• The two-day FOMC meeting begins today; Treasury cut its borrowing estimate for Q3; JOLTS data will be the highlight; July Conference Board consumer confidence index will also be reported
  
• Eurozone started reporting July CPI data; eurozone reported solid Q2 GDP data; Chancellor Reeves outlined the results of an audit of U.K. finances; tighter U.K. fiscal policy could leave the BOE more room to ease monetary policy
  
• The two-day BOJ meeting began today; we would be on the lookout for potential FX intervention after the decision; Japan reported mixed June labor market data; China’s Politburo pledged to boost consumer spending; commodity prices are sinking

The dollar is trading flat as the BOJ and FOMC meetings get under way. DXY is trading flat near 104.564. However, it had an outside up day yesterday that points to further gains. The euro is trading higher near $1.0835 after stronger than expected GDP data (see below), while sterling is trading flat near $1.2865 ahead of an expected BOE cut Thursday. The yen is trading higher near 155 ahead of the BOJ decision overnight (see below). If the BOJ disappoints, there is scope for USD/JPY to move sharply higher. While the Fed is expected to open the door for a September cut tomorrow, recent firmness in the U.S. data suggests the market is once again getting carried away with its pricing for aggressive easing (see below). Beyond just the U.S. story, we continue to believe that weaker data in many of the major economies will feed into more dovish central banks, underscoring that the divergence story remains in place and should continue to support the dollar.

AMERICAS

The two-day FOMC meeting begins today. There is simply no reason for the Fed to cut rates now when the economy continues to hum along. That said, we believe the Fed will leave the door open for a cut at the September FOMC meeting. There will be no updated Dot Plots or macro forecasts tomorrow. The “Goldilocks” economic backdrop of solid growth and modest disinflation suggests the Fed is unlikely to cut the funds rate as much as currently priced in. The market is pricing almost 75 bp of easing by year-end and nearly 150 bp of total easing over the next 12 months. If the soft landing scenario remains intact, such aggressive easing simply cannot be justified.

Chair Powell’s press conference is the usual wild card. Before the media blackout period, we saw a clear shift in tone from Fed speakers. In particular, there are growing concerns for many policymakers about softness in the labor market. However, we do not expect Powell to validate the aggressive easing that’s priced in by the markets, and he may in fact push back a bit.

The Treasury Department cut its borrowing estimate for Q3. It now sees borrowing at $740 bln vs. the April estimate of $847 bln. Treasury maintained its estimate of its end-Q3 cash balance at $850 bln. Looking ahead, it estimated Q4 borrowing at $565 bln and sees the year-end cash balance at $700. Details of its quarterly refunding will be released tomorrow but no surprises are expected.

June JOLTS data will be the highlight. Openings are expected at 8.0 mln vs. 8.140 mln in May. Recent data suggest labor supply and demand are coming into better balance. The job openings rate is near pre-pandemic levels at 4.9% and the layoff rate remained unchanged at a low of 1.0% in May. So far, the data suggest the Fed can achieve a soft landing without a material increase in the unemployment rate.

July Conference Board consumer confidence index will also be reported. Headline is expected at 99.7 vs. 100.4 in June. If so, it would remain roughly within the same narrow range that’s held throughout the past two years. Regardless, positive real wage growth, rising house prices, and encouraging labor demand suggest household spending will remain an important tailwind for GDP growth. Indeed, personal consumption grew 2.3% SAAR in Q2 even as GDP grew 2.8% SAAR.

EUROPE/MIDDLE EAST/AFRICA

Eurozone started reporting July CPI data. Spain’s EU Harmonised inflation came in at 2.9% y/y vs. 3.2% expected and 3.6% in June. Germany reports later today and is expected to remain steady at 2.5% y/y. However, German state data already reported today suggest upside risks to the national reading. France and Italy report tomorrow. France’s EU Harmonised inflation is expected at 2.8% y/y vs. 2.5% in June, while Italy’s is expected at 1.2% y/y vs. 0.9% in June. Eurozone readings will also be reported tomorrow. Headline is expected to remain steady at 2.5% y/y while core is expected to fall a tick to 2.8% y/y. Of note, Spain is one of the only eurozone countries to report core inflation and it came in as expected at 2.8% y/y vs. 3.0% in June. Overall, the eurozone disinflationary process is well on track and supports the case for the ECB to cut rates again in September and then December.

Eurozone reported solid Q2 GDP data. Headline GDP rose a tick more than expected at 0.3% q/q in Q2 vs. 0.3% in Q1. For comparison, the US economy grew 0.7% q/q in Q2. The country breakdown shows Germany remains the “sick man of Europe” as GDP unexpectedly contracted -0.1% q/q vs. 0.1 expected and 0.2% in Q1. France came in a tick higher than expected at 0.3% q/q vs. a revised 0.3% (was 0.2%) in Q2, while Spain came in three ticks higher than expected at 0.8% q/q vs. 0.8% in Q1. Lastly, Italy came in as expected at 0.2% q/q in Q2 vs. 0.3% in Q1. The eurozone is limping along as Q3 gets under way, with the composite PMI falling to 50.1 in July. Both the German and French composite PMIs are in contractionary territory at 48.7 and 49.5, respectively.

Chancellor of the Exchequer Reeves outlined the results of an audit of U.K. finances. As widely leaked, Reeves warned of a GBP22 bln (0.8% of GDP) funding shortfall that needs to be filled and announced emergency savings totaling GBP5.5 bln. According to Reeves, “there will be more difficult decisions around spending, around welfare, and around tax.” Of note, Reeves stressed that Labour would keep its vow not to hike the VAT, income tax, or national insurance but refrained from promising not to change the capital gains tax or other taxes on wealth, pensions, and inheritances. Reeves said she would deliver Labour’s first budget on October 30.

Tighter U.K. fiscal policy could leave the Bank of England more room to ease monetary policy. Our base case is for the BOE to start easing Thursday, as headline CPI inflation has been at the BOE’s 2% target the last two months and leading indicators point to sharply lower inflation. In July, the U.K. BRC shop price inflation remained muted at a 32-month low of 0.2% y/y, as non-food prices dropped -0.2% m/m for a second consecutive month.

ASIA

The two-day Bank of Japan meeting began today. Consensus sees no change in rates, but the market is split. 11 of the 49 analysts polled by Bloomberg see a hike of varying degrees, while the swaps market sees 50% odds of a 10 bp hike. In addition, the bank said it would announce a reduction in its monthly bond-buying at this meeting from JPY6 trln currently. Bloomberg consensus sees a modest reduction to JPY5 trln per month. If policymakers really want to prevent the yen from weakening again, we would expect the BOJ to deliver a hawkish surprise on both counts. Updated macro forecasts will be released at this meeting and should also be tweaked to support the case for further tightening. Unfortunately, recent weakness in the economy suggests the BOJ will disappoint tomorrow.

Recent yen strength has been driven by expectations of a hawkish BOJ decision. If the BOJ disappoints, then much of that rally will quickly reverse. Indeed, USD/JPY has already moved back above 155 as the meeting got under way. And even if the BOJ delivers, there is potential for a “buy the rumor, sell the fact” market reaction. Even after this recent yen rally, the market is only pricing in 65 bp of total tightening over the next three years. If this doesn’t change, there is really nothing supporting the yen.

We would be on the lookout for potential FX intervention after the decision. We would also be wary of possible intervention after the FOMC decision, as we saw after the May 1 FOMC decision. Recently, the BOJ has intervened when the yen was already gaining and so we think much will depend on how its monetary policy decision is digested by the markets. The BOJ has intervened twice in July to the tune of around JPY5.6 trln, though official data won’t be available until July 31.

Japan reported mixed June labor market data. The unemployment rate fell a tick to 2.5%, while the job-to-applicant ratio fell a tick to 1.23. Both were expected to remain steady. Overall, the labor market remains relatively tight, but the drop in the job-to-applicant ratio to the lowest since March 2022 suggests some cracks are forming. Furthermore, wage pressures remain quite restrained and so we see no need for the BOJ to hike aggressively.

China’s Politburo pledged to boost consumer spending. After the meeting of the 24-member body led by President Xi ended, the official statement said, “The focus of economic policies needs to shift toward benefiting people’s livelihood and promoting spending.” Officials also promised to roll out more measures to shore up the economy at an appropriate time. We believe the pledges are meant to calm markets that were spooked by the PBOC surprise rate cut last week. Markets had gotten way too complacent about China risks, and the rate cut underscored growing official unease. As we’ve been saying for some time now, the steady “drip drip” of stimulus will do little to improve the economy’s medium-term outlook, which we believe hinges crucially on addressing the huge debt overhang. Until that has been accomplished, growth will remain well below expectations.

COMMODITIES

Mainland China growth remains weak and so commodity prices are sinking. Oil, copper, iron ore, and coal prices are all under pressure and at or near levels that held before China finally reopened in December 2022. While that's bad news for producers such as Brazil, Chile, OPEC members, Australia, and many others, it's good news for consumers. If this feeds into lower inflation, this could give the Fed more confidence to cut in September.