• Fed Chair Powell delivers his Semiannual Monetary Policy Report to Congress; New York Fed June inflation expectations were reported; NFIB small business optimism improved in June; Mexico reports June CPI
  
• Moody’s warned that France’s outlook may be lowered; ECB doves are downplaying high services inflation; June U.K. BRC sales were weak; BOE’s Haskel remains hawkish
  
• BOJ is preparing to cut back its bond buying at the July meeting; Japan reported firm June machine tool orders; Australia Westpac consumer confidence fell in July

The dollar is treading water ahead of Powell. DXY is trading flat near 105.035 as markets await Fed Chair Powell’s Senate testimony (see below). The euro is trading flat near $1.0825 while sterling is trading higher near $1.2825. USD/JPY is trading higher near 161 even as the BOJ prepares to cut its bond-buying (see below). Recent softness in the data is challenging our view that the backdrop of persistent inflation and robust growth in the U.S. remains largely in place. However, we note that weaker data in many of the major economies underscore the fact that the relative story should continue to support the dollar.

AMERICAS

Fed Chair Powell delivers his Semiannual Monetary Policy Report to Congress. He appears before the Senate Banking Committee today and then before the House Financial Services Committee tomorrow. Powell is expected to continue urging patience before the Fed eases. He noted last week that the latest data “do suggest that we’re getting back on a disinflationary path” and stressed that “the strong economy and job market give us the ability to take time” before starting to cut rates. The U.S. economy, whilst slowing, is still doing whether well and so the Fed will be cautious and remain on hold at the July 30-31 FOMC meeting. The market is pricing in less than 10% odds of a cut then and around 80% in September, virtually unchanged from pre-NFP. Barr and Bowman also speak today.

New York Fed June inflation expectations were reported. 1-year expectations fell to 3.0% vs. 3.2% in May, 3-year expectations rose to 2.9% vs. 2.8% in May, and 5-year expectations fell to 2.8% vs. 3.0% in May. The Fed will be happy to see expectations generally falling, though all readings remain well above the Fed's 2% target. This is another reason for the Fed to stay patient.

NFIB small business optimism improved in June. Headline came in at 91.5 vs. 90.2 expected and 90.5 in May. This was the third straight monthly gain and the highest since December.

Mexico reports June CPI. Headline is expected at 4.87% y/y vs. 4.69% in May, while core is expected at 4.14% y/y vs. 4.21% in May. If so, headline would accelerate for the fourth straight month to the highest since January and move further above the 2-4% target range. Banco de Mexico releases its minutes Thursday. At the June 27 meeting, the bank kept rates steady at 11.0% by a 4-1 vote, with the dissent in favor of a 25 bp cut. At the previous meeting May 9, the vote to hold rates was unanimous and so the door to a rate cut is slowly opening. Afterwards, Governor Rodriguez said rates cuts will be “on the table” in the next meetings and added “Going forward, what we’re seeing is that we’ll have space to reduce the degree of restriction.” The market is pricing in 25 bp of easing over the next three months and a total of 100 bp over the next twelve months.

EUROPE/MIDDLE EAST/AFRICA

Moody’s warned that France’s outlook may be lowered to negative from stable. The agency noted that “A weakening commitment to fiscal consolidation would increase downward credit pressures.” Moody’s added that any reversal of the structural reforms enacted since 2017 would be negative for France’s rating if there are “materially negative medium-term implications for France’s growth potential and/or fiscal trajectory.” Of note, Moody’s affirmed France’s sovereign rating at Aa2 (equivalent to AA) with a stable outlook back in April. Both S&P and Fitch have France a notch lower at AA-. Most eurozone bond spreads have come back in to pre-election levels except for France, which remains elevated and wide of Portugal.

ECB doves are downplaying high services inflation. Panetta noted that “Concerns are not unwarranted, but they need to be put into perspective, as services prices tend to move differently from those of goods.” President Lagarde also recently downplayed sticky services inflation. Cipollone also speaks today. No change is expected at the July 18 meeting, but the market is pricing in nearly 80% odds of a cut September 12.

June U.K. BRC sales were weak. Sales came in at -0.5% y/y vs. 0.8% expected and 0.4% in May. This was the second y/y contraction in the past three months and does not bode well for June retail sales data that will be reported July 19.

Bank of England MPC member Haskel remains hawkish. He said “The continued tight and impaired labor market means that inflation will remain above target for quite some time. I would rather hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably.” Haskel remains one of the leading hawks at the BOE and so his comments aren't too surprising. Recall that he voted for a 50 bp hike back in August, when the BOE ended the tightening cycle with a 25 bp hike. He continued to dissent in favor of 25 bp hikes at the September, November, December, and February meetings but then dropped his dissents at the March, May, and June meetings. Haskel’s term ends August 31 so that would be his final meeting. His replacement will be named by new Chancellor Reeves.

Bank of England is likely to cut 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 when inflation is already at the 2% target.

ASIA

Bank of Japan is preparing to cut back its bond buying at the July meeting. The bank surveyed market participants for their views on how much it should reduce its JGB purchases from the current JPY6 trln per month. Reports suggest the responses ranged from zero, a range of JPY2-3 trln, and JPY4 trln per month. JGB yields have already risen significantly this year. We suspect that given the BOJ’s cautiousness, we should only expect very gradual reductions so as not to cause any spikes in yields.

Japan reported firm June machine tool orders. Total orders came in at 9.7% y/y the strongest since August 2022 but due in large part to low base effects. Domestic orders came in at -0.1% y/y while foreign orders came in at 14.6% y/y. May core machine orders will be reported Thursday and are expected at 7.1% y/y vs. 0.7% in April.

Australia Westpac consumer confidence fell in July. Headline came in at 82.7 vs. 83.6 and nearly reverses the June gain. High rates have taken a toll on confidence and yet retail sales remain firm and inflation remains elevated. The market is pricing in nearly 50% odds of a rate hike in either September or November.