• Powell’s comments before the Senate support our view that the Fed will remain cautious; the economy is still holding up relatively well; Brazil reports June IPCA inflation
  
• Italy reported May IP; there are two BOE speakers today; Norway reported soft June CPI data
  
• Japan PPI continues to rise; RBNZ delivered a dovish hold; China reported soft CPI and PPI data

The dollar is trading flat ahead of Powell, Part Deux. DXY is trading flat near 105.075 as markets await Fed Chair Powell’s House testimony, which is likely to mirror his Senate testimony (see below). The euro is trading higher near $1.0820, and sterling is trading higher near $1.2810. USD/JPY is trading higher near 161.50 even as PPI data raises the odds of a BOJ hike this month (see below). NZD is underperforming after the RBNZ’s dovish hold (see below), while NOK is underperforming after soft June CPI data (see below). Recent softness in the U.S. data is challenging our view that the backdrop of persistent inflation and robust growth in the U.S. remains largely in place. However, today’s developments highlight the fact that weaker data in many of the major economies will feed into more dovish central banks, underscoring that the relative story should continue to support the dollar.

AMERICAS

Fed Chair Powell delivered his Semiannual Monetary Policy Report to the Senate yesterday. He noted that “Elevated inflation is not the only risk we face. Reducing policy restraint too late or too little could unduly weaken economic activity and employment.” However, Powell added that easing too soon or too much could harm inflation progress. In keeping his cautious tone, Powell said that inflation has eased “notably” but remains above its 2% target and stressed that “More good data would strengthen our confidence that inflation is moving sustainably toward 2%.” Lastly, he noted that the labor market “appears to be fully back in balance” and that recent data send “a pretty clear signal that labor market conditions have cooled considerably.” He appears before the House Financial Services Committee today.

Powell’s comments support our view that the Fed will remain cautious. The bank is widely expected to remain on hold at the July 30-31 FOMC meeting. The market is pricing in less than 5% odds of a cut then and around 80% in September, virtually unchanged from pre-NFP. After the July 30-31 meeting, the Fed will see July and August readings for jobs, CPI, PPI, and retail sales as well as the July PCE reading ahead of the September 17-18 FOMC meeting. By that time, the Fed should have a much better idea of where the economy is going and will feel more comfortable making a policy pivot. Goolsbee, Bowman, and Cook speak today.

The economy is still holding up relatively well. The Atlanta Fed's GDPNow model is tracking Q2 growth at 1.5% SAAR and will be updated today after the May wholesale inventories and trade sales data. Elsewhere, the New York Fed's Nowcast model is tracking Q2 growth at 1.8% SAAR vs. 1.9% previously and Q3 growth at 2.1% SAAR vs. 2.2% previously and will be updated Friday. Bottom line: the labor market is softening but the overall economy is still growing near trend. That should give the Fed confidence to stay on hold in July, but with an eye towards cutting rates in September.

Brazil reports June IPCA inflation. Headline is expected at 4.32% y/y vs. 3.93% in May. If so, headline would accelerate for the second straight month to the highest since February and move nearer to the top of the 1.5-4.5% target range. At the last meeting June 19, the central bank “interrupted” the easing cycle and kept rates steady at 10.5%. However, central bank chief Campos Neto pushed back against market expectations for rate hikes, stressing “It’s not our base case scenario.” The market disagrees and is pricing in 125 bp of tightening over the next twelve months.

EUROPE/MIDDLE EAST/AFRICA

Italy reported May IP. IP came in at 0.5% m/m vs. flat expected and -1.0% in April. However, the y/y rate worsened to -3.3% vs. a revised -3.0% (was -2.9%) in April. Eurozone IP will be reported next week and is likely to worsen from -3.0% y/y in April. The weak PMI readings suggest softness in the eurozone economy will carry over into Q3. No wonder the ECB delivered its “hawkish cut” last month. No change is expected at the July 18 meeting, but the market is pricing in nearly 80% odds of a cut September 12. To us, there is no doubt that the ECB will cut two more times this year, with growing risks of even more.

There are two Bank of England speakers today. Chief Economist Pill and external MPC member Mann both speak. Along with Haskel, Mann is one of the leading hawks at the BOE and so her comments are likely to reflect this. Like Haskel, Mann voted for a 50 bp hike back in August, when the BOE ended the tightening cycle with a 25 bp hike. Like Haskel she continued to dissent in favor of 25 bp hikes at the September, November, December, and February meetings but then dropped her dissents at the March, May, and June meetings. We still believe the BOE cuts sooner rather than later. The market sees nearly 70% odds of a cut August 1, but we believe it is a done deal, as there is simply no reason to wait until September 19. Inflation is already at the 2% target, while the economic data have clearly softened in recent months.

Norway reported soft June CPI data. Headline came in at 2.6% y/y vs. 3.0% expected and actual in May, while underlying came in at 3.4% y/y vs. 3.6% expected and 4.1% in May. This was the lowest headline reading since September and well below the Norges Bank’s forecasts for Q2. The Norges Bank may regret delivering that hawkish hold at the June 20 meeting, when it pushed out the timing of the first rate cut to Q1 2025 from Q3 2024 previously and penciled in just one 25 bp cut over the next twelve months. The market still sees two cuts over the same period, with nearly 50% odds of a third one after today’s soft data.

ASIA

Japan PPI continues to rise. Headline came in as expected at 2.9% y/y vs. a revised 2.6% (was 2.4%) in May. This was the fifth straight monthly acceleration to the highest since August, and points to upside CPI risks ahead. The market sees nearly 60% odds of a hike at the July 30-31 BOJ meeting, up from around 33% back in mid-June. Still, only 35 bp of total tightening is priced in over the next twelve months and so upward pressure on USD/JPY is likely to remain in place.

Reserve Bank of New Zealand delivered a dovish hold. It kept rates steady at 5.5%, as expected, but the bank signaled a willingness to ease sooner rather than later. It said there are signs that inflation persistence will ease, and that headline CPI is expected to return to target in H2. The RBNZ added that it sees risks that inflation expectations could normalize more rapidly and that it discussed risks that tight policy was impacting the economy more than expected. Of note, a rate hike was not mentioned at all, while at the previous meeting May 22, Governor Orr admitted that a hike had been a “real consideration.”

There was no press conference nor updated macro projections, which will come at the next meeting August 14. Of note, the RBNZ’s May rate path projection implies a 60% probability of a rate hike by year-end and the first OCR cut in Q3 2025, but the dovish message today suggests we will see a dovish shift in the rate path projection next month. Our base case now is for the RBNZ to start easing as soon as October vs. November previously. The market has more than fully priced in an October rate cut, with nearly 60% odds of an earlier cut in August.

China reported soft CPI and PPI data. CPI came in at 0.2% y/y vs. 0.4% expected and 0.3% in May, while PPI came in as expected at -0.8% y/y vs. -1.4% in May. CPI is the lowest since March and moves further below the target of “around 3%.” Deflation risks remain very much alive and so we look for further monetary stimulus in the coming months.