• Markets are still digesting Powell’s Jackson Hole speech; we are curious how other Fed officials will spin this; market pricing for the Fed hasn't changed
  
• There are two key ECB speakers today; Germany reported a soft August IFO survey; Riksbank minutes were released
  
• Early polls suggest a two-person race for the LDP leadership; PBOC kept its 1-year MLF rate steady at 2.30%, as expected

The dollar is getting some traction after Powell’s dovish speech. DXY is trading slightly higher near 100.763 on some Middle East tension driven by Israel and Lebanon hostilities over the weekend. JPY and CHF are outperforming, with USD/JPY trading lower near 144 and EUR/CHF trading lower near .9453. Elsewhere, sterling is trading lower near $1.3190 and the euro is trading lower near $1.1175. Despite Powell’s lack of any pushback, we continue to believe that market expectations for aggressive Fed easing remain overdone (see below). We continue to believe that the divergence story remains in place (supported by the August PMIs) and should eventually support the dollar. However, after Jackson Hole, it will likely take even longer for the current dovish Fed market narrative to run its course as the dollar remains vulnerable near-term.

AMERICAS

Markets are still digesting Powell’s Jackson Hole speech. Rather than sticking with the gradual and cautious message that most Fed officials had been pushing, Powell went full dove as he said, “The time has come for policy to adjust.” He cautioned that “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.” However, his bias became clear when he said, “We do not seek or welcome further cooling in labor market conditions.” For emphasis, he added that the slowdown in the labor market was “unmistakable.”

We are curious how other Fed officials will spin this. Daly speaks today. Up until Powell spoke Friday, virtually every Fed speaker had laid out a gradual, cautious path. Indeed, some even said that they need to see more data before committing to a cut. To us, it seems that with one more round of key economic data coming out before the September 17-18 FOMC meeting, Powell pre-committed and belied the data dependent approach he advocated.

Yet market pricing for the Fed really hasn't changed. How could it, when it's already near maximum dovish? 100 bp of easing is still seen by year-end, with 200 bp total seen over the next 12 months. Odds of a 50 bp move in September are between 30-35%. With his focus on the labor market, it’s clear that the jobs data is the most important for policy. If we get a strong August NFP (above 200k), then we lean towards 25 bp. If we get a weak reading (below 100k), then we think a 50 bp cut becomes live. Anything in between and it’s a toss-up. Of note, Bloomberg consensus for August NFP is 160k vs. 114k in July, while its whisper number currently comes in at 150k.

Q3 growth appears to be solid. The Atlanta Fed’s GDPNow model is tracking Q3 growth at 2.0% SAAR and will be updated today after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q3 growth at 1.9% SAAR and will be updated Friday. It should also publish its first estimate for Q4 at the same time. While both model estimates are down from their earlier highs, growth near trend remains quite impressive in light of the Fed’s tightening.

Regional Fed surveys for August will continue to roll out. Dallas manufacturing will be reported today and is expected at -16.3 vs. -17.5 in July. Dallas services and Richmond manufacturing and services wrap things up tomorrow. July durable goods orders will also be reported today and are expected at 5.0% m/m vs. -6.7% in June.

EUROPE/MIDDLE EAST/AFRICA

There are two key ECB speakers today. Knot and Nagel speak later today. Chief Economist Lane sounded hawkish at Jackson Hole as he warned that “The return to target is not yet secure. In particular, the monetary stance will have to remain in restrictive territory for as long as is needed to shepherd the disinflation process towards a timely return to the target.” However, Lane also acknowledged that “A rate path that is too high for too long would deliver chronically below-target inflation over the medium term and would be inefficient in terms of minimizing the side effects on output and employment.” The ECB can’t have it both ways and so with the growth outlook looking quite soggy, we believe it will continue easing with a 25 bp cut in September.

Germany reported a soft August IFO survey. Headline came in at 86.6 vs. 86.0 expected and 87.0 in July, with both current assessment and expectations falling to 86.5 and 86.8, respectively. Headline is the lowest since February and follows other sentiment indicators lower. Germany reports September GfK consumer Wednesday. Headline is expected at -18.2 vs. -18.4 in August. Germany’s overall growth outlook is deteriorating as the composite PMI fell to a 5-month low at 48.5 on slower services sector expansion and a deeper downturn in manufacturing activity.

Riksbank minutes were released. At the August 20 meeting, it cut rates 25 bp to 3.5% and warned that “the policy rate can be cut two or three more times this year, which is somewhat faster than the Executive Board assessed in June.” However, minutes revealed that a 50 bp cut was discussed before the bank decided on the smaller cut as most board members felt that more gradual cuts added predictability to the process. Deputy Governor Breman noted that the bank holds more policy meeting now, giving it more opportunities to adjust policy. Governor Thedeen stressed that a bigger rate cut “would require more than just isolated negative economic outcomes or temporary market movements,” which suggest the bar is high for a 50 bp cut. Thedeen added that he saw three cuts as more likely than two, the swaps market agrees and is pricing in 75 bp of cuts by year-end. With inflation tracking the Riksbank’s forecasts, we doubt the bank will deliver more easing than is currently priced in.

ASIA

Early polls suggest a two-person race for the LDP leadership. FNN poll shows former Environment Minister Koizumi with 22.4% support, followed by former Defense Minister Ishiba with 21.6% and Economic Security Minister Takaichi with 10.8%. Elsewhere, a Yomiuri poll shows Ishiba leading with 22% followed by Koizumi with 20% while a TV Asahi poll shows Ishiba leading with 27% followed by Koizumi with 23%. The election will be held September 27. All LDP members of parliament have a vote, while an equal number of votes will be cast by rank-and-file members of the LDP. A simple majority of these total votes is needed to win. If no one wins, a runoff is held between the top two candidates.

PBOC kept its 1-year MLF rate steady at 2.30%, as expected. This was too soon to cut again after the surprise 20 bp cut July 25, but further stimulus is likely as the economy struggles. July industrial profits will be reported tomorrow. Weakness in the mainland economy is likely to persist over the medium-term, as policymakers so far have refrained from taking the painful measures necessary to address the huge debt overhang.