There was broad dollar weakness last week stemming from the double whammy of a dovish Fed hold coupled with the weak jobs report. JPY, CHF, and SEK outperformed while AUD, GBP, and CAD underperformed. The dollar is likely to remain pressure due to absence of any major U.S. data releases this week.
AMERICAS
Markets are still digesting the FOMC’s dovish hold and soft jobs report. The double whammy has pushed UST yields lower, which in turn has weighed on the dollar. Yet we continue to believe that the market is once again overreacting to one data point. To wit, the market is fully pricing in 100 bp of easing by year-end, with nearly 65% odds of another 25 bp on top of that. This incorporates nearly 75% odds that the Fed’s first cut in September will be 50 bp. Looking further ahead, the market is pricing in over 200 bp of total easing over the next 12 months. Unless the U.S. economy falls into a deep recession, this rate path seems unlikely. However, we cannot stand in the way of this dovish narrative until we see more data.
We don’t think the Fed will be happy with this market narrative. If so, look for Fed speakers to push back in the coming days. Last Friday, Goolsbee stressed that “We’d never want to overreact to any one month’s numbers.” However, he reminded everyone that “if unemployment is going to go up higher than the neutral rate, that is exactly the kind of pinching on the other side of the mandate that the law says the Fed has to think about and respond to.” Goolsbee and Daly speak Monday. Barkin speaks Thursday.
With little in the way of top tier data this week, UST yields and the dollar are likely to remain under downward pressure. The 10-year yield has fallen to 3.79%, the lowest since December, while the 2-year yield has fallen to 3.88%, the lowest since May 2023. Lower yields tend to loosen financial conditions, but this was offset by falling equity markets. We’re not sure how this will net out when last week’s financial conditions are reported Wednesday by the Chicago Fed. However, we remain confident that financial conditions are likely to continue loosening in the run-up to the first cut in September and then beyond. Given the Fed’s concerns about the labor market, we think it will be happy to see the market do some of the easing for them.
ISM services PMI Monday will be the data highlight. Headline is expected at 51.0 vs. 48.8 in June. The already released regional Fed services business surveys point to downside risks. However, the US S&P Global services PMI rose to a 28-month high at 56.0 in July vs. 55.3 in June. Keep an eye on prices paid, activity, and employment.
The U.S. economy overall remains solid. Yes, there are pockets of weakness, but GDP grew 2.8% SAAR in Q2. For Q3, the Atlanta Fed’s GDPNow model is tracking 2.5% SAAR and will be updated Tuesday after the data. The New York Fed’s Nowcast model is tracking Q3 growth at 2.1% SAAR and will be updated Friday. Its first estimate for Q4 will come at the end of August.
The Fed’s Senior Loan Officer Opinion Survey will be released Monday. The results will offer an overview of bank lending practices over Q3. We don’t expect any major surprises. The June FOMC meeting minutes pointed out that consumer credit remained generally available despite some signs of tightening. Credit also remained largely available to commercial real estate (CRE) borrowers outside of construction and land development loans.
Bank of Canada releases the summary of its deliberations Wednesday. At the July meeting, the bank delivered its second straight 25 bp cut and signaled more to come. The BOC scrapped previous reference that “risks to the inflation outlook remain”, pointing out instead that “with the economy in excess supply and slack in the labor market, the economy has more room to grow without creating inflationary pressures.” In fact, BOC projects both core and headline inflation to reach its 2% target in Q4 2025. The next meeting is September 4 and another 25 bp cut is expected. The swaps market is pricing in 150 bp of total easing over the next 12 months.
Canada data highlight will be July jobs report Friday. Consensus sees a 28.7k rise in jobs vs. -1.4k in June, while the unemployment rate is expected to rise a tick to 6.5%. Overall, Canada’s labor market has cooled significantly, and indications of labor market slack are emerging. The Bank of Canada points out the job vacancy rate has come down significantly, and firms reporting of labor shortages are now below normal.
Canada also reports July PMIs. S&P Global services and composite PMIs will be reported Tuesday. Last week, its manufacturing PMI came in at 47.8 vs. 49.3 in June. Ivey PMI will be reported Wednesday.
EUROPE/MIDDLE EAST/AFRICA
Eurozone reports final July services and composite PMIs Monday. Spain and Italy report for the first time and their composite PMIs are expected at 54.3 and 50.9, respectively. Both would be down from June. Anything worse and it’s possible that the eurozone composite PMI will get dragged below 50 from 50.1 in June.
Germany reports key data. June factory orders will be reported Tuesday and is expected at -14.0% y/y vs. -8.6% in May. Trade data will be reported Wednesday. Exports are expected at -1.5% m/m vs. -3.6% in May, while imports are expected at 2.3% m/m vs. -7.0% in May. IP will also be reported Wednesday and is expected at -4.2% y/y vs. -6.7% in May.
Eurozone reports June retail sales Tuesday. Headline is expected at 0.1% y/y vs. 0.3% in May. In y/y terms, June retail sales in France and Italy fell -0.7% and -1.0%, respectively, while Spain’s rose 0.3%. Germany has not reported May or June sales data yet, but we would expect significant weakness.
Weak data should keep the ECB in easing mode. Next meeting is September 12 and a 25 bp cut is fully priced in, with some odds seen of a larger 50 bp move. We think that’s unlikely, but do believe that the ECB will have to cut more than is currently priced in. The swaps market is pricing in 150 bp of total easing over the next 12 months.
Norway reports July CPI Friday. Headline is expected to rise three ticks to 2.9% y/y, while underlying is expected to remain steady at 3.4% y/y. Inflation is tracking below the Norges Bank’s forecasts for headline CPI at 3.2% for Q2 and 3.9% for Q3 and underlying CPI at 4.0% for Q2 and 3.7% for Q3. Bottom line: the Norges bank may need to cut rates sooner and by more than they currently forecast, which would be a drag for NOK. At the June meeting, the Norges Bank pushed out the timing of a first rate cut to Q1 2025 from Q3 2024 previously and projects just one 25 bp cut over the next 12 months. Next meeting is August 15, and no change is expected then. The swaps market now sees 125 bp of easing over the same period.
ASIA
Minutes of the June BOJ meeting will be released Monday. At that meeting, the bank kept rates steady but said it would pare its monthly bond-buying at the next meeting July 30-31. The message was relatively dovish and so the minutes will be of interest in order to figure out why the bank turned so hawkish for the next meeting in July.
The summary of opinions for the July 30-31 BOJ meeting will be released Thursday. At that meeting the BOJ decided by a 7-2 majority vote to raise the policy rate 15 bp “to remain at around 0.25%” from a target range of 0-0.10% previously. The BOJ also decided, by a unanimous vote, on a plan to reduce the amount of its monthly outright purchases of JGBs from roughly JPY6 trln to about JPY3 trillion by Q1 2026. Importantly, the BOJ signaled it plans to tighten policy further. According to the BOJ, “if the outlook for economic activity and prices presented in the July Outlook Report will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.”
Japan highlight will be June cash earnings data Tuesday. Nominal earnings are expected at 2.4% y/y vs. 2.0% in May, while real earnings are expected at -0.9% y/y vs. -1.3% in May. Scheduled full-time earnings are expected at 2.9% y/y vs. 2.7% in May, reflecting the results of the annual spring labor-management wage negotiations. Japan’s improving wage dynamic validates the Bank of Japan’s guidance to tighten policy further. However, the swaps market is pricing in just 15 bp of tightening over the next 12 months and 45 bp total over the next three years.
June current account data Thursday will also hold some interest. The adjusted surplus is expected at JPY2.276 trln vs. JPY2.406 trln in May. However, the investment flows will be of more interest. The May data showed that Japan investors were net buyers of U.S. bonds (JPY3.318 trln), the most time since January. Japan investors stayed net sellers (-JPY273.4 bln) of Australian bonds for the fifth straight month and turned net sellers of Canadian bonds (-JPY7.8mln) for the first time since February. Investors stayed buyers of Italian bonds (JPY14.3 bln) for the second straight month after three straight months of selling. Overall, Japan investors turned total net buyers of foreign bonds (JPY3.087 trln), the most since September. With Japan yields likely to move even higher in H2, it’s possible that Japan investors will stop chasing higher yields abroad, but we think it’s still too early to say.
Reserve Bank of Australia meets Tuesday and is expected to keep rates steady at 4.35%. We also anticipate the RBA to stick to its neutral policy guidance that “the Board is not ruling anything in or out” and to reiterate “that it will be some time yet before inflation is sustainably in the target range” and warn again of “the need to remain vigilant to upside risks to inflation.” The RBA will publish new sets of forecasts in its August Statement on Monetary Policy. We see risks that Governor Bullock reveals during her post-meeting press conference that a rate hike was not on the table in part because Australia households continue to curb spending. If so, Australian interest rate expectations can adjust lower and weigh on AUD. The market sees over 80% odds of a 25bp cut by year-end. Bullock speaks again Thursday.
New Zealand highlight will be Q2 employment data Wednesday. Employment is expected to shrink -0.2% q/q, same as in Q1, whereas the RBNZ has penciled in a 0.1% rise. The unemployment rate is expected to rise four ticks to 4.7% on a lower participation rate of 71.3% vs. 71.5% in Q1. For reference, the RBNZ projects unemployment and participation rates of 4.6% and 71.5% in Q2, respectively. Finally, private wages are expected at 0.8% q/q, same as in Q1 and a tick lower than the RBNZ forecasts. The market sees about 75% odds of a cut at the next meeting August 14. We think the RBNZ can afford to wait for October before slashing rates, as New Zealand non-tradeable CPI inflation remains sticky and business confidence has picked up. We will reconsider our RBNZ view after the Q2 labor market data.
RBNZ survey of inflation expectations for Q3 will be released Wednesday. 2-year inflation expectations have declined from a high of 3.6% in Q4 2022 to 2.3% in Q2, near the middle of the 1-3% target range.
