Drivers for the Week of August 11, 2024

August 11, 2024

Win Thin

Here's a look at the main drivers in Developed Markets this week.

The dollar put in a mixed performance overall last week. NOK, CAD, and AUD outperformed while CHF, GBP, and JPY underperformed. Key U.S. data this week should show that the economy remain far from recession and so market sentiment should improve further. As such, the dollar should eventually gain from repricing of Fed easing, which currently seems too dovish.

AMERICAS

A sense of calm returned to the markets last week. This was due to a combination of solid U.S. data, a dovish BOJ pivot, and upbeat Fed comments. Over the weekend, Fed Governor Bowman followed suit, noting that the recent jump in unemployment to 4.3% in July may be exaggerating the degree of labor-market cooling. She added that “The progress in lowering inflation during May and June is a welcome development, but inflation is still uncomfortably above the committee’s 2% goal. I will remain cautious in my approach to considering adjustments to the current stance of policy.”

For now, the Fed is not in any hurry to cut rates. The notion of an intra-meeting cut seems very unlikely and so we continue to see the first cut at the September 17/18 FOMC meeting. A 50 bp cut is possible but will fully depend on the data, with around 55% odds priced in now. The market is still fully pricing in 100 bp of easing by year-end, as well as 175-200 bp of total easing over the next 12 months. Unless the U.S. economy falls into a deep recession, this rate path still seems unlikely. However, we cannot stand in the way of this dovish narrative until we see more data. Bostic speaks Tuesday. Musalem and Harker speak Thursday. Goolsbee speaks Friday.

Data highlight will be July retail sales Thursday. Headline is expected at 0.4% m/m vs. flat in June, while ex-autos is expected at 0.1% m/m vs. 0.4% in June. The so-called control group used for GDP calculations is expected at 0.1% m/m vs. 0.9% in June. 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 consumption will hold up.

July PPI will be reported Tuesday. Headline is expected at 2.3% y/y vs. 2.6% in June, while core is expected at 2.7% y/y vs. 3.0% in June. Keep an eye on PPI ex-trade, transportation, and warehousing, as it feeds into the PCE calculations. Another sticky print above 4% y/y poses an upside risk to inflation.

July CPI will be reported Wednesday. Headline is expected to remain steady at 3.0% y/y, while core is expected to fall a tick to 3.2% y/y. Further progress on inflation will reinforce the case for a lower Fed funds rate. However, with super core CPI (core services less housing) remaining sticky above 4% y/y, we believe the Fed will remain cautious. The Cleveland Fed’s Nowcast model forecasts headline and core at 3.0% y/y and 3.3% y/y, respectively. Looking ahead to August, the model shows headline at 2.7% y/y and core at 3.4% y/y.

University of Michigan reports preliminary August consumer sentiment. Headline is expected at 66.9 vs. 66.4 in July, with both current conditions and expectations seen up modestly. These readings would be consistent with somewhat softer household spending activity. 1-year inflation expectations are seen steady at 2.9%, while 5- to 10-year expectations are expected to drop a tick to 2.9%, which should keep the Fed cautious. Of note, the New York Fed reports its July 1-year inflation expectations Monday.

Regional Fed surveys for August start rolling out. Empire manufacturing will be reported Thursday and is expected at -5.5 vs. -6.6 in July. Philly Fed manufacturing will also be reported Thursday and is expected at 5.0 vs. 13.9 in July. New York Fed services survey will be reported Friday and stood at -4.5 in July. July IP will also be reported Thursday and is expected at -0.3% m/m vs. 0.6% in June.

EUROPE/MIDDLE EAST/AFRICA

U.K. highlight will be July CPI data Wednesday. Headline is expected at 2.3% y/y vs. 2.0% in June, core is expected at 3.4% y/y vs. 3.5% in June, and CPIH is expected at 3.1% y/y vs. 2.8% in July. Of note, services inflation is expected to slow to 5.5% y/y vs. 5.7% in June. For reference, the BOE projects headline CPI at 2.4% y/y and services CPI at 5.6% y/y in July. Softer services inflation would lower the bar for more BOE easing. Recall that strength in services inflation was one of the major reasons four MPC members dissented at the August meeting in favor of keeping rates on hold. Next policy meeting is September 19, and the market sees 40% odds of a cut then.

U.K. labor market data Tuesday will also be important. Average weekly earnings ex-bonuses are expected to fall three ticks for the three months ended in June to 5.4% y/y, which would track a little above the Bank of England’s Q2 projection of 5.1% y/y. Including bonuses, total earnings are expected to fall more than a full percentage point to 4.6% y/y. Slower wage growth will keep the BOE in easing mode. Elsewhere, unemployment is expected to rise a tick to 4.5%.

U.K. Q2 GDP data will be reported Thursday. Consensus sees growth at 0.6% q/q vs. 0.7% in Q1, while the y/y rate is expected at 0.9% vs. 0.3% in Q1. The BOE projects Q2 GDP growth of 0.7% in Q2 as recent strength in household real income growth support consumption spending. June GDP, IP, services, and construction will also be reported at the same time.

U.K. July retail sales data will be reported Friday. Total retail sales volume is expected at 0.6% m/m vs. -1.2% in June, while the y/y rate is expected at 1.4% vs. -0.2% in June. A modest pick-up in retail sales would be consistent with the July improvement in the BRC same store sales.

Germany reports August ZEW survey Tuesday. Expectations are expected at 31.8 vs. 41.8 in July, while current assessment is expected at -75.0 vs. -68.9 in July. If so, this would be the second straight drop in expectations to the lowest since March and is consistent with continued weakness in the economy in H2. The worsening eurozone outlook should keep the ECB in easing mode, with a September 12 cut fully priced in.

Norges Bank meets Thursday and is expected to keep rates steady at 4.5%. In our view, the risk is the Norges Bank opens the door for a rate cut by year-end as inflation has been tracking below the bank’s forecasts for the past couple of months. Headline and underlying inflation printed at 2.8% and 3.3% in July, while the Norges Bank projects headline CPI at 3.9% and underlying CPI at 3.7% over Q3. At the June meeting, the Norges Bank cautioned that the policy rate will likely be kept at 4.50% through year-end before gradually being reduced from Q1 2025. A more dovish Norges Bank policy guidance would be a drag on NOK. As it is, the market is pricing in the first cut in December and 125 bp of total easing over the next 12 months. Updated macro forecasts will come at the next meeting September 19.

Sweden reports July CPI Wednesday. Headline is expected to fall a tick to 2.5% y/y, CPIF is expected at 1.6% y/y vs. 1.3% in June, and CPIF ex-energy is expected to fall two ticks to 2.1% y/y. The Riksbank forecasts CPIF inflation at 2.2% in July. If inflation prospects track its projection, the Riksbank’s guidance from the June meeting is to cut the policy rate “two or three times during the second half of the year.” The market is even more dovish and sees 100 bp of easing by year-end. Next meeting is August 20 and a 25 bp cut is fully priced in, with nearly 40% odds of a larger 50 bp move.

ASIA

Japan highlight will be Q2 GDP data Thursday. GDP growth is expected at 0.6% q/q vs. -0.7% in Q1, while the SAAR is expected at 2.3% vs. -2.9% in Q1. For reference, the Bank of Japan projects real GDP growth of 0.6% for FY24. Private consumption and business spending are expected at 0.6% q/q and 0.8% q/q, respectively. A bounce would be in line with the recovery in high-frequency data. However, some of the forward-looking indicators have softened, making the BOJ’s hawkish hike a bit riskier.

Australia highlight will be July jobs data Thursday. Consensus sees 20k jobs added vs. 50.2k in June, while the unemployment rate is seen steady at 4.1% on an unchanged participation rate of 66.9%. If so, the unemployment rate would remain near the lower end of the RBA’s estimated full employment range of 4.0-5.75%. Overall, the labor market is easing only gradually, curbing expectations the RBA will cut rates this year.

Australia Q2 wage price index will be reported Monday. Nominal wage growth ex-bonuses is expected to pick up a tick to 0.9% q/q, while the y/y rate is expected to fall a tick to 4.0% y/y. The RBA points out that its liaison contacts suggest wage growth was little changed over the recent quarter. Sticky wage growth around 4% y/y will keep the RBA cautious from easing too soon. The market has fully priced in a 25 bp cut by year-end. That’s about right in our view.

Reserve Bank of New Zealand meets Wednesday and is expected to keep rates steady at 5.5%. However, the market is split. In the analyst community, 9 of the 21 polled by Bloomberg anticipate a cut, while the market sees nearly 75% odds of a 25 bp cut to 5.25%. We believe the RBNZ can afford to wait for October before cutting rates. New Zealand Q2 non-tradeable CPI inflation was a tick higher than the RBNZ anticipated, business confidence picked-up in July and the rise in the unemployment rate in Q2 tracked the RBNZ forecast. Instead, we expect the RBNZ to signal rate cuts are in the pipeline this year but push back against market expectations for roughly 100 bp of total easing by year-end.

The RBNZ will release its Monetary Policy Statement with updated macro forecasts at the same time. Watch out for downward revisions to the Official Cash Rate (OCR) projections. For reference, the RBNZ currently forecasts the OCR to peak at 5.65% in Q4 2024 with a first OCR cut penciled in for Q3 2025. We believe rate hikes will be off the table, with the first cut coming much earlier.

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