• U.S. rates are moving higher as Fed tightening expectations adjust; Fed speakers are limited ahead of the Kansas City Fed’s Jackson Hole Economic Symposium; Chicago Fed NAI is worth discussing; we get some key survey data today; key housing data will also be reported
  
• Preliminary eurozone August PMI readings continue to weaken; preliminary U.K. August PMI readings were reported; Israel delivered a hawkish surprise yesterday
  
• Japan reported preliminary August PMI readings and July department store sales; Australia reported preliminary August PMI readings; Indonesia delivered a hawkish surprise with a 25 bp hike to 3.75%
  

The dollar continues to strengthen ahead of Jackson Hole. DXY is up for the fifth straight day and is coming off of its best week since March 2020, trading near 109.09 currently. This is the highest since July 15 and it is on track to test the July 14 high near 109.294. After that, there really aren't any major chart points until the January 2002 high near 120.51 and the July 2001 high near 121. Can the dollar rally another 10% from current levels? Fundamentally, that seems hard to justify but stranger things have happened. Of note, the euro low from July 2001 comes in near .8350. The euro remains heavy and traded at new lows for this move near $0.9900. The next near-term target is the September 2002 low near $0.9615. Sterling also made new lows for this move near $1.1720 and is on track to test the March 2020 low near $1.1410. USD/JPY traded as high as 137.70 and remains on track to test the July 14 high near 139.40. We maintain our strong dollar call as the dollar smile seems intact. As risk-off impulses ebb, the dollar should continue to benefit from the relatively strong U.S. economic outlook and heightened Fed tightening expectations.

AMERICAS

U.S. rates are moving higher as Fed tightening expectations adjust. WIRP suggests a 50 bp hike is fully priced in for the September 20-21 FOMC meeting, with over 65% odds of a 75 bp hike. Looking ahead, the swaps market is still pricing in a 3.75% terminal rate vs. 3.5% at the start of last week. U.S. rates continue to move higher, with the 2-year yield trading near 3.33% currently and approaching the June 14 high near 3.45%. Elsewhere, the 10-year trading is trading above 3% for the first time since July 21 near 3.02% and is approaching the July high near 3.10%. Of note, the real 10-year yield near 0.45% is the highest since late July. These rate moves are expected to continue and are dollar-positive.

Fed speakers are limited ahead of the Kansas City Fed’s Jackson Hole Economic Symposium. Fed Chair Powell gives his keynote speech Friday at 10 AM ET. In the past, the Fed has used this symposium to announce or hint at policy shifts ahead of the September FOMC meetings. That said, we do not think the Fed will paint itself into a corner ahead of the September 20-21 FOMC meeting. Rather, we expect Powell to maintain a hawkish tone as he tries to manage market expectations without actually promising anything concrete. Besides Powell, Kashkari is the only other scheduled speaker this week and he speaks today.

Chicago Fed National Activity Index for July is worth discussing. The headline came in at 0.27 vs. -0.25 expected and a revised -0.25 (was -0.19) in June. As a result, the 3-month moving average remained steady at -0.09. The better than expected reading shows continued resilience in the US economy. Recall that when that 3-month average moves below -0.7, that signals imminent recession and we are still well above that threshold. Negative readings indicate the economy is growing below trend and that is exactly what the Fed wants. Still, many fear a hard landing and so we need to keep an eye on this data series as well as the U.S. yield curve. At 35 bp, the 3-month to 10-year curve is the steepest since August 11 and above the cycle low near 21 bp. While this move higher is welcome, the risks of eventual inversion remain high.

We get some key survey data today. S&P Global preliminary August PMI readings will be reported. Manufacturing is expected at 51.8 vs. 52.2 in July and services is expected at 49.8 vs. 47.3 in July. If so, the composite should move back close to 50.0 vs. 47.7 in July. Regional Fed manufacturing surveys for August will also continue rolling out, with the Richmond Fed expected at -4 vs. 0 in July. So far, the surveys have been mixed as Empire came in at -31.3 vs. 11.1 in July and Philly Fed came in at 6.2 vs. -12.3 in July.

Key housing data will also be reported. July new home sales are expected at -2.5% m/m vs. -8.1% in June. Keep an eye on the supply of new homes on the market. In June, it stood at 9.3 months and was the highest since 2009. At some point, significant price cuts will be seen here in order to help clear this inventory and that should eventually translate into lower inflation readings via the shelter component. Of note, the CPI basket gives about 33% weight to shelter, while the PCE basket has 18% weight. Either way, shelter has been a big factor behind the rise in core inflation measures and so we look for some relief ahead. Pending home sales will be reported tomorrow and are expected at -2.5% m/m vs. -8.6% in June.

EUROPE/MIDDLE EAST/AFRICA

Preliminary eurozone August PMI readings continue to weaken. Headline manufacturing came in at 49.7 vs. 49.0 expected and 49.8 in July, services came in at 50.2 vs. 50.5 expected and 51.2 in July, and the composite came in at 49.2 vs. 49.0 expected and 49.9 in July. Looking at the country breakdown, the German composite came in at 47.6 vs. 47.3 expected and 48.1 in July while the French composite came in at 49.8 vs. 51.0 expected and 51.7 in July. Italy and Spain will be reported with the final PMI readings in early September. Three of the four largest eurozone economies are now contracting and this will likely spread to Spain as well.

ECB tightening expectations remain elevated. WIRP suggests a 50 bp hike is fully priced in for September 8, with nearly 25% odds of a larger 75 bp move. The swaps market is pricing in 200 bp of tightening over the next 12 months that would see the deposit rate peak near 2.0%, up from 1.75% at the start of this week. Yet higher expected rates have done nothing for the euro. The single currency traded at new lows for this move near $0.9900 and remains on track to test September 2002 low near $0.9615. Panetta speaks today.

Preliminary U.K. August PMI readings were reported. Manufacturing came in at 46.0 vs. 51.0 expected and 52.1 in July, services came in at 52.5 vs. 51.6 expected and 52.6 in July, and the composite came in at 50.9 vs. 51.0 expected and 52.1 in July. The CBI also released the results of its August industrial trends survey, with orders at -7 vs. 3 expected and 8 in July and selling prices at 57 vs. 41 expected and 48 in July. Its distributive trades survey will be reported Thursday, with retailing reported sales expected at -8 vs. -4 in July.

BOE tightening expectations also remain elevated. WIRP suggests a 50 bp hike September 15 is fully priced in, with 35% odds of a larger 75 bp move. The swaps market is pricing in 225 bp of tightening over the next 12 months that would see the policy rate peak near 4.0%, up from 3.25-3.50% at the start of last week and 3.0-3.25% at the start of the week before that. Can the BOE really tighten so aggressively when policymakers are already expecting a recession by Q4? Higher expected U.K. rates have done nothing for sterling either. Cable traded at new lows for this move near $1.1720 and remains on track to test the March 2020 low near $1.1410.

Bank of Israel delivered a hawkish surprise yesterday. It was expected to hike 50 bp but instead delivered a 75 bp hike to 2.0%. The bank noted that “The Israeli economy is recording strong growth, accompanied by a tight labor market and an increase in the inflation environment. The increase in inflation is broad-based, with contributions from most CPI components.” The hawkish message was received as the swaps market is now pricing in a terminal rate near 3.0% vs. 2.25% at the end of last week, which we thought was too low. At the previous meeting in July, bank researchers saw the policy rate at 2.75% in Q2 2023 but that rate path has likely steepened now. Next policy meeting is October 3 and updated macro forecasts will be released then.

ASIA

Japan reported preliminary August PMI readings and July department store sales. Manufacturing came in at 51.0 vs. 52.1 in July, services came in at 49.2 vs. 50.3 in July, and the composite came in at 48.9 vs. 50.2 in July. This was the first reading below 50 since February, as rising COVID numbers and slowing regional growth weigh on the economy. Sales slowed to 9.6% y/y vs. 11.7% in June. Despite some upward pressure on the CPI readings, recent weakness in the real sector data support the bank’s decision to maintain ultra-loose policy for now. Next policy meeting is September21-22 and no change is expected then. With monetary policy divergences widening with the Fed, USD/JPY is likely to march higher. It traded as high as 137.70 today and remains on track to test the July 14 high near 139.40.

Australia reported preliminary August PMI readings. Manufacturing came in at 54.5 vs. 55.7 in July, services came in at 49.6 vs. 50.9 in July, and the composite came in at 49.8 vs. 51.1 in July. This was the first reading below 50 since January and further weakness will feed into the notion that the RBA will pivot sooner rather than later as headwinds build. For now, market expectations are fairly steady as WIRP suggests a 50 bp hike September 6 is about 70% 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%. Similar to what we’ve seen with the ECB and BOE, the heightened RBA expectations have not prevented AUD from weakening; it is currently testing the .6855 area and a break below would set up a test of the July 14 low near .6680.

Bank Indonesia delivered a hawkish surprise with a 25 bp hike to 3.75%. However, nearly a quarter of the 22 analysts polled by Bloomberg looked for the hike. Governor Warjiyo said “This decision is a preemptive and forward looking step to mitigate the risk of rising core inflation and inflation expectations due to the increase in non-subsidized fuel prices and volatile food inflation, as well as to strengthen the rupiah exchange rate stabilization policy amid high global uncertainty and increasingly strong domestic economic growth.” The bank raised its core inflation forecast for this year to 4.15% vs. 2-4% previously and raised its headline inflation forecast to 5.24% vs. 4.5-4.6% previously. Warjiyo said the bank is seeing evidence of second-round effects. We also believe some administered prices will be raised soon after President Joko Widodo said last week that the budget could no longer maintain heavy subsidies.