- Our broad U.S. macro calls will be tested this week; Fed manufacturing surveys for August wrap up with Dallas reporting today; all eyes are on Hurricane Ida after it made landfall last night
- Germany and Spain report EU harmonized August CPI readings; ECB Governing Council member Villeroy sounded less dovish; ECB asset purchases for the week ending August 27 will be reported; the trucker shortage in the U.K. needs to be monitored
- Japan reported firm July retail sales data; reports suggest Suga has asked LDP Secretary General Nikai to come up with a fiscal stimulus package; Chinese state media is calling President Xi’s regulatory crackdown “a profound revolution”
The dollar is stabilizing after the post-Powell sell-off. After trading as low as 92.598 earlier, DXY has since recovered to trade around 92.70. DXY had an outside down day Friday, which warns of further losses. The euro tested the August 13 high near $1.1805 but so far has been unable to make a clean break. A move above $1.1815 would set up a test of the July 30 high near $1.1910. Sterling continues to lag and so far has been unable to break above $1.38. USD/JPY remains heavy below 110 and a break of 109.70 and then 109.55 is needed to set up a test of the August 16 low near 109.10, We remain positive on the dollar but acknowledge that stronger U.S. data this week is needed to offset the impact of Powell’s speech.
Our broad U.S. macro calls will be tested this week. As Powell reminded us, the data remain key. If the outlook changes and the U.S. economy slows significantly, then it would be a likely game-changer for the dollar. The Fed would have no choice but to adjust its expected tapering path significantly. Yet even then, the dollar may hold up better than expected since a U.S. recession would likely be part of a broader global downturn. It all goes back to relative performances.
Fed manufacturing surveys for August wrap up with Dallas reporting today. It is expected at 23.0 vs. 27.3 in July. So far, Kansas City Fed came in at 29 vs. 30 in July, Richmond Fed came in at 9 vs. 27 in July, Empire survey came in at 18.3 vs. 43.0 in July, and Philly Fed came in at 19.4 vs. 21.9 in July. Virtually all the survey and PMI readings were at or near record highs this summer and so some moderation is to be expected from these lofty levels. This does not mean the manufacturing sector is slowing sharply. July pending home sales (0.4% m/m expected) will also be reported. Canada reports Q2 current account data.
All eyes are on Hurricane Ida after it made landfall last night. As of this writing, all of New Orleans was without power and utility companies say the outages could last for weeks due to “catastrophic damage” to the its transmission system. Ida has weakened but the rain continues and many are expecting historic flooding on top of the high winds. It is still too early to estimate the potential damage and yet by all accounts so far, Ida is not as bad as Katrina was in terms of size and intensity.
Germany and Spain report EU harmonized August CPI readings. The former is expected at 3.4% y/y vs. 3.1% in July, and the German state data already reported today suggest upside risks. Indeed, Spain already reported at 3.3% y/y vs. 2.9% expected and actual in July. France and Italy report EU harmonized CPI readings tomorrow. Later that day, the eurozone reading will be reported and headline inflation is expected at 2.7% y/y vs. 2.2% in July. Eurozone PPI will be reported Thursday and is expected to accelerate to 11.0% y/y vs. 10.2% in June. The ECB hawks will be spooked by the rising inflation numbers but the doves are firmly in control right now and so policy is likely to remain loose for the time being.
That said, European Central Bank Governing Council member Villeroy sounded less dovish. He said the bank should consider more favorable financing conditions in the eurozone in deciding on the pace of PEPP next week. While this suggests a possible slowing in asset purchases, Villeroy stressed that any changes would not amount to tapering. He said “On monthly volumes, we are looking at the favorable financing conditions, and we should underline that they are more favorable than at our June meeting. We have to decide the monthly volumes for the fourth quarter.” Villeroy is considered one of the uber-doves and so his comments are noteworthy. While the bank will discuss changes to its asset purchases at the next meeting September 9, we do not think a consensus will be reached until the December 16 meeting.
ECB asset purchases for the week ending August 27 will be reported. Net purchases were EUR16.6 bln for the week ending August 20 vs. EUR17.2 bln for the week ending August 13 and EUR16.4 bln for the week ending August 6. The ECB has been aiming for net weekly purchases of around EUR20 bln since the accelerated pace began in March, but have fallen a bit short due to thin market conditions over the summer. Of note, July eurozone M3 slowed as expected to 7.6% y/y vs. 8.3% in June. This was the slowest since March 2020 and is extremely disappointing in light of ongoing ECB asset purchases.
The trucker shortage in the U.K. needs to be monitored. While it’s easy to make jokes about milkshake shortages, the lack of truck drivers is leading to deeper supply chain issues as industry officials warn of potential shortages around Christmas. There are of course upside risks to wages and prices if the problem persists. While this is a global problem, the U.K. is also suffering from the impact of Brexit. Many U.K. firms have asked the government to have EU truck drivers added to a special visa program to make it easier to fill the shortfall in workers. However, the government has so far refused, arguing that companies can lure staff with better wages. Stay tuned.
Japan reported firm July retail sales data. Sales rose 1.1% m/m, nearly trip the expected 0.4% m/m but still down from the 3.1% gain in June. The strength is surprising given the lockdowns in place and is unlikely to be sustained as we move through Q3. We fully expect Suga to announce a fiscal package soon to help boost the slumping economy and shore up his public support. For now, the Bank of Japan is on hold as it awaits fiscal stimulus. Next policy meeting is September 21-22 and no change is expected then.
Indeed, reports suggest Suga has asked LDP Secretary General Nikai to come up with a fiscal stimulus package. The measures would be part of Suga’s campaign pledge for the LDP leadership vote scheduled for September 29. Over the weekend, Senior LDP member Kishida called for a new stimulus package worth “several tens of trillion yen” as soon as possible. Kishida is a former Foreign Minister and will challenge Prime Minister Suga for leadership of the LDP next month. As such, we expect Suga to announce a significant package north of JPY10 trln.
Chinese state media is calling President Xi’s regulatory crackdown “a profound revolution.” That suggests we are closer to the beginning of the process than the end. In recent speeches, Xi has been stressing the need for “common prosperity” as a euphemism for better income distribution, which suggest that the crackdown also serves as a warning to the heads of the tech giants who have become enormously wealthy. Lastly, authorities announced tighter restrictions on gaming, limiting minors to three hours of online play per day. Gaming has been denounced by state media as “spiritual opium” and this is clearly part of Xi’s overarching plan to remake the domestic social and economic landscape.