• July discount minutes show that New York and Chicago Feds voted to lower the discount rate; other Fed officials are being more cautious; consumer confidence continues to recover; Banxico releases its quarterly inflation report
  
• Eurozone reported July money supply data; BOE MPC member Mann speaks today; Israel is expected to keep rates steady at 4.5%
  
• BOJ Deputy Governor Himino reiterated the bank’s hawkish stance; Australia reported July CPI; BOT Governor Sethaput signaled willingness to cut rates

The dollar is getting more traction. DXY is trading higher near 101 and seems like a technical move given the lack of any news or data today. The euro is leading the foreign currencies lower after failing to break above $1.12, while sterling is holding up better but still trading lower near $3.3220. We see scope for EUR/GBP to continue falling. USD/JPY is trading higher near 144.45. With the U.S. labor market looking solid, we continue to believe that market expectations for aggressive Fed easing remain overdone (see below). We also continue to believe that the divergence story remains in place (supported by the August PMIs) and should eventually support the dollar. While we believe that the dollar remains vulnerable until the dovish Fed narrative changes, its recent resilience is encouraging.

AMERICAS

Discount minutes show that New York and Chicago Feds voted to lower the discount rate. We know from the July 30-31 FOMC minutes that “several” members felt that a cut in the Fed Funds rate was warranted at that meeting, though it ultimately waited for the widely expected cut at the September17-18 meeting. Chicago Fed President Goolsbee is a well-known dove but he appears to have good company in New York Fed President Williams. The discount rate moves in tandem with the Fed Funds rate but can serve as a signaling tool. Here, the signal is loud and clear.

Other Fed officials are being more cautious. Yesterday, Mester said that she does not believe the Fed is behind the curve and added that she doesn’t support a 50 bp rate cut “right out of the box.” We agree. Waller and Bostic speak today and are also likely to call for a cautious approach to easing.

Market pricing for the Fed still hasn't changed. 100 bp of easing is still seen by year-end, with 200 bp total seen over the next 12 months. Odds of a 50 bp move in September remain between 25-35%. With Powell’s focus on the labor market, it’s clear that the jobs data is the most important reading for policy. If we get a strong August NFP (above 200k), then we lean towards 25 bp. If we get a weak reading (below 100k), then we think a 50 bp cut becomes live. Anything in between and it’s a toss-up. Bloomberg consensus for NFP is 155k, while its whisper number stands at 151k.

Consumer confidence continues to recover. August Conference Board consumer confidence was reported yesterday and headline came in at 103.3 vs. 100.8 expected and a revised 101.9 (was 100.3) in July. This was the second straight gain and the highest since February, driven by increases in both present situation and expectations to 134.4 and 82.5, respectively. However, all three series remain roughly within the same narrow range that’s held throughout the past two years. Still, positive real wage growth, rising house prices, and a solid labor market suggest household spending will remain an important tailwind to GDP growth. University of Michigan reports final August consumer sentiment Friday.

Banco de Mexico releases its quarterly inflation report. At the last meeting August 8, the bank restarted the easing cycle with a 25 bp cut to 10.75% and said that inflation trends may allow for the discussion of more cuts. It was a 3-2 and the minutes underscored the split. Some members felt that the slowdown in activity was greater than expected and that risks are biased to the downside. All said that disinflation was expected to continue, but most felt that the balance of risks to inflation were biased to the upside and that the inflationary environment remains complex. Since that meeting, inflation readings have fallen further. Next Banxico meeting is September 26 and if disinflation continues, another 25 bp cut to 10.5% seems likely. The swaps market is pricing in 175 bp of easing over the next 12 months.

Despite today’s bounce, the peso is likely to continue underperforming. Not only will rates continue falling, but political risks will continue rising after a key congressional committee yesterday approved AMLO’s full plan to overhaul Mexico’s judiciary. Some were hoping for a watered down version but it seems likely it’s full speed ahead. While AMLO and his Morena party say the new rules are meant to eliminate corruption, critics believe it will erode judicial independence. Of note, judicial workers launched nationwide strikes against the overhaul last week. Both U.S. and Canadian officials have been critical, leading AMLO to put relations with its two neighbors “on pause.” The full lower house debate may begin as early as next week, when the new congress is seated.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported July money supply data. Broad money growth (M3) rose 2.3% y/y vs. 2.7% expected and a revised 2.3% (was 2.2%) in June. Despite the downside miss, M3 growth remains the strongest since February 2023. Overall, credit dynamics are improving but remain weak by historical standards. Yesterday, Knot said that “I will have to wait until I have the full data and information going into that meeting to decide my position on whether September is appropriate. I would have to do so again in October and December.” Bottom line: Subdued broad money growth (M3) leaves room for ECB to ease policy further.

Bank of England MPC member Mann speaks today. She will be on a panel titled “The Value of Economic Research for Policy.” Yesterday, Prime Minister Starmer paved the way for higher taxes in the upcoming October 30 budget. Tighter fiscal policy could leave the BOE more room to ease policy. However, with the UK economy in a good place, we doubt the BOE will deliver more than the 50 bp of easing that’s priced in by year-end. Bottom line: EUR/GBP has room to edge lower.

Bank of Israel is expected to keep rates steady at 4.5%. At the last meeting July 8, the bank kept rates steady at 4.5% and said it expects the Gaza conflict to wind down in early 2025. The research department saw the policy rate at 4.25% in Q2 2025, with the bank noting that “Due to the revised assumption regarding the duration of the fighting, our assessment is that the risk premium, which rose due to the war, will decline more gradually than we assumed. A higher interest rate will be necessary in order to stabilize inflation.” Since that meeting, inflation accelerated to 3.2% in July, the highest since November and back above the 1-3% target range. As such, another hold today seems warranted. The swaps market is still pricing in 50 bp of total easing over the next 12 months that would see the policy rate bottom near 4.0%.

ASIA

Bank of Japan Deputy Governor Himino reiterated the bank’s hawkish policy stance. Himino stated that the bank’s stance “is that it will examine the impact of market developments and the July rate hike. If it has growing confidence that its outlook for economic activity and prices will be realized, it will adjust the degree of monetary accommodation.” Himino also echoed recent comments by Governor Ueda and cautioned that financial markets “remain unstable.” This suggests the bar for a follow-up rate increase by year-end is high, limiting JPY upside traction.

Australia reported July CPI. Headline came in a tick higher than expected at 3.5% y/y vs. 3.8% in June and was the lowest since March and nearing the 2-3% target range. Trimmed mean inflation came in at 3.8% y/y vs. 4.1% in June and was the lowest since January. At its August meeting, the RBA warned “it was unlikely that the cash rate target would be reduced in the short term.” Nevertheless, the swaps market continues to imply over 90% odds of a 25 bp cut by year-end. We also expect RBA to join the global easing cycle later this year as Australian household spending slows. Timely transaction-based spending data and the RBA’s liaison discussions point to subdued consumption growth.

Bank of Thailand Governor Sethaput signaled willingness to cut rates. He said the bank “stands ready to adjust as circumstances mandate. We are not dogmatic. We need to be pragmatic and flexible. We will be guided by behaving in a prudent way.” He added that the bank is closely watching the deterioration in credit quality and whether it affects liquidity and the broader economy, adding that it’s not expected “to fall off the cliff.” We believe that the bank is also waiting on the fate of the cash handout program. Despite early reports suggesting it will be halted, the press is now saying that the handouts will continue. The swaps market is still pricing in some odds of a rate cut over the next three months, with 50 bp of total easing seen over the next 12 months.