• With Jackson Hole behind them, Fed officials continue their aggressive communication efforts; a Fed put is clearly out of the question; we get some labor market data ahead of the Friday jobs report; Canada reports Q2 current account data; Chile received a $18.5 bln Flexible Credit Line from the IMF
  
• Reports suggest that the EU is preparing some sort of emergency intervention in its power market; ECB Chief Economist Lane remains in the dove camp; August eurozone CPI data have started rolling out; real sector data from the eurozone remain weak; BOE data show overseas investors sold gilts aggressively in July; Hungary is expected to hike rates 100 bp to 11.75%
  
• Japan reported solid July labor market data; Australia reported very weak July building approvals
  

The dollar’s post-Jackson Hole rally ran out of steam. After trading at a new cycle high near 109.478 yesterday, DXY has fallen back to trade near 108.50 currently. The euro is trading just above parity but feels heavy. Recent moves above $1.00 have been hard to sustain and we believe the single currency remains on track to test the September 2002 low near $0.9615. Sterling traded at a new low for this move yesterday near $1.1650 but has rebounded to trade just above $1.17. Similarly, it remains heavy and on track to test the March 2020 low near $1.1410. USD/JPY traded at the highest since July 15 near 139 yesterday but has since fallen back to trade near 138.25. We still look for a test of the July 14 high near 139.40 and maintain our medium-term target of 147.65, the August 1998 high. We maintain our strong dollar call, with EM FX remaining particularly vulnerable.

AMERICAS

With Jackson Hole behind them, Fed officials 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 airwaves with a hawkish message. We expect a similar effort after Jackson Hole. Barkin and Williams speak today. We expect all Fed officials to stick to Powell’s hawkish script this week. WIRP suggests over 70% 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 higher odds of a 4% terminal rate 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.

A Fed put is clearly out of the question. Kashkari said “I was actually happy to see how Chair Powell's Jackson hole speech was received. People now understand the seriousness of our commitment to getting inflation back down to 2%.” He added that “I certainly was not excited to see the stock market rallying after our last Federal Open Market Committee meeting. Because I know how committed we all are to getting inflation down. And I somehow think the markets were misunderstanding that.” Lastly, Kashkari noted that “One of the biggest mistakes they made in the 1970s at the Fed is they thought that inflation was on its way down. The economy was weakening. And then they backed off and then inflation flared back up again before they had finally quashed it. We can't repeat that mistake.” Kashkari continues to stake out his position as one of the most hawkish on the FOMC.

We get some labor market data ahead of Friday jobs report. July JOLTS job openings will be reported and expected at 10.375 mln vs. 10.698 mln in June. if so, it would be the fourth straight month dropping from the March peak near 11.855 mln. Yet the overall level of job openings remains nearly 4 mln above pre-pandemic levels. This makes it even harder to predict how the labor market will behave as growth slows. If firms are already starved for workers, it’s not clear how fast they would lay off workers in an already stretched situation. August Challenger job cuts and weekly jobless claims will be reported Thursday. While the labor market remains strong, there is no question that unemployment will eventually rise as the Fed continues tightening. However, keep in mind that the labor market is a lagging indicator and we may not see weakness for months to come. June S&P CoreLogic house price index (19.2% y/y expected) and August Conference Board consumer confidence (98.0 expected) will also be reported.

Canada reports Q2 current account data. Due in large part to the spike in oil prices, Canada’s current account has moved from a deficit -1.8% of GDP in 2020 to an estimated (by the OECD) surplus near 1.7% of GDP in 2022 and 2.9% in 2023. This is one of the factors supporting CAD, which is the best performing major YTD. The economy remains strong and price pressures remain high and so it’s full speed ahead for the Bank of Canada. WIRP suggests a 75 bp hike is fully priced in for September 7, with nearly 75% odds of a 100 bp move. The swaps market is pricing in 125-150 bp of tightening over the next 12 months that would see the policy rate peak between 3.75-4.0%.

Chile received a $18.5 bln Flexible Credit Line from the IMF. The agency noted that the two-year credit line will “augment buffers and provide insurance against adverse scenarios,” though it will be treated as precautionary. Of note, Chile’s foreign reserves have fallen sharply due to the central bank’s defense of the peso, standing at $44.7 bln vs. the $55 bln peak from October 2021. The FCL could be used to replenish those reserves. From the IMF website: “To date, five countries—Chile, Colombia, Mexico, Peru and Poland—have had FCL arrangements. The FCL has provided a valuable backstop for these countries, and helped boost market confidence during a period of heightened risks.”

EUROPE/MIDDLE EAST/AFRICA

Reports suggest that the EU is preparing some sort of emergency intervention in its power market. It seems more EU member states are calling for price caps. The Czech Republic, which currently holds the rotating presidency of the EU, will reportedly convene an emergency meeting of EU Energy Ministers September 9. Whatever happens, we know that price caps are only a short-term band-aid. Look at what's happening in the U.K., where those caps have had to be continually adjusted to reflect underlying cost pressures. There are always unintended consequences, whether the policies are price caps, subsidies, or other measures that prevent supply and demand from fully determining the price.

ECB Chief Economist Lane remains in the dove camp. It’s clear that he is not in favor of a larger 75 bp hike next month, noting that the same overall rise in borrowing costs is less likely to generate adverse effects if it comes in a “multi-step calibrated series rather than a smaller number of larger rate increases.” He stressed that “A steady pace, that is neither too slow nor too fast, in closing the gap to the terminal rate is important.” Lane is one of the more dovish members of the GC and we assume he was in the group that favored a 25 bp hike in July. A 50 bp hike is fully priced in for September 8 with 50% odds of a 75 bp move. It's going to be a close call and will depend in large part on the August CPI data out this week. we agree with Lane that large-scale ECB hikes while much of the eurozone is already in recession will be quite disruptive.

Indeed, August eurozone CPI data have started rolling out. Spain reported EU Harmonised inflation of 10.3% y/y, as expected and down from 10.7% y/y in July. This was the first deceleration since April and is certainly welcome news. Germany reports later today and its EU Harmonised measure is expected to pick up three ticks to 8.8% y/y for Germany. German state data already out today have been mixed and offer little guidance for the national reading. France, Italy, and eurozone report tomorrow. France is expected to fall a tick to 6.7% y/y while Italy is expected to fall two ticks to 8.2% y/y. For the eurozone as a whole, headline is expected to pick up a tick to 9.0% y/y and core is expected to pick up a tick to 4.1% y/y. July eurozone PPI will be reported Friday and is expected to remain steady at 35.8% y/y.

Real sector data from the eurozone remain weak. Spain reported July retail sales at -0.5% y/y vs. a revised 0.7% (was 1.0%) in June. Although its composite PMI in July was 52.7, it will likely fall below 50 in the coming months as Spain is clearly following the rest of the eurozone into recession. France reports July consumer spending tomorrow and is expected at -0.2% m/m, while Germany reports July retail sales Thursday and are expected at -0.1% m/m vs. -1.5% in June. The eurozone reports September 5 and Italy reports September 7.

Bank of England data show overseas investors sold gilts aggressively in July. Non-residents sold GBP16.6 bln of gilts last month, the largest monthly total since 2018. The fact that such a large sell-off took place even as global bonds were rallying suggest a significant rotation out of the U.K. is under way. We’ve been pointing out for a while that the notion of a Truss-led UK government is concerning. The main planks of her platform are 1) large-scale tax cuts, 2) BOE mandate review, and 3) hard Brexit. None of these can be seen as positive for sterling and gilts and so along with likely recession in Q4, the reasons to be underweight U.K. assets are piling up.

National Bank of Hungary is expected to hike rates 100 bp to 11.75%. At the last meeting July 26, the bank hiked the base rate 100 bp to 10.75% in late July. The bank said “The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilizes around the central bank target in a sustainable manner.” It is expected to hike the 1-week deposit rate 100 bp Thursday to match the base rate. CPI rose 13.7% y/y in June, the highest since July 1998 and further above the 2-4% target range. The swaps market is pricing in another 225 bp of tightening over the next 6 months that would see the base rate peak near 13.0%.

ASIA

Japan reported solid July labor market data. Unemployment rate remained steady at 2.6% but the job-to-applicant ratio rose to 1.29 vs. 1.27 expected and actual in June. Governor Kuroda stood out as the Lonesome Dove at Jackson Hole, where he said “We have no choice other than continued monetary easing until wages and prices rise in a stable and sustainable manner.” Like other BOJ officials, Kuroda is putting weight on wage growth and not just inflation, and so the state of the labor market has taken on greater importance. The continued rise in the job-to-applicant ratio speaks of growing excess demand for labor, which should put upward pressure on wages. However, this is a slow process and we have seen only modest wage gains so far. Recent data have been softening and so despite the recent uptick in inflation readings, we believe the Bank of Japan will maintain its ultra-loose policy for now. Next policy meeting is September 21-22 and no change is expected then.

Australia reported very weak July building approvals. They were expected at -3.0% m/m but instead plunged -17.2% vs. a revised -0.6% (was -0.7%) in June. As a result, the y/y rate fell to -28.0% vs. -17.8% in June and resumes the weakening trend that’s been in place since all year. Despite some softness in recent data, RBA market expectations are fairly steady as WIRP suggests a 50 bp hike September 6 is about 65% 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%.