The dollar mounted a broad-based recovery last week after weeks of relentless selling. CAD, NOK, and CHF outperformed while NZD, JPY, and GBP underperformed. The Fed is widely expected to hike rates 25 bp this week and should deliver a hawkish message to the markets, as U.S. data continue to surprise to the upside. On the other hand, the ECB is likely to give a more nuanced message while the BOJ is likely to remain the outlier and keep policy on hold. The dollar rebound should continue this week as monetary policy divergences continue to widen.

AMERICAS

The two-day FOMC meeting ends Wednesday with an expected 25 bp hike. Forward guidance will be key. We strongly believe the Fed should not signal another skip in September, as doing so for the June meeting really handcuffed the Fed at a time when it needed maximum flexibility. Given how firm the labor market remains, we believe the right thing for the Fed to do is to emphasize a more data-dependent approach and stress that a skip in September should not be assumed. There won’t be updated macro forecasts and Dot Plots until the September meeting. WIRP suggests odds of a hike then around 15% and top out near 33% November 1.

As always, the press conference will be key. At the June presser, Chair Powell called the decision to hold rates “prudent” but added that the Fed will continue to make decisions meeting by meeting. Of course, this begs the question of how the Fed could pre-commit to a skip way back on May 3, well before the June 14 decision. Powell stressed in June that “It will be appropriate to cut rates at such time as inflation is coming down really significantly, and we’re talking about a couple years out.” It’s worth noting that the first cut is largely priced in for next March but this is of course open to repricing and dependent on the data.

June core PCE Friday will be important. Headline is expected at 3.0% y/y vs. 3.8% in May, while core is expected at 4.2% y/y vs. 4.6% in May. Of note, the Cleveland Fed’s inflation Nowcast sees the two at 3.0% y/y and 4.2% y/y, respectively and right at consensus. However, its model suggests both PCE measures will accelerate in July to 3.4% y/y and 4.5% y/y, respectively. Personal income and spending will be reported at the same time. Income is expected at 0.5% m/m while spending is expected at 0.4% m/m. Real personal spending is expected at 0.3% m/m.

We get some key survey readings for July. S&P Global preliminary PMIs will be reported Monday. Manufacturing is expected at 46.2 vs. 46.3 in June, services is expected at 54.0 vs. 54.4 in June, and composite is expected at 53.0 vs. 53.2 in June. Regional Fed surveys will also continue rolling out, starting with the Philly Fed non-manufacturing index Tuesday. Richmond Fed manufacturing (-10 expected) and business conditions surveys will both be reported Tuesday as well. Kansas City Fed manufacturing index will be reported Thursday, followed by its services index Friday.

Chicago Fed National Activity Index for June will be reported Monday. Headline is expected -0.16 vs. -0.15 in May. If so, the 3-month moving average would rise to -0.06 vs. -0.14 and would be the highest since October. Recall that when that 3-month average moves below -0.7, that signals imminent recession and so we are still well above that threshold. 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.

Advance Q2 GDP data will be reported Thursday. Consensus stands at 1.8% SAAR vs. 2.0% in Q1. Of note, the Atlanta Fed’s GDPNow model is currently tracking Q2 growth at 2.4% SAAR, unchanged from the previous reading. The next and final model update comes Wednesday. After Q2 GDP is reported Thursday, the Atlanta Fed’s initial estimate for Q3 growth will then be released Friday. Bloomberg consensus for Q3 currently stands near 0.4% SAAR and will likely move higher if momentum in the economy is sustained.

Housing sector data will remain in focus. May FHFA and S&P CoreLogic house price indices will be reported Tuesday. June new homes sales will be reported Wednesday and are expected at -5.0% m/m vs. 12.2% in May. Pending home sales will be reported Thursday and are expected at -0.5% m/m vs. -2.7% in May.

Consumer confidence measures will be reported. Conference Board reports its July measure Tuesday and its headline is expected at 112.0 vs. 109.7 in June. If so, it would be the highest since December 2021. University of Michigan reports its final July reading Friday. The preliminary reading of 72.6 was the highest since September 2021 and this improvement would line up with the Conference Board.

Other minor data will round out the U.S. picture. June durable goods orders (1.0% m/m expected), advance goods trade (-$91.9 bln expected), wholesale and retail inventories, and weekly jobless claims will all be reported Thursday. Q2 Employment Cost Index will be reported Friday and is expected at 1.1% q/q vs. 1.2% in Q1. Initial claims are expected at 235k vs. 228k last week, while continuing claims are expected at 1.75 mln vs. 1.754 mln last week. Of note, the continuing claims data are reported with a one-week lag and this week’s reading is for the BLS survey week containing the 12th of the month. Current consensus for July NFP stands at 180k vs. 209k in June.

Bank of Canada releases the summary of its deliberations Wednesday. At the July 12 meeting, it hiked rates 25 bp to 5.0%. It said it now sees inflation returning to the 2% target by mid-2025 vs. end-2024 previously, adding that it is concerned progress towards it could stall. Updated macro forecasts were released. Later, Governor Macklem said the bank discussed holding rates and awaiting more data but decided that the cost of delay exceeded the benefit of waiting. He said the bank is prepared to hike again if needed but that it would assess rates on a decision-by-decision basis. Looking ahead, WIRP suggests 30% odds of a hike at the next meeting September 6, rising to nearly 70% October 25 and 75% December 6. It will all come down to the data.

EUROPE/MIDDLE EAST/AFRICA

The two-day ECB meeting ends Thursday with an expected 25 bp hike. The big question is how the bank frames the debate going forward. At the last meeting June 15, the bank hiked 25 bp and President Lagarde said the bank was very likely to continue hiking rates in July, adding that there is still ground to cover and that the ECB is not yet at its destination. It remains puzzling to us how central bankers can say future decisions are data dependent and then go ahead and pre-commit to its next move in the same breath. Lagarde added then that the ECB is not “thinking about” pausing. However, the fact that she mentioned it suggests that the ECB is “thinking about thinking about” pausing.

Looking ahead, the end of the tightening cycle is within sight. WIRP suggest odds of another 25 bp hike stand near 60% September 14, rise to 80% October 26, and top out near 90% December 14. The messaging this week will be key. Does the ECB take a hawkish line and commit to another hike or does it take a softer data-dependent line? Even leading hawks Knot and Nagel signaled last week that they were not committed to a September hike and so the usual hawk vs. dove dynamics appear to have shifted. As a result, we expect the ECB to take the middle ground and set forth a conditionally hawkish message that is much more data-dependent than the one it gave in June. Updated macro forecasts will come at the September meeting. June M3 data will be reported Wednesday and is expected at 0.8% y/y vs. 1.4% in May. If so, it would be the slowest since April 2014 and signals slower economic activity ahead.

Eurozone July CPI readings will start rolling out after the ECB decision. France, Spain, and Germany report Friday. France’s headline EU Harmonised inflation is expected at 5.0% y/y vs. 5.3% in June, Spain’s is expected at 1.8% y/y vs. 1.6% in June ,and Germany’s is expected at 6.6% y/y vs. 6.8% in June. Italy and eurozone report CPI next Monday.

Eurozone Q2 GDP readings will start rolling out after the ECB decision too. France and Spain report Friday. France’s GDP growth is expected at 0.1% q/q vs. 0.2% in Q1 and Spain’s is expected at 0.4% q/q vs. 0.6% in Q1. Germany, Italy, and eurozone report GDP next Monday. Of note, Q1 eurozone growth was revised up last week to flat q/q vs. -0.1% in Q1 but we see downside risks to the Q2 readings given the recent weakness seen in the eurozone PMIs. It’s clear that the U.S. economy will continue to outperform the eurozone this year.

Preliminary July PMIs will be reported Monday. Headline manufacturing is expected at 43.5 vs. 43.4 in June, services is expected at 51.6 vs. 52.0 in June, and composite is expected at 49.6 vs. 49.9 in June. Looking at the country breakdown, the German composite is expected at 49.8 vs. 50.6 in June and the French composite is expected at 47.7 vs. 47.2 in June. Italy and Spain won’t be reported until final PMIs are reported next week.

Some eurozone countries report other key data. Germany reports July IFO business climate Tuesday. Headline is expected at 88.0 vs. 88.5 in June, with both current assessment and expectations falling to 92.9 and 83.5, respectively. August GfK consumer confidence will be reported Thursday and is expected at -24.5 vs. -25.4 in July. Elsewhere, Spain reports June retail sales Thursday. Germany has been the weak link in the eurozone but France and Italy are quickly catching up, with Spain also likely to tip into recession.

The U.K. has a fairly quiet week. Preliminary July PMIs will be reported Monday. Manufacturing is expected at 46.0 vs. 46.5 in June, services is expected at 53.0 vs. 53.7 in June, and composite is expected at 52.3 vs. 52.8 in June. Elsewhere, CBI releases the results of its July surveys. Industrial trends will be reported Tuesday, with total orders expected at -18 vs. -15 in June and selling prices expected at 16 vs. 19 in June. Distributive trade will be reported Thursday, with retailing reported sales expected to remain steady at -9.

BOE tightening expectations remain subdued. WIRP suggests odds of a 50 bp hike August 3 have fallen to 55% after being largely priced in at the start of last week. Looking ahead, odds of a 25 bp hike September 21 stand near 80% while odds of one last 25 bp hike top out near 90% in December. This new expected rate path would see the bank rate peak near 6.0% vs. 6.25% at the start of last week and 6.5% at the start of the week before that. This is a huge downward adjustment that is taking a toll on sterling.

ASIA

The two-day Bank of Japan meeting ends Friday with an expected hold. Recent reports suggest, contrary to market speculation, that the bank will not tweak its Yield Curve Control this week. We concur and see an October tweak as more likely. Updated macro forecasts will be released and other reports suggest upward revisions to the FY23 core inflation forecast followed by a possible cut in the FY24 forecast. This would certainly seem to justify steady policy. While the BOJ always has the capacity to surprise markets, we truly believe that policymakers remained very concerned about removing accommodation too soon.

July Tokyo CPI will be reported Friday ahead of the BOJ decision. Headline is expected at 2.9% y/y vs. 3.2% in June, while core (ex-fresh food) is expected at 2.9% y/y vs. 3.2% in June. Lastly, core ex-energy is expected at 3.7% y/y vs. 3.8% in June. If so, this would be the lowest reading for Tokyo core since September and would imply a similar drop in the national reading. In turn, this disinflation would justify the BOJ’s cautious approach to removing accommodation.

Preliminary July PMIs and June department store sales will be reported Monday. The composite is likely to continue falling from the 54.3 peak in May.

Australia highlight will be June and Q2 CPI data Wednesday. Headline inflation is expected at 5.5% y/y in June vs. 5.6% in May. For Q2, headline is expected at 6.2% y/y vs. 7.0% in Q1 while trimmed mean is expected at 6.0% y/y vs. 6.6% in Q1. Q2 PPI and June retail sales will be reported Friday. RBA expectations remain subdued. WIRP suggests nearly 50% odds of a hike August 1, rising to over 75% September 5 and largely priced in for October 3. Odds of a second hike rise to over 40% December 5 and top out at nearly 60% in early 2024. Here too, it will all depend on the data.

Preliminary July PMIs will be reported Monday. The composite has fallen two straight months from the 53.0 peak in April and is flirting with the key 50 boom/bust level. With China slowing and the RBA tightening, it’s only a matter of time before it falls below 50.