• U.S. yields continue to rise; the pace of Quantitative Tightening doubles this month; August ISM manufacturing PMI will be the highlight; we get more labor market data with August Challenger job cuts and weekly jobless claims today; Canada reports July building permits and August S&P Global manufacturing PMI
  
• The ECB looks increasingly likely to hike rates 75 bp at the September 8 meeting; final August eurozone manufacturing PMI readings were reported; reports suggest Russia is considering increased purchases of “friendly” currencies
  
• Japan reported final August manufacturing PMI and vehicle sales; Australia reported final August manufacturing PMI; Caixin reported soft August manufacturing PMI; Korea reported August trade data
  

The dollar is firm as the new month begins. We believe yesterday’s dollar selling was due largely to month-end rebalancing going into the fix. With that out of the way, fundamentals suggest the rally is back on track. DXY is trading back above 109 and should soon test the 109.478 cycle high from earlier this week. The euro continues to struggle and is trading heavy right above parity. We believe the single currency remains on track to test the September 2002 low near $0.9615. Sterling is trading at a new low for this move today near $1.1555 and remains on track to test the March 2020 low near $1.1410. USD/JPY traded at a new high for this near 139.70 and we and maintain our medium-term target of 147.65, the August 1998 high. Indeed, we maintain our strong dollar call as markets are finally starting to price in the Fed’s hawkish message.

AMERICAS

U.S. yields continue to rise. The 10-year traded near 3.22% today, the highest since June 28, while the 2-year traded near 3.51%, the highest since November 2007. The real 10-year yield traded near 0.72%, the highest since mid-June and seemingly on track to test the June 14 cycle high near 0.82%. The rise in rates reflect the ongoing repricing of the Fed’s likely tightening path. WIRP suggests 70% 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 a 4.0% terminal rate. It's not a coincidence that Fed officials keep bringing up Paul Volcker, as the implications are clear.

Yesterday, Mester stuck to the script. She said ““My current view is that it will be necessary to move the fed funds rate up to somewhat above 4% by early next year and hold it there. I do not anticipate the Fed cutting the fed funds rate target next year.” However, she wouldn’t commit to the September 20-21 FOMC meeting, noting “The size of rate increases at any particular FOMC meeting and the peak fed funds rate will depend on the inflation outlook.” Lastly, Mester said recession was not her base case but acknowledged that the risks have risen. Today, Bostic speaks.

The pace of Quantitative Tightening doubles this month. As per the May 3-4 FOMC meeting, QT began June 1 with a monthly cap on Treasury runoff set at $30 bln that will increase this month to the maximum $60 bln. Similarly, the monthly cap on MBS runoff was initially set at $17.5 bln and that will increase this month to the maximum $35 bln. Due to various quirks, the actual runoff has been much smaller as the Fed’s balance sheet has shrunk only $63 bln in total over the past three months. Those quirks are expected to fade and lead to a faster pace of runoff in the coming months. We have been surprised that yields at the long end of the curve haven’t risen more and so perhaps a faster pace of QT might have an impact. Stay tuned.

August ISM manufacturing PMI will be the highlight. Headline is expected at 51.9 vs. 52.8 in July. Prices paid is expected at 55.3 vs. 60.0 in July, while employment is expected at 49.5 vs. 49.9 in July. ISM services PMI won’t be reported until September 6 and consensus sees 55.2 vs. 56.7 in July, the highest since April. Yesterday, Chicago PMI came in at 52.2 vs. 52.1 expected and actual in July. With a lot of PMIs falling below 50 recently, the Chicago reading stands out as pretty solid. July construction spending (-0.2% m./m) and August vehicle sales (13.3 mln annual rate) will also be reported today.

We get more labor market data with August Challenger job cuts and weekly jobless claims today. Yesterday, ADP private sector jobs came in at 132k vs. 300k expected. However, ADP just retooled the methodology and so we have no idea yet whether it provides a more accurate read on NFP, where consensus stands at 300k. Of note, initial jobless claims fell to 250k and continuing claims fell to 1.415 mln for the BLS survey week containing the 12th of the month. 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.

Canada reports July building permits and August S&P Global manufacturing PMI. Yesterday, Q2 GDP growth came in at 3.3% SAAR vs. 4.4% expected and 3.1% in Q1. Still, the economy remains relatively 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, while the swaps market is pricing in 150 bp of tightening over the next 12 months that would see the policy rate peak near 4.0%.

EUROPE/MIDDLE EAST/AFRICA

The ECB looks increasingly likely to hike rates 75 bp at the September 8 meeting. WIRP suggests nearly 75% odds of a 75 bp hike and if expectations remain this high next week, the ECB will take the plunge. August CPI readings certainly make the case for more aggressive tightening and it seems more and more on the GC are leaning towards this outcome. However, 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 France are contracting and it's only going to get worse this fall/winter when rate hikes and energy shortages start to bite.

Final August eurozone manufacturing PMI readings were reported. Headline fell a tick from the preliminary to 49.6, as Germany was revised down to 49.1 from 49.8 and France was revised up to 50.6 from 49.0. Italy and Spain report for the first time, with the former at 48.0 vs. 48.5 in July and the latter at 49.9 vs. 48.7 in July. If France hadn’t recovered, the manufacturing sectors of the four biggest eurozone economies would all be in contractionary territory. That said, it’s only going to get worse if energy shortages materialize. Final eurozone services and composite PMIs will be reported September 5. Lastly, Germany reported July retail sales at 1.9% m/m vs. -0.1% expected and a revised -1.6% (was -1.5%) in June, which led the y/y to improve to -5.5% from a revised -9.6% (was -9.8%) in June..

Reports suggest Russia is considering increased purchases of “friendly” currencies. The central bank would reportedly buy as much as $70 bln in yuan and other “friendly” currencies this year to help slow the ruble’s surge whilst diversifying its foreign reserves. This would simply be a continuation of the shift in its foreign reserve holdings towards “friendly” currencies that’s been seen over the past few years. This move was well under way even before the West froze a large portion of Russia’s overseas assets, but Russia would clearly prefer parking its money in nations that are seen as allies. Besides China, this group would likely Turkey, India, and perhaps some of the Middle Eastern oil exporters. As it is, the ruble exchange rate is meaningless until foreign investors are allowed to sell their holdings in Russia and repatriate those proceeds.

ASIA

Japan reported final August manufacturing PMI and vehicle sales. The final reading rose half a point from the preliminary to 51.5, but still fell overall for the fifth straight month to the lowest since September 2021. Elsewhere, vehicle sales fell -13.3% y/y vs. -13.4% in July. 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. This monetary policy divergence is back in focus as USD/JPY traded at a new high for this cycle near 139.70 today. After the psychological 140 level, the next big target is the August 1998 high near 147.65.

Australia reported final August manufacturing PMI. The final reading fell to 53.8 vs. 54.5 preliminary and fell overall for the second straight month to the lowest since August 2021. Despite some softness in recent data, RBA market expectations have remained fairly steady. WIRP suggests a 50 bp hike September 6 is about 65% 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%.

Caixin reported soft August manufacturing PMI. It came in at 49.5 vs. 50.0 expected and 50.4 in July. This was the second straight down month and the lowest since May. Caixin services PMI will be reported Monday and is expected at 54.0 vs. 55.5 in July. September readings are likely to be even worse after authorities just locked down the 21 mln residents of the city of Chengdu due to a Covid outbreak. The economy is clearly slowing much faster than policymakers expected, which explains the CNY1 trln stimulus package announced last week as well as other policy measures. Despite recent stimulus, we believe the economy will continue slowing and that will have spillover effects to the rest of the region.

Korea reported August trade data. Exports came in at 6.6% y/y vs. 5.6% expected and 9.2% in July, while imports came in at 28.2% y/y vs. 23.7% expected and 21.8% in July. It’s clear that the slowdown in mainland China is having spillover effects on regional trade and activity, with Korea and Taiwan bearing the brunt of that weakness.