 mln (was 1.702 mln) the previous week.

ISM manufacturing PMI will also be reported. Headline is expected at 47.0 vs. 46.4 in July. Keep an eye on prices paid and employment, which stood at 42.6 and 44.4 in July, respectively. Yesterday, Chicago PMI came in at 48.7 vs. 44.2 expected and 42.8 in July, the highest since August 2022 and suggesting some upside risks to ISM today. July construction spending (0.5% m/m expected) and August vehicle sales (15.5 mln annual rate expected) will be reported.

The U.S. economy remains strong. The Atlanta Fed’s GDPNow model is tracking Q3 growth at 5.6% SAAR vs. 2.4% in Q2. Next model update comes today after the data. 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. Of note, Bloomberg consensus sees Q3 growth at 2.0% SAAR and Q4 at 0.4% SAAR.

July PCE readings are worth discussing. Headline came in as expected at 3.3% y/y vs. 3.0% in June, while core came in as expected at 4.2% y/y vs. 4.1% in June. However, the eye-opener was super core PCE at 4.7% y/y vs. 4.1% in June. This was the highest since February and points to strong underlying services inflation. Of note, the Cleveland Fed’s Nowcast model estimates August headline and core PCE at 3.6% y/y and 4.0% y/y, respectively. In other words, not much progress in meeting the 2% target is likely near-term. Until the economy slows to sub-trend growth and the labor market loosens, it’s hard to see how we can get significant disinflation and so we believe the Fed will have to go higher for longer, as it has promised.

Personal income and spending were reported at the same time. Income came in a tick lower than expected at 0.2% m/m vs. 0.3% in June, while spending came in 0.8% m/m vs. 0.7% and a revised 0.6% (was 0.5%) in June. In y/y terms, both nominal and real spending picked up and mirrored the acceleration in the retail sales “control group.” Simply put, consumption remains strong and is likely to continue driving growth in Q3 and Q4.

Canada highlight is Q2 GDP data. Growth is expected at 1.2% annualized vs. 3.1% in Q1. August S&P Global manufacturing PMI will also be reported. The economy is showing some signs of slowing but inflation picked up in July and so the Bank of Canada will remain on alert. WIRP suggests 10% odds of a hike September 6, rising to 45% October 25 and topping out around 55% December 6.

EUROPE/MIDDLE EAST/AFRICA

The account of the July 21 European Central Bank meeting was incredibly dovish. Apparently, the preference to hold rates was initially expressed before policymakers decided on a 25 bp hike. The hawks felt that another hike might be needed in September in the absence of “convincing evidence that the effect of the cumulative tightening was strong enough,” but the doves felt “that it was quite probable that the September ECB staff projections would revise the inflation path sufficiently downwards toward 2%, without the need for another interest rate hike in September.” Concerns were raised that the economy was facing stagflation risks. It’s hard to believe that policymakers initially wanted to hold. The fact that they discussed stagflation feeds into those fears that were fanned by the data yesterday.

European Central Bank tightening expectations remain subdued. WIRP suggest odds of a 25 bp hike stand near 20% September 14, rise to 50% October 26 and top out near 55% 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 this 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.

Final eurozone August manufacturing PMIs were reported. Headline fell two ticks from the preliminary to 43.5. Looking at the country breakdown, Germany remained steady at 39.1 while France fell four ticks from the preliminary to 46.0. Italy and Spain reported for the first time and came in at 45.4 and 46.5, respectively. Italy rose nearly a point from July while Spain fell over a point from July. Final eurozone services and composite PMIs will be reported next Tuesday.

U.K. reported August nationwide house prices and final August manufacturing PMI. House prices came in at -5.3% vs. -4.9% expected and -3.8% in July. This was the biggest drop since July 2009 and most analysts look for further weakness in housing as the Bank of England continues tightening. 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. Elsewhere, final manufacturing PMI rose half a point from the preliminary to 43.0.

Switzerland reported August CPI. Headline was expected to fall a tick but instead remained steady at 1.6% y/y and still below the 2% target. Core fell two ticks as expected to 1.5% and was the lowest since April 2022. Next SNB policy meeting is September 21 and WIRP suggests odds of a 25 bp hike are around 33%, rising to peak near 55% December 14. At the last policy meeting June 22, the Swiss National Bank downshifted to a 25 bp hike but signaled that further tightening would be needed. President Jordan said “We are not at the end - most likely there could be more rate hikes necessary in order to bring inflation on a permanent basis below 2%.” Since that meeting, the Swiss franc has gained nearly 2.5% vs. the euro and over 1% vs. the dollar, which has helped push inflation down and perhaps precluded the need for further tightening, at least for now.

ASIA

Japan reported soft Q2 capital spending and final August manufacturing PMI. Total capital spending slowed to 4.5% y/y vs. 8.3% expected and 11.0% in Q1, while spending ex-software slowed to 4.4% y/y vs. 7.5% expected and 10.0% in Q1. It seems Japan firms are cutting capital spending due to concerns about the growth outlook. This may lead to a downward revision in Q2 GDP growth and bodes ill for Q3 and beyond. Elsewhere, company profits came in at 11.6% y/y vs. -0.1% expected and 4.3% in Q1, while company sales came in at 5.8% y/y vs. 4.3% expected and 5.0% in Q1. Final manufacturing PMI fell a tick from the preliminary to 49.6.

Caixin reported firm August manufacturing PMI. It rose to 51.0 vs. 49.0 expected and 49.2 in July. This reading must be taken with a huge grain of salt, even a bigger than the one for official manufacturing PMI reported yesterday at 49.7 vs. 49.3 in July. There is simply no way China’s manufacturing sector is expanding even as manufacturing in the rest of the world is contracting. Caixin reports its services and composite PMIs next Tuesday. Services is expected at 53.7 vs. 54.1 but markets should be prepared for another “unusual” reading.

China announced more steps to support the currency and the economy. In terms of FX, policymakers announced reduced foreign currency deposit requirements for banks. The PBOC announced that financial institutions will be required to hold 4% of their FX deposits in reserve from September 15 vs. 6% currently. The move is meant to help support the yuan as it effectively boosts the amount of foreign currency available in the financial system. In terms of the economy, policymakers cut down payments for home purchases and boosted tax breaks for childcare and education expenses. As with the countless other measures already taken, they are literally pushing on a string.