• The Jackson Hole Economic Symposium has begun; we see risks of an asymmetrical market reaction to Powell; ahead of Powell’s speech, Fed officials remain hawkish; July core PCE data will be important; yesterday’s data came in firm for the most part
  
• The account of the ECB’s July meeting is worth discussing; the bottom line is that the ECB will continue to hike rates and simply hope that the market doesn’t test its resolve to keep peripheral spreads lower; Germany reported weak September GfK consumer confidence
  
• Japan August Tokyo CPI ran hot; RBNZ is beginning to pivot
  

The dollar is slightly softer ahead of Powell’s speech. DXY is down for the second straight day and trading near 108.19. It should continue to see strong support near 108 even as it remains on track to test the July 14 high near 109.294. The euro should continue to have trouble making much headway above $1.00 and is currently trading just above that key level. We believe it remains on track to test the September 2002 low near $0.9615. Likewise, sterling should continue to struggle above $1.18 and we believe it remains on track to test the March 2020 low near $1.1410. USD/JPY is trading just below 137 but this pair should move higher to eventually test the July 14 high near 139.40. We maintain our strong dollar call and would look fade this dollar weakness heading into today’s speech by Powell.

AMERICAS

The Kansas City Fed’s Jackson Hole Economic Symposium has begun. This year’s theme is "Reassessing Constraints on the Economy and Policy" and the full agenda is now available here. Fed Chair Powell gives his keynote speech today at 10 AM ET. Last year, the text of his speech was released right as his speech started at 10 AM ET. In the past, the Fed has used this symposium to announce or hint at policy shifts. We do not think the Fed will paint itself into a corner ahead of the September 20-21 FOMC meeting. Rather, we expect Powell manage market expectations today by maintaining the hawkish messaging. Between now and the September FOMC, we will get all the major August data and some of the early September surveys such as the preliminary S&P Global PMI readings and regional Fed surveys. The Fed will also have a better idea of how the economy is doing in Q3. . Please see our Jackson Hole preview here.

We see risks of an asymmetrical market reaction to Powell. Markets are universally braced for a hawkish speech from Powell and so it will be hard for him to out-hawk market expectations. As a result, we may see some “buy the tumor, sell the fact” price action today. Once the dust settles, however, we believe the underlying trends remain in play: stronger dollar, lower equities, and flatter yield curve. Ahead of the speech, WIRP suggests 50 bp hike remains fully priced in for the September 20-21 FOMC meeting, with over 70% odds of a 75 bp hike. Looking ahead, the swaps market is starting to price in a terminal rate slightly above 3.75% vs. 3.75% at the start of this week and 3.5% at the start of last week.

Ahead of Powell’s speech, Fed officials remain hawkish. George stressed that the Fed has to get rates higher to slow down demand and tighten financial conditions, noting “we have more room to go in raising rates.” She added that it’s not out of the question to hold rates above 4% and that current rates are not restrictive. Her view reflects what we think is shaping up to be the Fed consensus. As a result, we see risks of a hawkish shift in the September Dot Plots that show a 2023 median Fed Funds rate of 4% vs. 3.75% currently. We also think that the 2024 median is likely to shift up to 3.75% vs. 3.375% currently to drive home the idea that the Fed is not planning a quick pivot.

Harker stayed on message. He said the Fed needs to hike rates to a restrictive stance and that he would like the Fed Funds rate above 3.4% and “then maybe sit a while.” He added that he hasn’t decided on 50 or 75 bp at the September meeting but noted that 50 bp is “still a substantial move.” Lastly, Harker stress that the Fed’s job is “no way done” and that it needs to keep hiking. While Harker sounds a bit less hawkish than George, the hawkish messaging is still consistent. Of note, George is a voter this year and Harker is not.

July core PCE data will be important. It is expected to fall a tick to 4.7% y/y. If so, it would basically reverse the acceleration seen in June. While several inflation measures appear to have peaked, we are nowhere near the 2% target and so it’s full speed ahead for Fed tightening. Personal income and spending will be reported at the same time and are expected at 0.6% m/m and 0.5% m/m, respectively. July advance goods trade, wholesale and retail inventories, and final August University of Michigan consumer sentiment will also be reported today.

Yesterday’s data came in firm for the most part. First off, Q2 GDP was revised to -0.6% SAAR vs. -0.9% in the advance report. While this is old news, it means that the economy was on slightly firmer footing as H2 began. In that regard, the Atlanta Fed’s GDPNow model is now tracking 1.4% SAAR growth for Q3 vs. 1.6% previously. However, it’s early on and so each data point can lead to big swings in the estimate. Next update to the model will be released later today. Of note, Bloomberg consensus sees 1.5% SAAR in Q3 and 1.4% SAAR in Q4. Weekly jobless claims remain low, with initial claims at 243k and continuing claims at 1.415 mln. We note that the continuing claims data are for the BLS survey week containing the 12th of the month. Taken with the low initial claims last week, we think there may be upside risks to current NFP consensus of 295k. Lastly, the Kansas City Fed manufacturing survey came in at 3 vs. 10 expected and 13 in July.

EUROPE/MIDDLE EAST/AFRICA

The account of the ECB’s July meeting is worth discussing. The account shows that “A very large number of members agreed that it was appropriate to raise the ECB’s key interest rates by 50 bp as proposed by Mr. Lane. A 50 bp hike was seen as warranted in view of the worsening of the inflation outlook since the Governing Council’s June meeting.” However, it appears that “Some members argued in favor of raising the ECB key interest rates by 25 bp as this was the intended move communicated at the Governing Council’s June meeting and would preserve consistency with the Governing Council’s earlier communication. With recession risks looming, an increase of 25 bp was seen as more in line with a gradual monetary policy normalization.” Regarding fragmentation risks, “Members agreed that flexibility in reinvestments of redemptions coming due in the PEPP portfolio remained the first line of defense.” Underscoring the divisive nature of the new TPI, “it was suggested that European governments should, within their own domain of responsibility, advance institutional reforms in order to better address the underlying sources of fragmentation in the euro area.” It noted that “while monetary policy was able to react to self-fulfilling liquidity crises, solvency problems had to be tackled by other actors.”

The bottom line is that the ECB will continue to hike rates and simply hope that the market doesn’t test its resolve to keep peripheral spreads lower. We believe the account reflects ongoing reluctance of the creditor nation to unconditionally support the debtor nations. This is a dangerous stance to take as the September elections in September approach. As it is, the 10-year Italian spread to Germany continues to move higher. WIRP suggests a 50 bp hike is fully priced in for September 8, with 25% odds seen of a larger 75 bp move. The swaps market is pricing in 200 bp of tightening over the next 12 months that would see the deposit rate peak near 2.0%, up from 1.75% at the start of last week.

Germany reported weak September GfK consumer confidence. Headline was expected at -32.0 but instead plunged to a new record low of -36.5 vs. -30.6 in August. This comes after slightly better than expected IFO readings earlier this week. Germany remains the weak link in the eurozone but Italy and France are also getting weaker and playing catch-up.

ASIA

Japan August Tokyo CPI ran hot. Headline came in at 2.9% y/y vs. 2.7% expected and 2.5% in July, while core (ex-fresh food) came in at 2.6% y/y vs. 2.5% expected and 2.3% in July. Of note, core ex-energy came in at 1.4% y/y vs. 1.3% expected and 1.2% in July. Last week, July national CPI came in as expected and there are clear upside risks to the August data September 20. The July macro forecasts from the BOJ see core inflation at 2.3% in FY22 before falling back below target to 1.4% and 1.3% in FY23 and FY24, respectively. Despite some upward pressure on the CPI readings, we believe softer real sector data support the bank’s decision to maintain ultra-loose policy for now. Next policy meeting is September21-22 and no change is expected then.

Reserve Bank of New Zealand is beginning to pivot. Governor Orr said “We know we have to slow the economy. We knew we had to be 3% plus to begin that slowing journey and now we’re in a much more comfortable position. We think there’ll be least another couple of rate hikes, but then we hope to be in a position where we can be data driven.” The pivot likely reflects the much weaker than expected retail sales data for Q2 this week, as Orr said “Our outlook is for almost flat real consumption so for us to see retail sales come off like that, it’s not a surprise. It’s a good signal that that monetary policy is biting and we’re doing our work. Consumers will be taking a significant part of the brunt of the slowdown because, we’re an open trading economy. Our monetary policy mostly bites on domestic spending.” Lastly, Orr stressed that “Our core view is no, that we won’t see technical recession. There’s quite a reasonable bounce back in economic activity.”

It’s a bit of a shift from last week when it hiked rates 50 bp to 3.0% and took a more hawkish tone. Updated macro forecasts and expected rate path were released that show a more hawkish stance. The new rate path sees a year-end policy rate of 3.7% vs. 3.4% in May, followed by an end-2023 policy rate of 4.1% vs. 3.9% in May. The bank said it was appropriate to keep raising rates “at pace.” Governor Orr said then that “Our view is that sitting around that 4% official cash rate level buys the monetary policy committee right now significant comfort that we would have done enough to see inflation back to our remit.” Next policy meeting is October 5 and another 50 bp hike to 3.5% is 85% priced in. The swaps market is pricing in 100 bp of tightening over the next 6 months that would see the policy rate peak near 4.0%, which reflects the bank’s new expected rate path.