• The Fed is expected to deliver a dovish hold; Powell’s press conference is the usual wild card; data highlight will be ADP jobs; July Chicago PMI and Q2 ECI will also be reported; Canada highlight will be May GDP data; Brazil is expected to keep rates steady at 10.5%; Colombia is expected to cut rates 50 bp to 10.75%; Chile is expected to cut rates 25 bp to 5.5%
  
• Eurozone July CPI ran hot
  
• BOJ delivered a hawkish surprise; updated macro forecasts suggest no urgency to tighten; there have been no reports of BOJ intervention after the decision; Japan reported mixed June data; Australia reported soft June and Q2 CPI and Q2 real retail sales data; New Zealand July ANZ business survey was firm; China reported soft official July PMIs

The dollar is trading soft ahead of the FOMC decision. DXY is trading lower near 104.121. The dollar tends to weaken on FOMC decision days (see below), but today’s gains in the foreign currencies are being led by the yen after the BOJ delivered a hawkish surprise (see below). The euro is trading higher near $1.0835 after higher than expected CPI data (see below), while sterling is trading flat near $1.2840 ahead of the expected BOE cut tomorrow. AUD is the worst major performer due to a triple whammy of soft CPI, weak retail sales, and soft China PMIs (see below). While the Fed is expected to open the door for a September cut today, recent firmness in the U.S. data suggests the market is once again getting carried away with its pricing for aggressive easing (see below). Beyond just the U.S. story, we continue to believe that the divergence story remains in place and should continue to support the dollar.

AMERICAS

The two-day FOMC meeting ends today with a widely expected hold. There is simply no reason for the Fed to cut rates at this meeting when the economy continues to grow above trend. That said, we believe the Fed will leave the door wide open for a cut at the September FOMC meeting. There will be no updated Dot Plots or macro forecasts at this week’s meeting. Looking ahead, the “Goldilocks” economic backdrop of solid growth and modest disinflation suggests the Fed is unlikely to cut the funds rate as much as currently priced in. The market is pricing almost 75 bp of easing by year-end and nearly 150 bp of total easing over the next 12 months. If the soft landing scenario remains intact, such aggressive easing won’t be needed.

Chair Powell’s press conference is the usual wild card. Before the media blackout period, we saw a clear shift in tone from Fed speakers. Many implied that the time to cut was drawing nearer, which Powell is likely to repeat today. We also heard growing concerns about softness in the labor market, but recent data suggest firms continue to hire. We’ll know more this Friday, of course. While risks are skewed that Powell leans dovish, we do not expect him to validate the aggressive easing that’s priced in by the markets.

The dollar tends to weaken on FOMC decision days. It has done so for 5 straight and 12 of the past 14. We would be wary of possible FX intervention by the BOJ after the FOMC decision this afternoon, as we saw after the afternoon of the May 1 FOMC decision.

Data highlight will be the ADP private sector jobs estimate. It is expected at 150k, same as in June. This comes ahead of the July jobs report Friday. Of note, NFP has outperformed ADP two straight months and 10 of the past 11. Bloomberg consensus sees 175k vs. 206k in June, while its whisper number stands at 176k. For reference, the average non-farm payrolls monthly gain over the past 12 months is 220k. The unemployment rate is expected to remain steady at 4.1%, while average hourly earnings are expected to fall two ticks to 3.7% y/y.

July Chicago PMI will also be reported. Headline is expected at 45.0 vs. 47.4 in June. This series has been underperforming the national PMI readings in recent months and so offers little insight into ISM manufacturing PMI tomorrow, where headline is expected at 48.8 vs. 48.5 in June. Keep an eye on prices paid, which stood at 52.1 in June. Of note, the S&P Global manufacturing PMI fell to a 7-month low of 49.5 in June vs. 51.6 in June. However, services remained strong and so the S&P Global composite rose to the highest since April 2022 at 55.0. ISM services PMI will be reported Monday and headline is expected at 51.3 vs. 48.8 in June.

June JOLTS data were solid. Openings came in at 8.184 mln vs. 8.000 mln expected and a revised 8.230 mln (was 8.140 mln) in May. The openings rate was steady at 4.9%, which is still above the 4.5% level that typically triggers a noticeable rise in the unemployment rate. Labor supply and demand are clearly coming into better balance but there really isn’t much slack still. The data still suggest the Fed can achieve a soft landing without a material increase in the unemployment rate.

Q2 Employment Cost Index will also be reported. It is expected at 1.0% q/q vs. 1.2% in Q1. Average hourly earnings softened in Q2 and so we expect the ECI to reflect this and give the Fed more confidence to signal a September cut.

Canada highlight will be May GDP data. The economy is forecast to grow 0.1% m/m vs. 0.3% in April, but the risks are skewed to the downside because retail sales volume plunged 0.7% m/m in May. Subdued Canadian economic activity and moderating inflation pressures suggest the bar for more rate cuts is low, which can further weigh on CAD. Last week, the bank cut rates for the second straight meeting and signaled more to come. The swaps market sees over 90% odds of a cut at the next meeting September 4 and is pricing 125 bp of total easing over the next 12 months, up from 100 bp at the start of this week.

Brazil COPOM is expected to keep rates steady at 10.5%. At the June meeting, the bank voted unanimously to “interrupt” the easing cycle and kept rates steady at 10.5%. We expect the bank to reiterate “that monetary policy should continue being contractionary for sufficient time” as IPCA inflation unexpectedly quickened to a 5-month high of 4.45% y/y in mid-July. Central bank chief Roberto Campos Neto last month pushed back against rate hike expectations by noting “It’s not our base case scenario.” However, the swaps market is pricing in nearly 200 bp of tightening over the next 12 months.

Colombia central bank is expected to cut rates 50 bp to 10.75%. At the last meeting June 28, the bank cut rates 50 bp to 11.25%. The vote was 4-2, with the dissents in favor of a larger 75 bp cut. Governor Villar said rate cuts would continue but stressed that the bank needs to see a faster drop in inflation in order to cut at a faster rate. The improvement in headline inflation has stalled in the past few months, supporting the case for a 50 bp cut rather than 75 bp this week. The swaps market is pricing around 300 bp of total easing over the next 12 months that would see the policy rate bottom near 8.25%. The bank releases its quarterly inflation report Friday.

Chile central bank is expected to cut rates 25 bp to 5.5%. A few of the analysts polled by Bloomberg see steady rates. At the last meeting June 18, the bank cut rates 25 bp to 5.75%. The vote was 4-1, with the dissent in favor of a larger 50 bp cut. The bank signaled that the end of the easing cycle is nearing by noting “The board estimates that, if the assumptions of the central scenario materialize, the monetary policy rate would have accumulated the bulk of the cuts planned for this year during the first half.” The swaps market is pricing in 75 bp of total easing over the next 12 months that would see the policy rate bottom near 5.0%. Ahead of the decision, Chile reports June IP, retail sales, and unemployment. June GDP proxy will be reported Thursday.

EUROPE/MIDDLE EAST/AFRICA

Eurozone July CPI ran hot. Headline came in a tick higher than expected at 2.6% y/y vs. 2.5% in June, while core came in a tick higher than expected at 2.9% y/y, same as June. This wasn’t a huge surprise after Germany’s EU Harmonised inflation unexpectedly accelerated a tick to 2.6% y/y yesterday. France and Italy also reported today. France’s EU Harmonised inflation came in two ticks lower than expected at 2.6% y/y vs. 2.5% in June, while Italy’s came in five ticks higher than expected at 1.7% y/y vs. 0.9% in June. These reading more than offset Spain’s EU Harmonised inflation decelerating to 2.9% y/y vs. 3.6% in June. Nevertheless, the sluggish eurozone growth outlook suggests the disinflationary progress can resume. The swaps market continues to fully price in a 25 bp rate cut in September and another one in December.

ASIA

The two-day Bank of Japan meeting ended with a hawkish surprise. The bank voted 7-2 to hike the policy rate 15 bp to 0.25%. In addition, the bank said it would announce reduce its monthly bond-buying to JPY3 trln vs. JPY6 trln previously. While the market was split between a hike and no hike, a late leak in the Japan press limited the surprise factor. The BOJ signaled that it plans to tighten policy further. According to the BOJ “if the outlook for economic activity and prices presented in the July Outlook Report will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.” Moreover, the BOJ warned that risks to Japan economic activity and prices are skewed to the upside for fiscal 2025.

The updated macro forecasts suggest no urgency to tighten. The core inflation forecasts were tweaked modestly and so the swaps market continues to imply a modest BOJ tightening cycle, with 30 bp of hikes priced in over the next 12 months and 55 bp total over the next three years. We agree, as Japan’s underlying inflation is in a firm downtrend, and negative real cash earnings points to ongoing weakness in consumption spending activity. We doubt the BOJ will tighten more than is currently priced in. Until this changes materially, we believe JPY upside is limited.

So far, there have been no reports of BOJ intervention after the decision. We are a bit surprised it hasn’t, as the BOJ has intervened recently when the yen was already gaining. Sticking with that strategy today could have gotten them more bang for the buck. Perhaps it is waiting until after the FOMC decision to act more decisively. The Ministry of Finance reported that the BOJ intervened to the tune of JPY5.5 trln in July, matching market estimates based on the bank’s daily current account data.

Japan also reported June IP, retail sales, and housing starts. IP came in at -7.3% y/y vs. -6.4% expected and 1.1% in May, sales came in at 3.7% y/y vs. 3.2% expected and 2.8% in May, and starts came in at -6.7% y/y vs. -2.4% expected and -5.3% in May. This is a very mixed bag but recent softness in the data did not deter the BOJ from hiking today.

Australia reported June and Q2 CPI data. June headline CPI came in as expected at 3.8% y/y vs. 4.0% in May, while trimmed mean came in 4.1% y/y vs. 4.4% in May. For Q2, headline CPI came in as expected at 1.0% q/q vs. 1.0% in Q1 and the y/y rate picked up as expected to 3.8% y/y vs. 3.6% in Q1. However, trimmed mean CPI came in two ticks lower than expected at 0.8% q/q vs. 1.0% in Q1 and the y/y rate fell to 3.9% vs. 4.0% expected and actual in Q1. Bottom line: softer Australia underlying inflation and poor retail sales activity (see below) mean that rate hikes are off the table. The market went from pricing in a small probability of a rate hike by year-end to 60% odds of a 25 bp rate cut after today’s data. We expect the RBA to stay on hold the rest of this year because inflation remains well above the RBA’s 2-3% target.

Australia also reported soft Q2 real retail sales data. Retail sales volume came in a tick lower than expected at -0.3% q/q in Q2 vs. -0.4% in Q1. According to the RBA June meeting minutes, “uncertainty around the data for consumption and clear evidence that many households were experiencing financial stress” were the major reasons it was hesitant to raise the policy rate.

New Zealand July ANZ business survey was firm. The business confidence index rose 21 points to a four-month high of 27.1 in July and the forward-looking Own Activity Outlook index rose 4 points to a four-month high of 16.3. The swaps market implies over 60% probability of a rate cut at the next August 14 meeting. However, we think the RBNZ can afford to wait until October 9 before slashing rates because New Zealand non-tradeable CPI inflation remains sticky and business confidence is improving.

China reported soft official July PMIs. Manufacturing came in as expected at 49.4 vs. 49.5 in June, while non-manufacturing came in a tick lower than expected at 50.2 vs. 50.5 in June. As a result, the official composite fell to 50.2 from 50.5 in June and is the lowest since December 2022, right before reopening. Caixin reports manufacturing PMI tomorrow and is expected at 51.5 vs. 51.8 in June. We believe the Caixin PMIs have been overstating growth in China and that the official readings are closer to the mark. Indeed, the weak economy clearly led the PBOC to unexpectedly cut rates last week.