The dollar continues to build on its gains after Jackson Hole. Powell did not disappoint (see below) and so our broad macro calls remain in place: stronger dollar, weaker equities, and a flatter U.S. yield curve. While this week’s data are important, the Fed has made it clear that recession risks will not deter it from its fight against inflation. EM is also likely to remain under pressure; while sentiment was boosted by China’s CNY1 trln stimulus package, the overall backdrop remains poor.
Fed Chair Powell delivered the hawkish goods at Jackson Hole. He said restrictive policy will likely be required for some time and added that history cautions against prematurely loosening policy. Powell said the size of the September hike hinges on the totality of the data, adding that the July inflation data were welcome but the Fed needs to see more. Lastly, Powel said that sustained below-trend growth will be needed to reduce inflation. His speak was short and straight to the point. No doubts should remain that the Fed is nowhere close to stopping its drive to lower inflation. WIRP suggests over 65% odds of a 75 bp hike at the September 20-21 FOMC meeting, up from 50% at the start of last week. The swaps market is pricing in higher odds of a 4% terminal rate and we think that process is likely to continue. It's not a coincidence that Fed officials keep bringing up Paul Volcker, as the implications are clear.
With Jackson Hole behind them, Fed officials are likely to continue their aggressive communication efforts this week. As we saw after the July FOMC decision and then after the FOMC minutes, Fed officials blanketed the airwaves with a hawkish message. We expect a similar effort after Jackson Hole. Brainard speaks Monday, followed by Barkin and Williams Tuesday. Mester and Bostic speak Wednesday while the Dallas Fed introduces Logan as its new President. Bostic speaks again Thursday but we suspect more Fed speakers will pop up as the week progresses. We expect all Fed officials to stick to Powell’s hawkish script.
This week’s data will be key for the dollar’s near-term direction. Of course, jobs data Friday is the main event. Consensus sees 300k jobs added vs. 528k in July, while the unemployment rate is expected to remain steady at 3.5% and average hourly earnings are expected to remain steady at 5.2% y/y. Ahead of that, ADP is restarting its private sector jobs estimates Wednesday after taking two months off to retool its model and is also expected at 300k. Of note, initial jobless claims fell to 250k for the BLS survey week containing the 12th of the month. Other labor market indicators will be reported this week, including July JOLTS job opening Tuesday (10.475 mln expected) and August Challenger job cuts and weekly jobless claims Thursday. While the labor market remains strong, there is no question that unemployment will eventually rise as the Fed continues tightening. However, keep in mind that the labor market is a lagging indicator.
We get important survey readings as well. Regional Fed manufacturing surveys for August will wrap up with Dallas reporting Monday and expected at -12.7 vs. -22.6 in July. August Chicago PMI will be reported Wednesday and is expected at 52.5 vs. 52.1 in July. August ISM manufacturing PMI will be reported Thursday and is expected at 52.0 vs. 52.8 in July. Keep an eye on prices paid and employment, which stood at 60.0 and 49.9 in July, respectively. ISM services PMI won’t be reported until September 6 and consensus sees 56.2 vs. 56.7 in July, the highest since April.
Other data will round out the picture of the U.S. economy. June FHFA and S&P CoreLogic house price indices as well as August Conference Board consumer confidence (97.7 expected) will be reported Tuesday. July construction spending (-0.1% m./m) and August vehicle sales (13.5 mln annual rate) will be reported Thursday. July factory orders will be reported Friday and are expected at 0.2% m/m vs. 2.0% in July.
Canada has a very quiet week. Q2 current account data will be reported Tuesday. June and Q2 GDP will be reported Wednesday and are expected at 4.9% y/y and 4.4% SAAR , respectively. July building permits and August S&P Global manufacturing PMI will be reported Thursday. The economy remains strong and price pressures remain high and so it’s full speed ahead for the Bank of Canada. WIRP suggests a 75 bp hike is fully priced in for September 7, with nearly 33% odds of a 100 bp move. The swaps market is pricing in 150 bp of tightening over the next 6 months that would see the policy rate peak near 4.0%.
Reports suggest the ECB wants to discuss a 75 bp hike at the September 8 meeting. Over the weekend, Rehn and Kazaks made some hawkish comments. WIRP suggests a 50 bp hike is fully priced in, with nearly 50% odds of a 75 bp move. The problem with large-scale ECB hikes (the same goes for the BOE) is that they are hiking into a recession that's pretty much already here. Germany, Italy, and now France are contracting and it's only going to get worse this fall/winter when energy shortages really bite. Sure, the US faces recession risks too but we still think that Europe is in much weaker fundamental shape
August eurozone CPI data will be key. Spain and Germany report Tuesday. EU Harmonised inflation is expected to ease two ticks to 10.5% y/y for Spain but is expected to pick up three ticks to 8.8% y/y for Germany. France, Italy, and eurozone report Wednesday. France is expected to fall a tick to 6.7% y/y while Italy is expected to fall two ticks to 8.2% y/y. For the eurozone as a whole, headline is expected to pick up a tick to 9.0% y/y and core is expected to pick up a tick to 4.1% y/y. July eurozone PPI will be reported Friday and is expected to remain steady at 35.8% y/y.
Final August eurozone manufacturing PMI readings will be reported Thursday. Italy and Spain report for the first time, with the former expected at 48.1 vs. 48.5 in July and the latter expected at 48.5 vs. 48.7 in July. The manufacturing sectors of the four biggest eurozone economies are already contracting and it’s only going to get worse. Final eurozone services and composite PMIs will be reported September 5.
Eurozone countries also report key data. Germany reports August unemployment Wednesday and is expected at 27k vs. 47k in July, which would see the unemployment rate rise a tick to 5.5%. July retail sales will be reported Thursday and are expected at -0.1% m/m vs. -1.5% in June. July trade will be reported Friday. Elsewhere, Spain reports July retail sales Tuesday and August unemployment Friday while France reports July consumer spending (-0.2% m/m expected) Wednesday.
Japan has a fairly busy week. July labor market data will be reported Tuesday. Unemployment rate and job-to-applicant ratio are both expected to remain steady at 2.6% and 1.27, respectively. July IP, retail sales, housing starts, and August consumer confidence will all be reported Wednesday. IP is expected at -0.5% m/m vs. 9.2% in June, while sales are expected at 0.3% m/m vs. -1.3% in June. Final August manufacturing PMI and vehicle sales will be reported Thursday. Recent data have been softening and so despite the recent uptick in inflation readings, we believe the Bank of Japan will maintain its ultra-loose policy for now. Next policy meeting is September 21-22 and no change is expected then.
Australia reports some key data. July retail sales will be reported Monday and expected at 0.3% m/m vs. 0.2% in June. July building approvals will be reported Tuesday and expected at -3.0% m/m vs. -0.7% in June. Private sector credit will be reported Wednesday. Final August manufacturing PMI will be reported Thursday. Despite some softness in recent data, RBA market expectations are fairly steady as WIRP suggests a 50 bp hike September 6 is about 70% priced in, while the swaps market is pricing in 215 bp of tightening over the next 12 months that would see the policy rate peak near 4.0%.