• Fed officials see a solid labor market; this does not sound like the Fed is in a hurry to cut rates; Canada data highlight will be July jobs report; Mexico and Peru cut rates 25 bp; Brazil reports July IPCA inflation
  
• Norway reported July CPI; Czech central bank minutes showed concern about the weak koruna
  
• The BOJ has successfully tamped down market tightening expectations; China reported July CPI and PPI

The dollar is limping into the weekend. With no data nor major developments today, DXY is trading flat for the second straight day near 103.215. In fact, DXY is ending the week about where it started, which is not bad given the negative dollar sentiment that has been building. USD/JPY is trading back above 147 after trading near 145.45 yesterday. Sterling is trading flat near $1.2755, while the euro is trading flat near $1.0920. While the Fed is widely expected to cut rates in September, we continue to believe that markets are overreacting to the recent softness in the U.S. data. Looking at the totality of the data, the economy is still growing above trend and suggests the market is once again getting carried away with its pricing for aggressive easing (see below). We continue to believe that the divergence story remains in place and should continue to support the dollar. However, it will likely take weeks for the current market narrative to run its course. Next week’s retail sales and inflation data will be key.

AMERICAS

Fed officials see a solid labor market. Barkin said “I think you have got some time in a healthy economy to figure out whether this is an economy that is gently moving into a normalizing state that will allow you in a steady, deliberate way to normalize rates. Or is this one where you really do have to lean into it.” With regards to the labor market, Barkin noted that firms are “managing headcount through attrition, or they're slowing their hiring, but they're not firing. They aren't laying people off, businesses are just being cautious." Elsewhere, Schmid said with regards to inflation that “We are close, but we are still not quite there. The path of policy will be determined by the data and the strength of the economy.” He added that “Overall, the labor market still appears healthy. Last week’s employment report for July led many to question this resilience. But it is important to note that many other indicators point to continued strength.” Lastly, Goolsbee said “The job market is cooling, but it’s cooling back to levels that in the old days we would have said that’s about full employment, or that’s the steady state. Is it going to stop there or is it going to keep getting worse? That’s a very important question - to me, that’s not one that you can answer with one month’s number.”

This does not sound like the Fed is in a hurry to cut rates. The notion of an intra-meeting cut seems very unlikely and so we continue to see the first cut at the September 17/18 FOMC meeting. A 50 bp is possible but will fully depend on the data, with around 60% odds priced in now. The market is still fully pricing in 100 bp of easing by year-end, as well as 175-200 bp of total easing over the next 12 months. Unless the U.S. economy falls into a deep recession, this rate path still seems unlikely. However, we cannot stand in the way of this dovish narrative until we see more data.

Weekly jobless claims helped calm markets yesterday. Initial claims came in at 233k vs. 240k expected and a revised 250k (was 249k) last week, but the 4-week moving average still rose to 241k, the highest since last August. Elsewhere, continuing claims came in as expected at 1.875 mln vs. a revised 1.869 mln (was 1.877 mln) last week. It’s hard to believe that a weekly claims report can move markets, but it just goes to show that 1) labor market concerns are real and 2) there's no other data to guide markets. There is no Bloomberg consensus yet for August NFP, but its whisper number stands at 130k vs. 114k in July.

The U.S. economy overall remains solid. Yes, there are pockets of weakness, but GDP grew 2.8% SAAR in Q2. For Q3, the Atlanta Fed’s GDPNow model is tracking 2.9% SAAR and will be updated next Thursday after the data. The New York Fed’s Nowcast model is tracking Q3 growth at 2.1% SAAR and will be updated later today. Its first estimate for Q4 will come at the end of August.

Canada data highlight will be July jobs report. Consensus sees a 25.0k rise in jobs vs. -1.4k in June, while the unemployment rate is expected to rise a tick to 6.5%. Overall, Canada’s labor market has cooled significantly, and indications of labor market slack are emerging. The summary of deliberations from the last BOC meeting showed that it was particularly concerned with emerging slack in the labor market. The implication is that the July jobs data will be a key driver of interest rate expectations. The swaps market is pricing a total of 150 bp of easing over the next 12 months, which limits CAD upside momentum.

Banco de Mexico cut rates 25 bp to 10.75%. It was basically a coin toss but we’re a bit surprised the bank cut as 1) CPI data came in higher than expected and 2) EM sentiment remains fragile. Split vote was 3-2, with the two dissents in favor of steady rates. The bank said the inflation environment may allow discussion of more cuts and yet it raised its inflation forecasts significantly, with Q3 at 5.2% vs. 4.5% previously, Q4 at 4.4% vs. 4.0% previously, and Q1 2025 at 3.7% vs. 3.5% previously. The bank said risks to growth were to the downside and that it will take into account weaker economic activity in future decisions. The market is pricing in 200 bp of easing over the next 12 months.

Peru central bank cut rates 25 bp to 5.5%. Consensus saw steady rates, though nearly a third of the analysts polled by Bloomberg looked for a cut, the first after two straight holds. The bank noted that “Core inflation in July showed less persistence than in previous months” and added that it expects headline inflation to continue fluctuating around 2% for the foreseeable future. If core inflation continues to decelerate, the central bank is likely to continue with its cautious easing.

Brazil reports July IPCA inflation. Headline is expected at 4.47% y/y vs. 4.23% in June. If so, it would accelerate for the third straight month and would be the highest since February and near the top of the 1.5-4.5% target range. COPOM just left rates steady at 10.50% last week, but the minutes were hawkish as it “unanimously reinforced that it will not hesitate to raise the interest rate to ensure inflation convergence to the target if it deems it appropriate.” Next policy meeting is September 18, and the market sees over 80% odds of a 25 bp hike then.

EUROPE/MIDDLE EAST/AFRICA

Norway reported July CPI. Headline rose two ticks as expected to 2.8% y/y, while underlying unexpectedly fell a tick to 3.3% y/y. Inflation is tracking well below the Norges Bank’s forecasts for headline CPI of 3.2% for Q2 and 3.9% for Q3 and for underlying CPI of 4.0% for Q2 and 3.7% for Q3. The implication is that the Norges Bank may need to cut rates sooner and by more than they currently forecast, which is a drag for NOK. At the June meeting, the Norges Bank cautioned that the policy rate will likely be kept at 4.5% through year-end before gradually being reduced from Q1 2025. Norges Bank meets next week, and no change is expected. However, the market is fully pricing in a cut by year-end, along with 125 bp of total easing over the next 12 months.

Czech central bank minutes showed that the weak koruna was a major factor behind its cautious cut. The slowed the pace of easing August 1 to 25 bp after four straight 50 bp cuts. On that day, EUR/CZK traded at the highest since March 2022 near 25.535 and so the concern was justified. Some highlighted persistent services inflation while other saw inflationary risks from fiscal policy next year. However, all agreed that downside risks to growth had increased substantially and due partly by the slowdown in the German economy. July CPI will be reported next week, and headline is expected to remain steady at 2.0% y/y. Next policy meeting is September 25 and another 25 bp cut is likely. Looking ahead, the market is pricing in 100 bp of easing over the next six months.

ASIA

The Bank of Japan has successfully tamped down market tightening expectations. The market is now pricing in only 35% odds of a 10 bp hike by year-end, down from being fully priced in on August 1, right after its hawkish hike. Indeed, the market saw high odds of an even larger 15 bp move by year-end. Obviously, the BOJ’s efforts at damage control have had an impact but we continue to believe that the bank has made policy much more unpredictable. That will only mean that volatility will remain heightened and that’s not good for markets.

China reported July CPI and PPI. CPI came in two ticks more than expected at 0.5% y/y vs. 0.2% in June, while PPI came in a tick higher than expected at -0.8% y/y and steady from June. Overall, muted CPI inflation reflects weak domestic demand activity which remains a structural drag on the economy. The monthly data deluge comes next week and is expected to show ongoing softness in the economy.