• Fed Chair Powell remains hawkish; Fed tightening expectations remain elevated; Canada reports August jobs data and Q2 capacity utilization; Senior Deputy Governor Rogers laid out more details regarding the BOC’s thinking
  
• The ECB hiked rates 75 bp, as expected; ECB tightening expectations remain elevated; new macro forecasts were released; new U.K. Chancellor of the Exchequer Kwarteng sacked the Treasury’s top civil servant; Norway reported August CPI
  
• BOJ Governor Kuroda met with Prime Minister Kishida; Kishida has reportedly ordered an economic package in October to help the nation cope with rising inflation; China reported soft August CPI and PPI data
  

The dollar is soft in the wake of the ECB decision. After trading at a new cycle high Wednesday near 110.786, DXY is down for the third straight day and trading near 108.50. The euro has led the recovery in the foreign currencies and is currently trading just below $1.01. Sterling also bounced after testing the March 2020 low near $1.1410 and is currently trading just above $1.16. USD/JPY traded at a new high for this move near 145 Wednesday but is currently trade back below 142. We view this current dollar sell-off as corrective in nature and maintain our strong dollar call. In our view, nothing has changed fundamentally and the global backdrop continues to favor the dollar and U.S. assets in general.

AMERICAS

Fed Chair Powell remains hawkish. In his first appearance since Jackson Hole, Chair Powell picked up right where he left off, noting “We need to act now, forthrightly, strongly as we have been doing. My colleagues and I are strongly committed to this project and will keep at it.” He stressed that “History cautions strongly against prematurely loosening policy.” Elsewhere, Evans said “We could very well do 75 in September. My mind is not made up. I do know that we need to be increasing interest rates up to a substantially higher level than where they are now.” He added that “I wouldn’t say that I’m advocating sort of pausing at 3.5%, because I think 4 is more likely.” Evans, Waller, and George speak today. At midnight tonight, the media blackout goes into effect and there will be no Fed speakers until Chair Powell’s post-decision press conference on September 21.

Fed tightening expectations remain elevated. WIPR suggests nearly 90% odds of a 75 bp hike September 21, while the swaps market is pricing in a terminal rate of 4.0%. Only minor U.S. data today as July wholesale trade sales and inventories and Q2 household net worth will be reported.

Canada reports August jobs data and Q2 capacity utilization. Consensus sees a 15.0k gain in employment vs. -30.6k in July, with the unemployment rate seen rising a tick to 5.0%. The Bank of Canada just hiked rates 100 bp and warned that “Given the outlook for inflation, governing council still judges that the policy interest rate will need to rise further” but dropped the reference to front-loading the rate hikes and added “As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target.” WIRP suggests nearly 75% odds of a 50 bp hike at the next meeting October 26.

Senior Deputy Governor Rogers laid out more details regarding the bank’s thinking. She said “Our primary focus will be to judge how monetary policy is working to slow demand, how fast supply challenges are resolved, and most importantly, how both inflation and inflation expectations respond.” She said “Because we are in a period of excess demand, we need a period of lower growth to balance things out and bring demand back in line with supply” but added “We continue to see a path to a soft landing.” Rogers would not commit to future moves, noting “We’ll take the next decision when it comes.” While we hesitate to call this a pivot, it does seem that the bank will take a step back from its jumbo moves and gauge how past hikes are impacting the economy.

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank hiked rates 75 bp, as expected. The bank said that it expects to hike rates further over the next several meetings, adding that it will regularly reevaluate the policy pate and take a meeting by meeting approach. The bank said it will reinvest its APP reinvestment proceeds for an extended period and for as long as needed and noted that PEPP reinvestments are being conducted flexibly. All of this was pretty much as expected.

As always, Madame Lagarde's press conference was key. She said there were different views but the decision was unanimous. Most importantly, she said 75 bp was not the norm but that the large deviation of inflation from target justifies front-loading rate hikes. Lagarde said future rate decisions will be made meeting by meeting and data-dependent. When asked about how far the ECB is likely to tighten, she said she did not know what the terminal rate was but did say that current rates are “far away” from the level that will return inflation to target. This is the correct, open-ended response; with the terminal rates for every central bank a moving target, why paint the ECB into a corner? Lastly, she said the bank would likely hike at more than two more meetings (including this one) but at fewer than five more. That leaves two, three, and four.

ECB tightening expectations remain elevated. WIRP suggests a 75 bp hike October 27 is fully priced in, as is a 50 bp hike December 15 and a 25 bp hike February 2. After that, it gets a bit fuzzy, with one more 25 bp hike seen over the subsequent 6 months. Higher than expected August CPI readings certainly make the case for more aggressive tightening. While the energy crisis adds another wrinkle to the process, we think it is too early yet for it to impact ECB policy right now.

New macro forecasts were released. The biggest revisions to inflation were 2022 and 2023 inflation, while the biggest revision to growth was 2023. It noted that the economy is expected to stagnate in Q1 2023 but it seems that no recession is expected. This is likely to prove to be too optimistic. France reported July IP at -1.6% m/m vs. -0.5% expected and a revised 1.2% (was 1.4%) in June. This dragged the y/y rate down to -1.2% vs. 0.4% expected and a revised 1.0% (was 1.4%) in June and was the deepest contraction since February 2021.

New U.K. Chancellor of the Exchequer Kwarteng sacked the Treasury’s top civil servant. Tom Scholar has served as permanent secretary at the Treasury since 2016 but said in a statement that he will be departing “with immediate effect.” During her campaign for Tory leadership, Prime Minister Truss attacked the so-called “bean counters” at Treasury and pledged to overhaul the staff and replace what she called the “orthodoxy” at Treasury. Civil servants are by definition non-partisan and so we find it concerning that Truss and Kwarteng may be purging those that do not believe in their brand of supply side economics. In related news, reports suggest the Treasury will draw up its own cost estimates of the recently announced energy rescue package rather than relying on the independent watchdog Office for Budget Responsibility. With a review of the Bank of England mandate likely, the new government is taking a big risk in terms of transparency and credibility even as it is set to ramp up gilt issuance.

Norway reported August CPI. Headline came in at 6.5% y/y vs. 7.0% expected and 6.8% in July, while underlying came in at 4.7% y/y vs. 4.8% expected and 4.5% in July. This was the first deceleration in the headline reading since January but remains well above the 2% target. At its last meeting August 18, Norges Bank hiked rates 50 bp to 1.75%and said that rates “will most likely be raised further in September” without indicating the likely size. Updated macro forecasts and expected rate path will be released at the September 22 meeting. We expect another 50 bp hike to 2.25%. Of note, the June rate path sees the policy rate peaking near 3.1% in 2024 vs. 2.5% previously. This is fairly consistent with the swaps market, which is pricing in 100 bp of tightening over the next 6 months that would see the policy rate peak near 2.75%.

ASIA

Bank of Japan Governor Kuroda met with Prime Minister Kishida as concerns about the weak yen rise. Kuroda said after the meeting that “The rapid weakening of the yen is undesirable. I talked about the currency market as part of my explanation of financial markets.” As we’ve note before, there e is really nothing that the BOJ can do about the weak yen as long as it maintains its ultra-dovish stance. The upcoming September 21-22 will be key. Will Kuroda maintain the dovish tone from the July meeting or will he pivot? Given what we see as risks of a 10-15 big figure move lower in USD/JPY from any hint of tightening, we suspect the BOJ will deliver another dovish hold this month.

Elsewhere, Prime Minister Kishida has reportedly ordered an economic package in October to help the nation cope with rising inflation. Reports suggest the government will consider a second extraordinary budget for this fiscal year to fund the measures. Meanwhile , Kishida extended some existing measures to be funded by reserves from the JPY6.2 trln package announced in April. Low-income households will receive JPY50,000 ($347) payments while regional governments will receive a JPY600 bln increase in grants. Reports suggest another JPY3.5 trln will be allocated to additional aid later this month from existing reserves of JPY4.75 trln

China reported soft August CPI and PPI data. CPI came in at 2.5% y/y vs. 2.8% expected and 2.7% in July, while PPI came in at 2.3% y/y vs. 3.2% expected and 4.2% in July. This was the first deceleration since January and moves inflation a bit further below the 3% target. This will also authorities to continue stimulus efforts. In that regard, China also reported August new loan and money supply data. Aggregate financing came in at CNY2.43 trln vs. CNY2.075 trln expected and CNY756 bln in July, while new loans came in at CNY1.25 trln vs. CNY1.5 trln expected and CNY679 bln in July. While the rebound in lending activity is welcome, we suspect policymakers will continue with its targeted monetary easing rather than push for massive stimulus due to financial stability concerns.