Drivers for the Week of August 20, 2023

August 20, 2023
Here's a look at the main drivers in Developed Markets this week.

The broad dollar rally continued last week. GBP outperformed and was the only major currency to gain while NOK, SEK, and AUD underperformed. DXY has risen five straight weeks and is the longest streak since April-May 2022. The same drivers boosting the dollar this past month are likely to persist this week, including strong U.S. data and higher U.S. yields.


All eyes are on the Kansas City Fed’s Jackson Hole Symposium this week. It begins Thursday and ends Saturday. This year’s topic is ““Structural Shifts in the Global Economy” and the full agenda is usually made available at that Thursday evening. While some may be looking any hints on policy, we do not think any decisions will be made until the actual September 19-20 FOMC meeting given the Fed’s data-dependency mode. However, we expect Chair Powell in his opening speech Friday morning to underscore the Fed’s commitment to meeting the 2% inflation target. As such, a hawkish tone should emerge from the symposium. We will be sending out Jackson Hole preview early this week. Ahead of Powell, there are several Fed speakers. Barkin, Goolsbee, and Bowman speak Tuesday. Harker speaks Thursday and twice again Friday.

Are Fed policymakers willing to address the elephant in the room, namely loose financial conditions? Some of the Fed doves have been talking up the potential for a soft landing without acknowledging why the economy has so far avoided a hard landing. The Chicago Fed’s measure of financial conditions is the loosest since early March 2022, before the Fed started hiking. Until financial conditions tighten, there’s unlikely to be any landing whatsoever as growth remains at or above trend. The Chicago Fed’s weekly reading will be out Wednesday.

Key August PMI readings will be reported. S&P Global reports preliminary PMIs Wednesday. Manufacturing is expected to remain steady at 49.0, services is expected to fall three ticks to 52.0, and the composite is expected to fall half a point to 51.5. If so, this composite would be the lowest since February. ISM PMI readings won’t be seen until next week.

July Chicago Fed National Activity Index will be reported Thursday. The headline is expected at -0.20 vs. -0.32 in June. If so, the 3-month moving average would come in at -0.27 vs. -0.16 in June and would be the lowest since December 2022. Recall that the recession signal comes when the 3-month moving average hits -0.7 and we are far from that. This series has taken on greater significance given that the 3-month to 10-year curve remains deeply inverted. The continued resilience in the economy is noteworthy and suggests the Fed still has more work to do in getting to the desired sub-trend growth. Indeed, the Atlanta Fed’s GDPNow model is currently tracking Q3 growth at 5.8 % SAAR. Next model update comes Thursday.

Regional Fed August surveys will continue to roll out. Philly and Richmond Fed non-manufacturing and Richmond Fed manufacturing (-10 expected) indices will be reported Tuesday. Kansas City Fed manufacturing index will be reported Thursday and is expected at -9 vs. -11 in July, while its services index will be reported Friday.

Housing data will be of interest. July existing home sales will be reported Tuesday and are expected at -0.2% m/m vs. -3.3% in June. New home sales will be reported Wednesday and are expected at 1.0% m/m vs. -2.5% in June. Other minor data will be reported. July durable goods orders will be reported Thursday and are expected at -4.0% m/m vs. 4.6% in June. Final University of Michigan consumer sentiment will be reported Friday.

There will be preliminary benchmark revisions to the establishment survey reported Wednesday. From the BLS website: “Each year, the establishment survey estimates are benchmarked to comprehensive counts of employment from the Quarterly Census of Employment and Wages (QCEW) for the month of March. These counts are derived from state unemployment insurance (UI) tax records that nearly all employers are required to file.” Weekly jobless claims will be reported Thursday. Initial claims are expected at 240k vs. 239k last week. Continuing claims are reported with a one week lag and this week’s data will be for the BLS survey week containing the 12th of the month. These are expected at 1.700 mln vs. 1.716 mln last week. Bloomberg consensus for August NFP has started out at 160k vs. 187k in July, while the unemployment rate is expected to remain steady at 3.5%.

Canada highlight will be June retail sales data Wednesday. Headline is expected at 0.0% m/m vs. 0.2% in May while ex-autos is expected at 0.3% m/m vs. 0.0% in May. The real sector data have come in soft recently but headline inflation accelerated to 3.3% y/y in July and so the Bank of Canada will remain on alert. WIRP suggests 33% odds of a hike September 6, rising to 66% October 25 and topping out near 80% December 6.


Eurozone data highlight will be preliminary August PMIs Wednesday. Headline manufacturing is expected to fall a tick to 42.6, services is expected at 50.5 vs. 50.9, and the composite is expected to fall a tick to 48.5. Looking at the country breakdown, the German composite is expected at 48.0 vs. 48.5 in July and the French composite is expected at 47.5 vs. 46.6 in July. Italy and Spain will be reported with the final PMI readings in early September.

Individual eurozone countries report limited data. France reports July retail sales Tuesday, followed by August business and manufacturing confidence Thursday. Germany reports August IFO business climate and final GDP data Friday. Headline IFO is expected at 86.7 vs. 87.3 in July, driven by a drop in current assessment to 90.0 that far outweighs a modest rise in expectations to 83.6.

European Central Bank tightening expectations remain subdued. WIRP suggest odds of a 25 bp hike stand near 50% September 14, rise to 70% October 26 and top out near 80% December 14. These odds will rise and fall with the data but Madame Lagarde clearly accentuated the negative at the last ECB meting and that’s what markets should focus on. 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. Lagarde speaks Saturday at Jackson Hole.

U.K. highlight will be preliminary August PMIs Wednesday. Headline manufacturing is expected at 45.0 vs. 45.3 in July, services is expected at 50.8 vs. 51.5, and the composite is expected at 50.3 vs. 50.8 in July. If so, this would be the lowest composite reading since January and moves closer to the 50 boom/bust level. A recession appears to be inevitable.

CBI reports its August surveys this week. Industrial trends survey will be reported Tuesday, with total orders expected at -12 vs. -9 in July. Distributive trades survey will be reported Thursday, with retailing reported sales expected at -15 vs. -25 in July. August GfK consumer confidence was delayed last week and will be reported Friday. It is expected at -29 vs. -30 in July.

Bank of England tightening expectations remain elevated. WIRP suggests 25% odds of a 50 bp hike September 21, while 25 bp hikes in November and February are priced in that would see the bank rate peak near 6.0% vs. 5.75% at the start of last week and 6.5% at the start of last month. Broadbent speaks Saturday at Jackson Hole.


Japan highlight will be August Tokyo CPI Friday. Headline is expected at 3.0% y/y vs. 3.2% in July, core (ex-fresh food) is expected at 2.9% y/y vs. 3.0% in July, and core ex-energy is expected at 3.9% y/y vs. 4.0% in July. If so, core would be the lowest since September and would bode well for the national CPI data. July department store sales will also be reported Friday.

Bank of Japan expectations remain muted. National core inflation of 3.1% y/y is the lowest since March and should fall further in August. This would support the Bank of Japan’s wait-and-see stance as the most recent forecasts show it falling back below the 2% target in both FY24 and FY25. Next policy meeting is September 21-22 and no change is expected then.

Preliminary August PMIs will be reported Wednesday. The composite PMI has remained above 50 all year but recent data suggest the economy is softening.

The only Australia data report will be preliminary August PMIs Wednesday. The composite PMI fell below 50 in July for the first time since March and was the lowest since December. With China slowing, we expect the composite PMI to continue falling and likely to remain below 50 in the coming months. The RBA has warned that further hikes may be needed but WIRP suggests no odds of a hike September 5 or October 3, rising to 25% November 7 and then topping out around 40% in Q1.

New Zealand reports some key data. July trade data will be reported Monday. Q2 real retail sales will be reported Wednesday and is expected at -0.2% q/q vs. -1.4% in Q1. If so, it would not bode well for Q2 GDP. The RBNZ has warned that further hikes may be needed but WIRP suggests only 10% odds of a hike October 4, rising to 45% November 29 and then topping out around 55% February 28.  

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