• Dollar weakness continues as markets position for a dovish message from Jackson Hole; Fed officials remain focused on the labor market; the DNC begins in Chicago tonight and ends Thursday
  
• Reports suggest Germany will significantly cut its aid to Ukraine
  
• Japan reported soft June core machine orders; Singapore announced a fiscal stimulus package

The dollar is trading soft as the new week begins. DXY is trading lower for the second straight day near 102.223 as markets position for a dovish message out of Jackson Hole (see below). The yen is outperforming and trading near 146.45 despite weak orders data (see below), sterling is trading slightly higher near $1.2960, and the euro is trading flat near $1.1035. While Powell is widely expected to signal a rate cut in September, we continue to believe that markets are overly pessimistic about the U.S. economy. Indeed, retail sales data showed that the primary driver of growth remains on firm footing. Looking at the totality of the data, the economy is still growing near 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. Last week’s data provided a good start but more needs to be seen.

AMERICAS

Dollar weakness continues as markets position for a dovish message from Jackson Hole. We will be putting out a preview shortly, but the bottom line is that while Powell should prepare markets for the start of the easing cycle in September, he should stress that any policy changes will be gradual and prudent. We expect Powell to stress the data-dependent nature of the Fed’s monetary policy decisions and to push back against any sort of pre-commitment to an aggressive easing path. Powell has already pulled off a mid-cycle adjustment back in 2019 and so he can draw on that experience.

Fed officials remain focused on the labor market. Over the weekend, Chicago Fed President Goolsbee said it’s not yet a certainty that it is time to cut rates, adding that there is still a lot of data to come in. However, he added that “if you keep too tight for too long, you will have a problem on the employment side of the Fed's mandate.” Minnesota Fed President Kashkari said, "The balance of risks has shifted, so the debate about potentially cutting rates in September is an appropriate one to have." He added that "If we were not seeing evidence that the labor market was weakening, if the unemployment rate was still in the 3.7% to 3.8% range, I don't think I would be even debating, 'Hey, is now the time to cut rates?'" Lastly, Daly pushed back against the need for rapid cuts and stressed that “Gradualism is not weak, it's not slow, it's not behind, it's just prudent.” Waller speaks today.

We agree on all counts. We see enough progress on inflation to start cutting rates next month. While we see some signs of softness in the labor market and the economy, we do not see imminent recession, which is what would be needed to get the Fed to cut as much as the market is pricing in. While the odds of a 50 bp cut in September have fallen (30% for Fed Funds futures, 15% for OIS), nearly 100 bp of total easing by year-end is still priced in, along with 175-200 bp of total easing over the next 12 months. This mispricing should eventually correct. The only U.S. data today is the July leading index.

The Democratic National Convention begins in Chicago tonight and ends Thursday. As candidates usually see a polling bump after their conventions, one can expect Vice President Harris to widen her lead over former President Trump, at least for the near-term. As things stand now, Harris has already overtaken Trump in some national and swing state polls. As a result, the betting markets now have her as the favorite to win in November. We will be putting out an election primer in early September that discusses Trumponomics vs. Kamalanomics and their likely impact on various asset classes.

EUROPE/MIDDLE EAST/AFRICA

Reports suggest Germany will significantly cut its aid to Ukraine. The ruling coalition had already announced plans to halve its current EUR8 bln in aid to EUR4 bln in 2025. However, FAZ has reportedly seen a draft budget that would cut spending further to EUR3 bln in 2026 and only EUR500 mln in both 2027 and 2028. Reports also suggest there are growing tensions in the ruling coalition. Chancellor Scholz and his Social Democrats are in favor of maintaining significant aid to Ukraine, while coalition partner Free Democrats believe the funding can be obtained elsewhere. Of note, the leader of the third coalition member Green Party and Economy Minister Habeck has already announced his intent to run for Chancellor in the 2025 federal elections.

ASIA

Japan reported soft June core machine orders. Orders came in at -1.7% y/y vs. 1.1% expected and 10.8% in May. This was the first y/y contraction since February and does not bode well for the Q3 economic outlook. Other forward-looking indicators suggest that growth is likely to slow from the 0.8% q/q rate posted in Q2.

Singapore announced a fiscal stimulus package. Prime Minister Wong delivered his first major speech since taking the post in May at the National Day Rally over the weekend. The new measures include added paternity leave, training allowances, increased unemployment benefits, and lower income housing grants. In addition, more than 2.4 mln Singaporeans would receive a cash payment of SGD200-400 in September as part of the budget passed earlier this year. The announcement comes ahead of a general election that must be held by November 2025. Though the government has run budget deficits for several years due to the pandemic and its aftermath, it has built up huge fiscal reserves that give it leeway to provide some fiscal largesse. Of note, this is likely to strengthen the case for the MAS to keep policy on hold at its October policy meeting.