The dollar came under pressure last week after lower than expected inflation data. However, the subsequent Fed messaging was clear: it does not put too much weight on one data point and it remains on track to continue hiking rates. As a result, the dollar got some traction as last week drew to a close and we expect the recovery to continue this week. FOMC minutes and July retail sales will be key for the greenback’s near-term direction.
AMERICAS
Fed tightening expectations continue to adjust. WIRP suggests a 50 bp hike is fully priced in for the September 20-21 FOMC meeting, with 50% odds of a 75 bp hike. Looking ahead, the swaps market is now pricing in a 3.75% terminal rate vs. 3.5% at the start of last week. We think this is the correct read and if the market eventually gives the Fed 75 bp next month, the Fed will take it. The market is still pricing in a quick turnaround by the Fed into an easing cycle in H1 2023. It's pretty clear that the Fed doesn't see it that way and the data bear that out, at least for now. Market should also reprice these easing expectations in the coming days and weeks.
FOMC minutes Wednesday will be very important for this repricing. At that meeting, the bank hiked rates 75 bp and set a generally hawkish tone. It wasn’t until Chair Powell’s post-decision press conference that markets saw a dovish pivot, when he acknowledged the pace of future rate hikes will depend on incoming data. Powell noted that another unusually large hike would really depend on the data, adding unnecessarily that it will likely be appropriate to slow the pace of hikes at some point. While this is simply stating the obvious, the markets seized on this as evidence that he was pivoting more dovish. Because the Fed has embarked on a corrective communication effort since that meeting, the minutes could reveal more about the Fed’s thinking then. George and Kashkari speak Thursday. Barkin speaks Friday.
July retail sales Wednesday will be the U.S. data highlight. Headline sales are expected at 0.1% m/m vs. 1.0% in June, while sales ex-autos are expected flat m/m vs. 1.0% in June. Lastly, the so-called control group used for GDP calculations is expected at 0.6% m/m vs. 0.8% in June. The Atlanta Fed’s GDPNow model is currently tracking 2.5% SAAR growth for Q3. 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 Tuesday.
Regional Fed manufacturing surveys will start rolling out. Empire survey kicks things off Monday and is expected at 5.0 vs. 11.1 in July. Philly Fed reports Thursday and is expected at -5.0 vs. -12.3 in July. In between, July IP will be reported Tuesday and is expected at 0.3% m/m vs. -0.2% in June.
Other minor data will be reported. August NAHB housing index and TIC data will be reported Monday. July building permits and housing starts will be reported Tuesday. June business inventories will be reported Wednesday. July existing home sales and leading index will be reported Thursday. Weekly jobless claims Thursday will be closely watched. That is because initial claims are for the BLS survey week containing the 12th of the month and are expected at 265k vs. 262k the previous week.
Canada highlights will be July CPI data Tuesday and June retail sales data Friday. Headline CPI is expected at 7.6% y/y vs. 8.1% in June, while core common is expected at 4.7% y/y vs. 4.6% in June. Headline sales are expected at 0.3% m/m vs. 2.2% in May, while sales ex-autos are expected at 0.8% m/m vs. 1.9% in May. Other minor data will be reported. June manufacturing and wholesale trade sales as well as July existing home sales will be reported Monday. July housing starts will be reported Tuesday. Bank of Canada meets September 7 and a 50 bp hike is fully priced in, with nearly 40% odds of a 75 bp move. The swaps market is pricing in only 100 bp of tightening over the next 6 months that would see the policy rate peak near 3.5%, followed by the start of an easing cycle the subsequent 6 months. We disagree with this expected pivot by the BOC.
EUROPE/MIDDLE EAST/AFRICA
The eurozone has a quiet week. German August ZEW consumer survey will be reported Tuesday. Expectations are expected at -52.7 vs. -53.8 in July, while current situation is expected at -48.0 vs. -45.8 in July. Germany reports July PPI Friday and is expected at 32.0%% y/y vs. 32.7% in June. Final eurozone Q2 GDP data will be reported Wednesday and final eurozone July CPI will be reported Thursday. ECB tightening expectations have steadied a bit. WIRP suggests a 50 bp hike is about 80% priced in for September 8. The swaps market is pricing in 150 bp of tightening over the next 12 months that would see the deposit rate peak near 1.5%.
U.K. data dump continues. Labor market data will be reported Tuesday. Employment is expected to rise 273k in the three months through June, while the unemployment rate is seen steady at 3.8%. July CPI data will be reported Wednesday. Headline is expected at 9.8% y/y vs. 9.4% in June, core is expected at 6.0% y/y vs. 5.8% in June, and CPIH is expected at 8.6% y/y vs. 8.2% in June. The Bank of England sees headline inflation peaking near 13% in October. August GfK consumer confidence will be reported Thursday and is expected to fall a point to -42. July retail sales and public sector net borrowing will be reported Friday. Headline sales are expected at -0.2% m/m vs. -0.1% in June while sales ex-auto fuels are expected at -0.3% m/m vs. 0.4% in June.
The BOE is set to continue tightening as inflation spirals ever higher. WIRP suggests a 25 bp hike September 15 is fully priced in, with 75% odds of a larger 50 bp move. The swaps market is pricing in 150-175 bp of tightening over the next 12 months that would see the policy rate peak between 3.25-3.50%, up from 3.0-3.25% at the start of last week.
Norges Bank meets Thursday and is expected to hike rates 50 bp to 1.75%. Last week, July CPI readings came in hot. Headline came in at 6.8% y/y vs. 6.3% expected and actual in June, while underlying came in at 4.5% y/y vs. 3.8% expected and 3.6% in June. At the last policy meeting June 23, Norges bank hiked 50 bp to 1.25% vs. 25 bp expected. It warned that “In the Committee’s assessment, a markedly higher policy rate is needed to stabilize inflation around the target.” It also flagged a likely 25 bp hike to 1.5% this meeting but last week’s CPI data pretty much cements another 50 bp. Of note, the updated June rate path suggested a steeper tightening cycle ahead as the bank now sees the policy rate peaking near 3.1% in 2024 vs. 2.5% previously. This is more aggressive than the market, as the swaps market is pricing in 100 bp of tightening over the next 12 months that would see the policy rate peak near 2.25%. We believe market pricing will eventually move closer to the Norges Bank’s expected path.
ASIA
Japan has a busy week. Q2 GDP data will be reported Monday. Annualized growth is expected at 2.6% vs. -0.5% in Q1. Private consumption and business spending are expected to add to growth, while inventories are expected to subtract and net exports are expected to be neutral for growth. Despite the recovery, policymakers remain concerned about H2 as virus numbers have risen sharply in Q3 and have weighed on some parts of the economy. July trade data and June core machine orders will be reported Wednesday. Exports are expected at 17.4% y/y vs. 19.3% in June, imports are expected at 45.5% y/y vs. 46.1% in June, and orders are expected at 7.7% y/y vs. 7.4% in May.
July national CPI data will be reported Friday. Headline is expected at 2.6% y/y vs. 2.4% in June, while core (ex-fresh food) is expected at 2.4% y/y vs. 2.2% in June. Core ex-energy is expected at 1.1% y/y vs. 1.0% in June and this shows that without energy prices, inflation remains subdued. The latest macro forecasts from the BOJ show core inflation above the 2% target this FY but falling back below target in FY23 and FY24. For now, the data support the bank’s decision to maintain ultra-loose policy for now.
Reserve Bank of New Zealand meets Wednesday and is expected to hike rates 50 bp to 3.0%. Updated macro forecast and expected rate path will be released. At the last meeting July 13, the bank hiked rates 50 bp and said it was appropriate to keep raising rates at pace. It added that the May rate path remained consistent with its CPI and jobs goals. The swaps market is pricing in 125-150 bp of tightening over the next 6 months that would see the policy rate peak between 3.75-4.0%, which would be consistent with the bank’s expected rate path from May. Q2 PPI data will be reported earlier that same day. July trade data will be reported Friday.
Australia highlight will be July jobs data Thursday. Consensus sees 26.5k jobs added vs. 88.4k in June, while the unemployment rate is seen steady at 3.5%. Ahead of that, RBA minutes will be released Tuesday. Recall that the bank hiked rates 50 bp to 1.85%, as expected. Governor Lowe said “The board expects to take further steps in the process of normalizing monetary conditions over the months ahead, but it is not on a pre-set path,” adding that the “size and timing” of future moves will be “guided by the incoming data.” The bank noted that “Inflation is expected to peak later this year and then decline back towards the 2–3% range. The expected moderation in inflation reflects the ongoing resolution of global supply-side problems, the stabilization of commodity prices and the impact of rising interest rates.” WIRP suggests a 25 bp hike at the next meeting September 6 is fully priced in, with only 50% odds of a larger 50 bp move. Same goes for the October 4 and November 1 meetings. Looking ahead, the swaps market is pricing in 195 bp of tightening over the next 12 months that would see the policy rate peak near 3.80%.
