• Sanctions, PCE, and Jackson Hole take the spotlight. USD slump to stabilize.

• Canada’s Q2 growth rebound clouded by deepening trade war.

• MNB to cut. BOT to hold. BOK and BSP to hike.

The Treasury’s buyback announcement dominated market action last week. Longer term Treasury yields initially fell but the relief proved fleeting, USD weakened against all major currencies and gold rallied. The Treasury’s intervention blurred the lines between improving market functioning and suppressing borrowing costs to contain fiscal stress.

Treasury Secretary Scott Bessent attempted to ease concerns over US fiscal policy noting the White House would soon announce “an increased focus on fiscal consolidation.” However, the Congressional Budget Office offers little evidence of fiscal consolidation, projecting historically large budget deficits and debt rising to a record 120% of GDP by 2036. Without credible spending cuts or revenue increases, the White House plan risks being little more than putting lipstick on a pig.

Regardless, we expect the USD slump to stabilize this week. The widening US growth edge over other major economies, reflected by the composite PMIs, can offset some of the structural drag to USD from worsening US fiscal credibility.

PCE to Say More than Warsh

Treasury Secretary Scott Bessent plans to unveil on Monday sweeping new measures against Iran “like have never been seen in the history of economic isolation on a country.” The US July PCE follows on Wednesday, before Fed Chair Kevin Warsh takes center stage at the Jackson Hole Economic Symposium on Friday.

This year's topic at the Fed’s Wyoming mountain retreat is “Financial Innovation: Implications for Payments and Policy.” Clear policy signal will likely be scarce given Warsh’s reluctance to provide forward guidance and the absence of a Q&A session.

In the past, Fed chairs had on several occasions used the annual retreat in Wyoming to signal major shifts in the policy outlook. Ben Bernanke opened the door to QE2 in 2010 and prepared markets for QE3 in 2012, while Jay Powell unveiled average inflation targeting in 2020, delivered a hawkish shock in 2022, and signaled the start of the easing cycle in 2024.

The symposium has also produced prescient warnings. In 2005, Raghuram Rajan warned that financial innovation had made the system more fragile. Two years later the subprime crisis erupted, triggering the 2008 global financial crisis.

ADP private employment change for the week ending August 8 will be of interest (Tuesday). While the weekly ADP is poor at predicting monthly NFP change, it does a better job at capturing the broad direction of travel. And it currently points to weakening labor demand.

US July PCE to show inflation contained and consumer spending activity flat. Headline PCE is seen rising 0.1% m/m vs. -0.1% in June and 3.6% y/y vs 3.7% in June. Core PCE is expected to rise 0.2% m/m vs. 0.1% in June and remain at 3.3% y/y for a second straight month. Real personal spending is expected at 0.0% m/m vs. 0.4% in June.

Fed funds futures price in a 40% probability of a 25bps hike to 3.75-4.00% at the next September 16 meeting and a total of nearly 50bps of tightening over the next twelve months. In our view, the risk is skewed towards a dovish Fed repricing. The US labor market is in balance, wage growth is consistent with the Fed’s 2% inflation target, and Fed policy is already somewhat restrictive.

Canada GDP: Comeback Under Cloud

Canada’s economy is expected to recover in Q2 boosted by domestic demand and exports (Friday). Real GDP is seen rising 3.4% SAAR vs. -0.1% in Q1, which would be stronger than the Bank of Canada’s (BOC) 2.5% projection. Statistics Canada’s advanced July GDP estimate will also offer an early read on Q3.

However, the worsening US-Canada trade war risk derailing the growth rebound. Tade talks between the two countries collapsed on Friday, triggering a fresh round of tariffs. 50% tariffs on nearly $20 billion in imports from Canada (0.85% of Canada’s GDP) kicked in on Saturday. The tariff applies to a range of products from wine to hockey sticks to cement. The tariff does not apply to energy, potash, products subject to tariffs under Section 232, and other goods like fish or critical minerals. Canada will match the new US tariffs dollar for dollar from September 8.

Encouragingly, the BOC can afford to keep rates on hold to support economic activity because core inflation remains close to the 2% target. As such, there is room for the swaps curve (which implies 75bps of tightening in the next twelve months) to adjust lower against CAD in the near term.

Australia Inflation: Cool Runnings

Australia CPI inflation seen easing in July (Wednesday). Headline CPI is expected at 3.3% y/y vs. 3.8% in June while trimmed mean CPI is expected at 3.5% y/y vs. 3.6% in June. The monthly CPI is Australia’s primary measure of inflation, but the RBA continues to focus on trimmed mean inflation from the quarterly CPI. The RBA projects the trimmed mean CPI to edge down to 3.3% y/y by end-December from 3.6% y/y in Q2, consistent with softening labor market conditions and cooling private sector wage growth.

The RBA Minutes of the August meeting (Tuesday) will offer some insights on the likelihood of another hike, while Q2 private capital expenditure data (Thursday) will help shape GDP forecasts ahead of the September 2 release. RBA cash rate futures continue to imply 60% odds of one final 25bps hike by year end to 4.60%.

In our view, the risk is skewed towards a more extended pause in the RBA tightening cycle because policy is already somewhat restrictive. Still, Australia’s attractive carry alongside the country’s strategic exposure to commodities linked to energy, AI, and defense remain key AUD tailwinds.

Central Bank Watch

National Bank of Hungary (MNB) is widely expected to deliver a third straight 25bps rate cut to 5.50% (Tuesday) after flagging in July it “sees room for further interest rate cuts throughout the summer.” MNB’s guidance to keep real interest rate positive and Hungary’s government plan to meet euro adoption conditions by 2030 are important tailwinds for HUF.

Bank of Thailand (BOT) is widely expected to keep the policy rate at 1.00% for a third straight meeting (Wednesday). Negative real rates should keep THB an Asian FX laggard.

Bank of Korea (BOK) is expected to deliver a back-to-back 25bps hike to 3.00% (Thursday). A minority of analysts polled by Bloomberg (5 of 17) have no change penciled in. We expect BOK to raise rates which can offer KRW additional support.

After voting unanimously to lift rates at its last July meeting, BOK stressed “that it will be necessary to continue a policy stance consistent with further rate hikes.” Indeed, real GDP growth is on track to exceed the bank’s 2.6% forecast for 2026, and inflation remains above the 2% target level.

Philippine central bank (BSP) is expected to deliver a third consecutive 25bps hike to 5.00% (Thursday). A minority of analysts polled by Bloomberg (4 of 22) have no change penciled in. We expect BSP to raise rates to curtail PHP weakness. USD/PHP rallied to a record high near 62.00 last week, underpinned in part by firmer crude oil prices.