The dollar is coming off of its best week since March 2020. DXY rose 2.4% and rose against every major currency. Of note, CAD and CHF outperformed while NZD and SEK underperformed. EM FX fared badly, as it struggles with tighter global liquidity and slower global growth. These drivers are likely to persist this week, with Fed Chair Powell expected to deliver a hawkish message at Jackson Hole and eurozone PMIs expected to show further softness in August.
The Kansas City Fed’s Jackson Hole Economic Symposium will be the main event. It is scheduled to begin Thursday and end Saturday. This year’s theme is "Reassessing Constraints on the Economy and Policy" and the full agenda is available here. Fed Chair Powell gives his keynote speech Friday at 10 AM ET. In the past, the Fed has used this symposium to announce or hint at policy shifts ahead of the September FOMC meetings. That said, we do not think the Fed will paint itself into a corner ahead of the September 20-21 FOMC meeting. Rather, we expect the Fed to try and manage market expectations at Jackson Hole. Between now and the September FOMC, we will get all the major August data and some of the early September surveys such as the preliminary S&P Global PMI readings and regional Fed surveys. The Fed will also have a better idea of how the economy is doing in Q3. Ahead of Jackson Hole, Kashkari speaks Tuesday.
Fed tightening expectations should continue to adjust. WIRP suggests a 50 bp hike is fully priced in for the September 20-21 FOMC meeting, with over 50% odds of a 75 bp hike. Looking ahead, the swaps market is now pricing in a 3.75% terminal rate vs. 3.5% at the start of last week. U.S. rates continue to edge higher, with the 2-year yield ending last week near 3.23% and the 10-year near 2.97%.
Chicago Fed National Activity Index for July will be reported Monday. It is expected at -0.25 vs. -0.19 in June. If so, the 3-month moving average would fall to -0.21 vs. -0.04 in June and would be the lowest since June 2020. A negative reading suggests growth is below trend but it is still well above the -0.7 threshold that signals imminent recession. Obviously, the economy is slowing and that is what the Fed wants. However, many fear a hard landing and so we need to keep an eye on this data series as well as the U.S. yield curve. At 33 bp, the 3-month to 10-year curve is the highest since flattest since August 21 and off the low near 21 bp. While this move higher is welcome, the risks of eventual inversion remain high.
Regional Fed manufacturing surveys for August will continue rolling out. Richmond Fed reports Tuesday. Kansas City reports Thursday. S&P Global preliminary August PMI readings will be reported Tuesday. Manufacturing is expected at 51.9 vs. 52.2 in July and services is expected at 50.0 vs. 47.3 in July. If so, the composite should move back above 50.0 vs. 47.7 in July. July durable goods orders will be reported Tuesday and are expected at 0.8% m/m vs. 2.0% in June. Of note, core orders (non-defense ex-aircraft) are expected at 0.3% m/m vs. 0.7% in June.
We get the first revision for Q2 GDP Thursday. Consensus sees no change to the advance -0.9% SAAR. Of course, this is old news as market are already looking ahead to Q3 and Q4. The Atlanta Fed’s GDPNow model is now tracking 1.6% SAAR growth for Q3 vs. 1.8% previously. However, it’s early on and so each data point can lead to big swings in the estimate. Next update to the model will be released Wednesday. Of note, Bloomberg consensus sees 1.5% SAAR in Q3 and 1.3% SAAR in Q4.
July core PCE data Friday will be important. It is expected to fall a tick to 4.7% y/y. If so, it would basically reverse the acceleration seen in June. While several inflation measures appear to have peaked, we are nowhere near the 2% target and so it’s full speed ahead for Fed tightening. Personal income and spending will be reported at the same time and are expected at 0.6% m/m and 0.4% m/m, respectively.
Other minor data will be reported. Housing data will be closely watched. July new home sales will be reported Tuesday and are expected at -2.5% m/m vs. -8.1% in June. Pending home sales will be reported Wednesday and are expected at -2.5% m/m vs. -8.6% in June. July advance goods trade and wholesale inventories will be reported Thursday. Final August University of Michigan consumer sentiment will be reported Friday.
Preliminary eurozone August PMI readings will be reported Tuesday. Headline manufacturing is expected at 48.9 vs. 49.8 in July, services is expected at 50.5 vs. 51.2 in July, and the composite is expected at 48.9 vs. 49.9 in July. Looking at the country breakdown, the German composite is expected at 47.3 vs. 48.1 in July and the French composite is expected at 51.0 vs. 51.7 in July. Italy and Spain will be reported with the final PMI readings n early September.
Germany remains the weak link in the eurozone. It reports August IFO business climate survey and final Q2 GDP data Thursday. Advance GDP was flat q/q but we see downside risks to the revision. Headline IFO is expected at 86.8 vs. 88.6 in July, with current assessment expected at 96.0 vs. 97.7 in July and expectations expected at 79.0 vs. 80.3 in July. September GfK consumer confidence will be reported Friday and is expected at -32.0 vs. -30.6 in August.
The account of the ECB’s July meeting will be released Thursday. Obviously, markets will be looking for clues about the upcoming meeting next month. Last month, the hawks won out and the ECB delivered a 50 bp hike. Of interest will be the discussions of the so-called Transmission Protection Instrument (TPI). Details have so far been very vague and the account should hold some clues as to how the ECB is viewing its eventual triggers and limitations. Over the weekend, Nagel said “Given high inflation, further interest rate hikes must follow.” He acknowledged that “If the energy crisis worsens, a recession seems likely next winter. The German economy still performed quite well under difficult conditions in the first half of the year. However, if further delivery problems are added, for example due to prolonged low water levels, the economic prospects for the second half would deteriorate further.”
ECB tightening expectations remain elevated. WIRP suggests a 50 bp hike is fully priced in for September 8, with 15% odds seen of a larger 75 bp move. The swaps market is pricing in 175 bp of tightening over the next 12 months that would see the deposit rate peak near 1.5%, up from 1.75% at the start of last week. Yet higher expected rates have done nothing for the euro. The single currency is trading at the lowest since mid-July and is on track to test the July 14 low near $0.9950. After that, the next target is the September 2002 low near $0.9615.
The U.K. has a fairly quiet week. Preliminary August PMI readings will be reported Tuesday. Manufacturing is expected at 51.0 vs. 52.1 in July, services is expected at 51.9 vs. 52.6 in July, and the composite is expected at 51.0 vs. 52.1 in July. The CBI also releases the results of its August surveys. Industrial trends will be reported Tuesday, with orders expected at 2 vs. 8 in July and selling prices expected at 40 vs. 48 in July. Distributive trade will be reported Thursday, with retailing reported sales expected at -9 vs. -4 in July.
BOE tightening expectations also remain elevated. WIRP suggests a 50 bp hike September 15 is fully priced in, with 25% odds of a larger 75 bp move. The swaps market is pricing in 225 bp of tightening over the next 12 months that would see the policy rate peak near 4.0%, up from 3.25-3.50% at the start of last week and 3.0-3.25% at the start of the week before that. Can the BOE really tightening so aggressively when policymakers are already expecting a recession by Q4? higher expected U.K. rates have done nothing for sterling either. Cable is trading at the lowest since mid-July and is on track to test the July 14 low near $1.1760. After that, there are no major chart points until the March 2020 low near $1.1410.
Japan reports some key data. Preliminary August PMI readings and July department store sales will be reported Tuesday. August Tokyo CPI will be reported Friday. Headline is expected at 2.7% y/y vs. 2.5% in July, while core (ex-fresh food) is expected at 2.5% y/y vs. 2.3% in July. Of note, core ex-energy is expected at 1.3% y/y vs. 1.2% in July. Last week, July national CPI came in as expected. Of note, the latest macro forecasts from the BOJ see core inflation at 2.3% in FY22 before falling back below target to 1.4% and 1.3% in FY23 and FY24, respectively.
Despite some upward pressure on the CPI readings, the data support the bank’s decision to maintain ultra-loose policy for now. Next policy meeting is September21-22 and no change is expected then. With monetary policy divergences widening with the Fed, USD/JPY is likely to march higher and is trading just below 137, and is on track to test the July 14 high near 139.40.