Drivers for the Week of September 10, 2023

September 10, 2023
Here's a look at the main drivers in Developed Markets this week.

The dollar extended its broad-based rally last week. NOK, CAD, and EUR outperformed while AUD, JPY, and NZD underperformed. U.S. data this week should support our view that the Fed needs to tighten further, though most likely at the November meeting. Meanwhile, data from the rest of the world are likely to underscore rising recession risks. The ECB is likely to deliver a dovish message this week as a result. With the U.S. economy remaining relatively strong, we believe the dollar will continue to outperform.


Recent data suggest a pause is warranted by the Fed next week. WIRP suggests only 5% odds of a hike September 20. More likely, we will see the next hike November 1. By that November meeting, we will get one more jobs report and two each of CPI, PPI, retail sales, and PCE. If things go the way we expect for the U.S., the current 50% odds of a hike then are too low. There are no Fed speakers this week due to the media embargo.

U.S. financial conditions continue to loosen. The Chicago Fed’s weekly financial conditions index are the loosest since early February, well before the Fed started hiking rates on March 16. Let that sink in. And then realize that the Fed has to do more in order to rein in the red hot US economy. How hot? The Atlanta Fed's GDPNow model is now tracking Q3 growth at 5.6% SAAR. Next model update comes next Thursday after the data.

August inflation data take center stage this week. CPI will be reported Wednesday. Headline is expected at 3.6% y/y vs. 3.2% in July, while core is expected at 4.3% y/y vs. 4.7% in July. The Cleveland Fed’s Nowcast model suggests headline and core inflation of 3.8% and 4.5%, respectively. Looking ahead to September, the model suggests headline and core inflation of 3.8% and 4.3%, respectively. PPI will be reported Thursday. Headline is expected at 1.3% y/y vs. 0.8% in July, while core is expected at 2.2% y/y vs. 2.4% in July.

Retail sales data Thursday will also be important. Headline is expected at 0.1% m/m vs. 0.7% in July, while ex-autos is expected at 0.4% m/m vs. 1.0% in July. The so-called control group used for GDP calculations is expected at -0.1% m/m vs. 1.0% in July. Consumption has held up relatively well in recent months and is currently driving solid Q3 growth.

Regional Fed manufacturing surveys for September will start rolling out. Empire survey kicks things off Friday and is expected at -10.0 vs. -19.0 in August. August IP will also be reported Friday and is expected at 0.1% m/m vs. 1.0%.

University of Michigan reports preliminary September consumer sentiment Friday. Headline is expected at 69.2 vs. 69.5 in August, with a small increase in expectations to 66.0 likely to be outweighed by a slightly larger decline in current conditions to 74.5. Both 1-year and 5- to 10-year inflation expectations are expected to remain steady at 3.5% and 3.0%, respectively.

Other minor data will be reported. August budget statement will be reported Wednesday and is expected at -$259.6 bln vs. -$220.8 bln in July. Weekly jobless claims and July business inventories will be reported Thursday. Initial claims are expected at 227k vs. 216k last week while continuing claims are expected at 1.695 mln vs. 1.679 mln last week. August import/export prices will be reported Friday.


European Central Bank meets Thursday and markets are split. Of the 49 analysts polled by Bloomberg, 26 see no change and 23 see a 25 bp hike to 4.0%. Similarly, WIRP suggest odds of a 25 bp hike stand near 40% but rise to 60% October 26 and top out near 70% December 14. These odds will rise and fall with the data but what’s very interesting to us is that the ECB is likely to stop hiking before the Fed does. If so, it would be a game-changer for the euro.

As always, Madame Lagarde’s press conference will be key. Recall that last time, she brought up the possibility of a pause for the first time this cycle. Since then, the account of that meeting show that a hold was the initial preference before policymakers decided on a 25 bp hike. We expect a downbeat, dovish tone from Lagarde. Updated macro forecasts will also be released. We expect growth forecasts to be revised down and inflation forecasts to be revised up. Lagarde speaks again Friday, along with Villeroy.

Germany reports September ZEW survey Tuesday. Expectations are expected at -15.0 vs. -12.3 in August, while current situation is expected at -76.0 vs. -71.3 in August. Germany remains the biggest weak link in the eurozone.

Italy reports July IP Monday. IP is expected at -0.3% m/m vs. 0.5% in June, while the y/y rate is expected at -1.8% vs. -0.8% in June. Eurozone reports July IP Wednesday and is expected at -0.9% m/m vs. 0.5% in June, while the y/y rate is expected at -0.4% vs. -1.2% in June.

U.K. data dump begins. Labor market data will be reported Tuesday. Unemployment for the three months ended July is expected to rise a tick to 4.3%, while average weekly earnings are expected to remain steady at 8.2% y/y. If so, the unemployment rate would be the highest since September 2021 and is nearly a full percentage point above the 3.5% low in August 2022. Applying the Sahm rule to the U.K., we already got the recession signal back in May, when the three-month average for the unemployment rate rose to half a percentage point above that 3.5% low.

U.K. GDP, IP, services, construction, and trade will all be reported Wednesday. GDP is expected at -0.2% m/m vs. 0.5% in June, IP is expected at -0.6% m/m vs. 1.8% in June, services index is expected at -0.1% m/m vs. 0.2% in June, and construction is expected at -0.5% m/m vs. 1.6% in June. We warned that the June bounce in the data was likely to be short-lived and this data should confirm this.

Bank of England tightening expectations have fallen sharply. WIRP suggests odds of a 25 bp hike September 21 are around 75%. For a time over the summer, a 50 bp hike was largely priced in and so the change is noteworthy. Odds of a second 25 bp hike are around 25% November 2 and then rise to top out near 50% February 1. However, the first cut is still not priced in until H2 2024. Mann speaks Tuesday.

Norway reports August CPI Monday. Headline is expected to remain steady at 5.4% y/y, while underlying is expected at 6.6% y/y vs. 6.4% in July. If so, headline would remain well above the 2% target. At the last policy meeting August 17, Norges Bank hiked rates 25 bp to 4.0% and said rates “will most likely be raised further in September” but gave no further forward guidance. We take Norges Bank at its word and look for a hike at the September 21 meeting. The swaps market agrees and sees a peak policy rate near 4.25% over the next three months.

Sweden reports August CPI Thursday. Headline is expected at 7.7% y/y vs. 9.3% in July, CPIF is expected at 4.9% y/y vs. 6.4% in July, and CPIF ex-energy is expected at 7.4% y/y vs. 8.0% in July. If so, CPIF inflation would be the lowest since February but still well above the 2% target. At the last policy meeting June 29, the Riksbank hiked rates 25 bp to 3.75% and said rates would be hiked at least one more time this year and noted that the weak krona is contributing to high inflation. The swaps market sees around 90% odds of a 25 bp hike at the next meeting September 21, with 35% odds of another 25 bp hike November 23.


Japan reports key orders data. August machine tool orders will be reported Monday. July core machine orders will be reported Thursday and are expected at -10.6% y/y vs. -5.8% in June. Orders have been weakening all year and we expect that trend to continue.

BSI Q3 large manufacturing index will be reported Wednesday. Business conditions improved in Q2 but that improvement will be hard to sustain as the economy shows signs of slowing so far in Q3. August PPI will also be reported Wednesday and is expected at 3.3% y/y vs. 3.6% in July. With price pressures showing signs of leveling off, the Bank of Japan is likely to remain on hold. Next policy meeting is September 21-22 and no change is expected then.

Australia highlight will be August jobs data Thursday. Consensus sees 25.5k jobs added vs. -14.6k in July, while the unemployment rate is expected to remain steady at 3.7%. Of note, the Sahm rule would be triggered when the 3-month average for the unemployment rate rises 0.5 percentage points above the low of 3.4% in October. We are not quite there yet but it’s only a matter of time.

Reserve Bank of Australia tightening expectations remain subdued. Deputy Governor Michele Bullock takes over September 18 for a seven-year as Governor. She will chair her first meeting October 3 and WIRP suggests virtually no odds of a hike then. Those odds rise modestly to top out near 25% in Q1 but we believe the tightening cycle has ended.  

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