The broad dollar rally continued last week. GBP, CAD, and CHF outperformed while NOK, JPY, and NZD underperformed. The dollar has posted four straight weekly gains on the back of strong U.S. data and higher U.S. interest rates. This should continue this week, with July retail sales expected to show continued strength in consumption. U.S. financial conditions remain loose and so the Fed needs to do more to slow the economy down. As a result, the dollar is likely to continue gaining.
Despite fairly benign CPI and PPI data, the dollar and U.S. yields ended last week at the highs. The 10-year yield ended the week near 4.15%, just shy of the 4.20% high for this move, while the 30-year yield ended the week near 4.26%, just shy of the 4.32% high for this move. Even the 2-year yield took part, ending the week near 4.90%, just shy of the 4.94% August high. As a result, the 2-year differentials continue to move in the dollar’s favor and DXY ended the week near 102.842, just shy of the 102.910 high for this move. The gains were impressive all around, coming despite fairly benign inflation data reported last week.
Indeed, the recent data out of the U.S. suggest that a September skip seems more and more likely. However, there are clearly some underlying inflation concerns and so we still don't think the Fed is done hiking. The market seems to agree with us as WIRP suggests 10% odds of a hike in September, rising to nearly 35% in November, down slightly from 40% at the start of last week.
FOMC minutes Wednesday will be very important. At the July 25-26 meeting, the Fed hiked rates 25 bp and noted that “Recent indicators suggest that economic activity has been expanding at a moderate pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.” Powell stayed on message and stressed that the Fed hasn’t made a decision to hike at every other meeting, adding that it would hike in September if the data warranted. Powell said the slowdown in June CPI was welcome but stressed it was only one month. He said the Fed needs to stay “on task” and that the Fed needs to hold rates “for some time.” Kashkari speaks Tuesday and should provide some hawkish guidance.
July retail sales Tuesday will be the data highlight. Headline is expected at 0.4% m/m vs. 0.2% in June, while sales ex-auto are expected at 0.4% m/m vs. 0.2% in June. The so-called control group used for GDP calculations is expected at 0.5% m/m vs. 0.6% in June. Consumption remains fairly strong, boosted by the firm labor market and solid wage gains.
Regional Fed surveys for August will start rolling out. Empire survey kicks things off Tuesday and is expected at -0.7 vs. 1.1 in July. New York Fed reports its services index Wednesday. Philly Fed survey will be reported Thursday and is expected at -10.5 vs. -13.5 in July.
Housing data will be closely watched. August NAHB housing market index will be reported Tuesday and is expected to remain steady at 56. July building permits and housing starts will be reported Wednesday. Permits are expected at 1.9% m/m vs. -3.7% in June, while starts are expected at 0.8% m/m vs. -8.0% in June. The housing sector has remained remarkably resilient even as the average national 30-year fixed mortgage rate has risen. It ended last week at 7.53%, the highest since September 2000.
Weekly jobless claims Thursday will be important. That’s because initial claims will be for the BLS survey week containing the 12th of the month. Those are expected at 240k vs. 248k last week. Continuing claims are reported with a one-week lag and are expected at 1.7 mln vs. 1.684 mln last week.
Other minor data will be reported. July import/export prices, June business inventories, and June TIC data will be reported Tuesday. July IP will be reported Wednesday and is expected at 0.3% m/m vs. -0.5% in June. July leading index will be reported Thursday and is expected at -0.4% m/m vs. -0.7% in June.
Canada highlight will be July CPI data Tuesday. Headline is expected at 3.0% y/y vs. 2.8% in June. if so, it would be the first acceleration since April but would still be within the 1-3% target range. Base effects are low in H2 and so there will be some further upward pressure on the y/y rates in the coming months. Elsewhere, core median and core trim are both expected to fall from June to 3.7% y/y and 3.6% y/y, respectively. Other minor data will be reported. June manufacturing sales and July existing homes sales will also be reported Tuesday. July housing starts and wholesale sales will be reported Wednesday. Bank of Canada expectations have steadied. WIRP suggests 20% odds of a hike September 6 and rising to around 55% for the October and December meetings and then topping out near 70% in January.
Eurozone has a quiet week. It reports revised Q2 GDP data and June IP Wednesday. IP is expected at 0.0% m/m vs. 0.2% in May, while the y/y rate is expected at -4.0% vs. -2.2% in May. If so, this would be the deepest y/y contraction since September 2020. June trade data will be reported Thursday. June construction output and final July CPI data will be reported Friday.
Germany reports August ZEW survey Tuesday. Expectations are expected at -15.0 vs. -14.7 in July, while current assessment is expected at -63.0 vs. -59.5 in July. If so, it would continue the deterioration in sentiment from the peak earlier this year and reflects the worsening outlook for Germany.
Market expectations for ECB policy remain subdued. WIRP suggest odds of a 25 bp hike stand near 40% September 14, rise to 65% October 26 and top out near 70% December 14. These odds will rise and fall with the data but Madame Lagarde clearly accentuated the negative last week and that’s what markets should focus on. What’s very interesting to us is that the ECB may stop hiking before the Fed does and we don't think the markets have priced this risk in yet.
The monthly U.K. data dump continues. Labor market data will be reported Tuesday, with unemployment expected to remain steady for the three months ending in June. Total average weekly earnings are expected at 7.4% y/y vs. 6.9% previously, while earnings ex-bonus are expected at 7.4% y/y vs. 7.3% previously. When all the recent wage agreements for public sector workers go into effect, this should put further upward pressure on average earnings.
July CPI data will be reported Wednesday. Headline is expected at 6.8% y/y vs. 7.9% in June, core is expected at 6.8% y/y vs. 6.9% in June, and CPIH is expected at 6.3% y/y vs. 7.3% in June. If so, headline would be the lowest since February 2022 but still well above the 2% target. And so the Bank of England is expected to continue hiking. WIRP suggests 85% odds of a 25 bp hike September 21, while a 25 bp hike December 14 is nearly priced in that would see the bank rate peak near 5.75% vs. 6.5% at the start of last month. However, the swaps market sees the rate staying at 5.75% over the next twelve months before rate cuts begin in the subsequent twelve months.
Other key data will be reported. August GfK consumer confidence will be reported Thursday and is expected at -29 vs. -30 in July. July retail sales will be reported Friday. Headline is expected at -0.5% m/m vs. 0.7% in June, while sales ex-auto fuel are expected at -0.6% m/m vs. 0.8% in June. The June GDP and IP data reported last week were strong but the July retail sales data are likely to show a weaker picture as Q3 started.
Norges Bank meets Thursday and is expected to hike rates 25 bp to 4.0%. At the last meeting June 22, the bank delivered a hawkish surprise and hiked rates 50 bp to 3.75% vs. 25 bp expected and said rates will “most likely be raised further in August.” Updated macro forecasts were released then and the expected rate path was shifted higher to a peak of 4.25% this year. The swaps market sees a more dovish path and is pricing in a peak policy rate peak near 4.0% over the next six months before easing begins over the subsequent six months.
Sweden reports July CPI Tuesday. Headline is expected to remain steady at 9.3% y/y, CPIF is expected to pick up a tick to 6.5% y/y, and CPIF ex-energy is expected to fall a tick to 8.0% y/y. If so, targeted CPIF would accelerate for the first time since February and move further above the 2% targe. Next Riksbank meeting is September 21 and a 25 bp hike to 4.0% is expected. At its last meeting June 29, the bank hiked rates 25 bp to 3.75% and said rates would be hiked at least one more time this year. Forward guidance shifted slightly more hawkish as the policy rate was seen peaking at 4.05% in Q2 2024 vs. 3.65% in the April forecasts and staying there through Q2 2025 before falling to 3.75% by Q2 2026 vs. 3.35% in April. However, the swaps market sees about 50% odds of one more hike to 4.25% in H1 2024 and we expect those odds to rise if inflation remains stubbornly high.
Japan highlight will be Q2 GDP data Tuesday. Growth is expected to remain steady at 0.7% q/q, while the SAAR is expected at 2.9% vs. 2.7% in Q1. If so, it would be the third straight quarter of acceleration. However, recent monthly indicators suggest the economy was losing momentum as Q3 began.
July trade data will be reported Thursday. Exports are expected at -0.9% y/y vs. 1.5% in June, while imports are expected at -14.7% y/y vs. -12.9% in June. If so, it would be the first contraction in exports since and the deepest contraction in imports since .
July national CPI Friday will also be important. Headline is expected to remain steady at 3.3% y/y, while core (ex-fresh food) is expected to fall two ticks to 3.1% y/y. Core ex-energy is expected to pick up a tick to 4.3% y/y, underscoring that much of the improvement in inflation has been from energy. And yet the Bank of Japan seems to be in no hurry to hike rates as its forecasts see core inflation falling back below the 2% target in both FY24 and FY25.
Reserve Bank of Australia releases its minutes Tuesday. At that August 1 meeting, the bank kept rates steady at 4.10% and Governor Lowe said “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data.” Since then, Lowe has emphasized that the bank is in data-dependent mode by noting “We’re kind of in a world where we’re just making I hope small adjustments to calibrate policy.” Of note, the RBA has kept rates steady for two straight meetings and Lowe will chair his last meeting September 5. Deputy Governor Michele Bullock takes over September 18 for a seven-year term as Governor and she will chair her first meeting October 3. WIRP suggest virtually no odds of a hike at either meeting, but then rise modestly to top out near 55% in Q1. Q2 wage index will also be reported Tuesday and is expected to remain steady at 3.7% y/y.
Australia data highlight will be July jobs reports Thursday. Consensus sees 15.0k job added vs. 32.6k in June, while the unemployment rate is seen up a tick to 3.6%. Unemployment has barely budged from the all-time low of 3.4% from last October. With the labor market remaining tight, the RBA will be on the alert for greater wage pressures.
Reserve Bank of New Zealand meets Wednesday and is expected to keep rates steady at 5.5%. At the last meeting July 12, the bank kept rates steady at 5.5% and was the first hold since the bank started tightening back in 2021. It noted that “Interest rates are constraining spending and inflation pressure as anticipated and required. The Committee is confident that with interest rates remaining at a restrictive level for some time, consumer price inflation will return to within its target range.” Updated macro forecasts and a press conference by Governor Orr will come at this meeting. It remains to be seen whether the RBNZ is eventually forced to restart the tightening cycle but for now, WIRP suggests less than 10% odds of a hike October 4 and rising to top out around 33% November 29. At the same time, easing is not priced in until H2 2024. Q2 PPI data will be reported Thursday.