• The only surprise out of Jackson Hole is that markets were surprised; U.S. yields continue to rise; with Jackson Hole behind them, Fed officials are likely to continue their aggressive communication efforts this week; regional Fed manufacturing surveys for August wrap up today
  
• Markets are leaning towards a 75 bp hike by the ECB at the September 8 meeting; European energy prices continue to surge
  
• Australia reported firm July retail sales; the yuan is the weakest in two years; Malaysia reported July CPI
  

The dollar continues to gain after Powell’s Jackson Hole speech. DXY is up for the second straight day and traded at a new high for this move near 109.478 before falling back below 109 currently. The euro tested the .$0.99 area earlier but is trading back near $0.9985. Moves above $1.00 will be hard to sustain and so the single currency remains on track to test the September 2002 low near $0.9615. Sterling traded at a new low for this move today near $1.1650 and remains on track to test the March 2020 low near $1.1410. USD/JPY is trading at the highest since July 15 near 139 and will soon test the July 14 high near 139.40. We maintain our medium-term target of 147.65, the August 1998 high, as the BOJ stood out at Jackson Hole as the Lonesome Dove. We maintain our strong dollar call, with EM FX remaining particularly vulnerable.

AMERICAS

The only surprise out of Jackson Hole is that markets were surprised. Powell’s speech was the culmination of a well-orchestrated, aggressive, and consistent communication effort by the Fed. Everything Powell said Friday was a distillation of comments made by other Fed officials these past several weeks. There was absolutely no hint of a pivot, though any expectations for one were purely wishful thinking. No doubts should remain that the Fed is nowhere close to stopping its drive to lower inflation. WIRP suggests nearly 75% odds of a 75 bp hike at the September 20-21 FOMC meeting, up from 50% at the start of last week. The swaps market is pricing in a terminal rate close to 4.0% and we think that process is likely to continue. It's not a coincidence that Fed officials keep bringing up Paul Volcker, as the implications are clear. Our broad macro calls remain intact: stronger dollar, lower equities, and flatter yield curve.

U.S. yields continue to rise. The 2-year yield is trading near 3.48%, a new high for this cycle. The 10-year yield is trading near 3.12, matching last week’s highs but well below the 3.50% high from mid-June. The real 10-year yield is trading near 0.53%, the highest since July 21. Further gains would set up a test of the June 1 high near 0.82%. Elsewhere, the 3-month to 10-year curve is trading near 35 bp, the steepest since last Wednesday and off the 21 bp low from August 10. While recession risks are palpable, this key metric does not yet signal that one is imminent.

With Jackson Hole behind them, Fed officials are likely to continue their aggressive communication efforts this week. As we saw after the July FOMC decision and then after the FOMC minutes, Fed officials blanketed the markets with a hawkish message. We expect a similar effort after Jackson Hole. Brainard kicks things off today. We expect each and every Fed official to stick to Powell’s hawkish script.

Regional Fed manufacturing surveys for August wrap up today. Dallas Fed is expected at -12.7 vs. -22.6 in July. More importantly, August Chicago PMI will be reported Wednesday and is expected at 52.5 vs. 52.1 in July. August ISM manufacturing PMI will be reported Thursday and is expected at 52.0 vs. 52.8 in July. Keep an eye on prices paid and employment, which stood at 60.0 and 49.9 in July, respectively. ISM services PMI won’t be reported until September 6 and consensus sees 56.2 vs. 56.7 in July, the highest since April.

EUROPE/MIDDLE EAST/AFRICA

Markets are leaning towards a 75 bp hike by the ECB at the September 8 meeting. At Jackson Hole and over the weekend, a large number of ECB officials were taking a hawkish line. WIRP suggests a 50 bp hike is fully priced in, with nearly 60% odds of a 75 bp move. The swaps market is pricing in 225 bp of tightening over the next 12 months that would see the deposit rate peak near 2.25%. The problem with large-scale ECB hikes (the same goes for the BOE) is that they are hiking into a recession that's pretty much already here. Germany, Italy, and now France are contracting and it's only going to get worse this fall/winter when energy shortages really bite. Sure, the US faces recession risks too but we still think that Europe is in much weaker fundamental shape

European energy prices continue to surge. German power for next year rose above EUR1000 per megawatt for the first time ever, following a similar move for French power last week. This means little relief in sight for headline eurozone inflation whilst also raising recession risks. Preliminary August eurozone CPI readings will be reported this week but it’s clear that there are upside risks for September as energy price continue to climb. Of note, Schnabel stressed at Jackson Hole that the ECB must continue hiking, noting “I would argue that even if we enter a recession, we have basically little choice than to continue our normalization path.”

ASIA

Australia reported firm July retail sales. Sales rose 1.3% m/m vs. 0.3% expected and 0.2% in June, which pushed the y/y rate up to 16.5% vs. 12.0% in June. This was the strongest since April 2021. Despite some softness in recent data, RBA tightening 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 225 bp of tightening over the next 12 months that would see the policy rate peak near 4.10%.

The yuan is the weakest in two years. USD/CNY broke above 6.8450 to trade near 6.9235, which targets the May 2020 high near 7.1775. Similarly, USD/CNH broke above 6.8565 to trade near 6.9180, which targets the May 2020 high near 7.1965. There has been some official jawboning against yuan weakness but not much can really be done. The monetary policy divergence story holds especially true here, as interest rate differentials continue to move in the dollar’s favor. In addition, the yuan should continue to trade with the broader EM FX and the global outlook calls for continued weakness.

Malaysia reported July CPI. Headline came in as expected at 4.4% y/y vs. 3.4% in June, the highest since May 2021. Bank Negara does not have an explicit inflation target but inflation is moving further above its 2.2-3.2% forecast range for this year and so should lead to continued tightening. At the last meeting July 6, the bank hiked 25 bp to 2.25%, only the second hike of this cycle. The bank noted then that “Any adjustments to the monetary policy settings going forward would be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support a sustainable economic growth in an environment of price stability.” Next policy meeting is September 8 and another 25 bp hike to 2.5% seems likely. The swaps market is pricing in 100 bp of tightening over the next 12 months that would see the policy rate peak near 3.25%.