The broad dollar rally against the majors continued last week. DXY rose for the sixth straight week and is the longest streak since May 2022. AUD, NZD, and CHF outperformed while GBP, JPY, and EUR underperformed. We believe Fed Chair Powell delivered as hawkish a message as he could whilst still remaining data dependent. Jobs data this Friday takes on even greater importance. When all is said and done, we believe the underlying U.S. economic resilience will require further tightening by the Fed and that will keep upward pressure on the dollar.
AMERICAS
Markets are still digesting Fed Chair Powell’s Jackson Hole remarks. He said the Fed is prepared to raise rates further if appropriate and added that persistent above-trend growth could warrant this. Powell stressed that the economy needs to grow below trend in order to get inflation back to the 2% target, and that if labor market does not ease, the Fed will respond. He said the Fed will “proceed carefully” on whether to hike again. Lastly, Powell said that the Fed cannot “identify with certainty” the neutral rate of interest. The markets initially took this as dovish but then reversed when the realization came Powell can’t and won’t promise outright that the Fed will hike again. He stressed that it's data-dependent and right now, the data say the Fed needs to hike again. 2-year interest rate differentials continue to move in the dollar’s favor.
Fed speakers this week should relay a similar message. Barr speaks Monday and Tuesday. Bostic and Collins speak Thursday. Bostic and Mester speak Friday. Of these speakers, Bostic is the most dovish while Mester is the most hawkish. We view Barr and Collins as centrists, thought remarks from Collins last week suggest she leans hawkish. WIRP suggests odds 20% of a hike September 20, up from 10% at the start of last week, with odds rising to nearly 65% November 1 vs. 40% at the start of last week. More importantly, the first cut has been pushed out to June from May at the start of last week.
The jobs report Friday will be the data highlight. Consensus sees 168k for NFP vs. 187k in July, while the unemployment rate is seen steady at 3.5% and average hourly earnings are seen falling a tick to 4.3% y/y. Of note, Bloomberg’s whisper number stands at 170k. Ahead of that, ADP reports its private sector jobs estimate Wednesday and consensus sees 198k vs. 324k in July. The preliminary benchmark revisions to the establishment survey released last week had no significant implications for the labor market, which remains tight as ever.
Other labor market data will be reported. July JOLTS job openings will be reported Tuesday and is expected at 9.450 mln vs. 9.582 mln in June. August Challenger job cuts and weekly jobless claims will be reported Thursday. Initial claims are expected at 235k vs. 230k last week while continuing claims are expected at 1.705 mln vs. 1.702 mln last week.
July PCE readings Thursday will also be important. Headline is expected at 3.3% y/y vs. 3.0% in June, while core is expected at 4.2% y/y vs. 4.1% in June. Of note, the Cleveland Fed’s Nowcast model estimates July headline and core PCE at 3.2% y/y and 4.2% y/y, respectively. For August, the Cleveland Fed estimates headline and core PCE at 3.6% y/y and 4.0% y/y, respectively. In other words, not much progress in meeting the 2% target is likely near-term. Until the economy slows to sub-trend growth and the labor market loosens, it’s hard to see how we can get significant disinflation and so we believe the Fed will have to go higher for longer, as it has promised. Personal income and spending will be reported at the same time and are expected at 0.3% m/m and 0.7% m/m, respectively. In y/y terms, the retail sales “control group” picked up in July and we expect personal spending (which includes services) to also remain firm.
Key survey readings for August will be reported. Dallas Fed manufacturing index will be reported Monday and is expected at -19.0 vs. -20.0 in July. This well be followed by its services index Tuesday. Chicago PMI will be reported Thursday and is expected at 44.1 vs. 42.8 in July. ISM manufacturing PMI will be reported Friday and headline is expected at 47.0 vs. 46.4 in July. Keep an eye on prices paid and employment, which stood at 42.6 and 44.4 in July, respectively.
We get another revision to Q2 GDP Wednesday. However, this is old news as markets look ahead to Q3 and Q4. In that regard, the Atlanta Fed’s GDPNow model is tracking Q3 growth at 5.9 % SAAR vs. 2.4% in Q2. While this is likely to be revised down in the coming weeks, momentum clearly persists and we think it is likely to mark the fifth straight quarter of at or above trend growth at a time when the Fed is trying to engineer below trend growth. Next model update comes Thursday. Of note, Bloomberg consensus sees Q3 growth at 1.5% SAAR and Q4 at 0.3% SAAR.
August Conference Board consumer confidence will be reported Tuesday. Headline is expected at 116.2 vs. 117.0 in July. Last week, final August University of Michigan consumer sentiment came in at 69.5 vs. 71.2 preliminary. Both current conditions and expectations fell nearly two full points from preliminary 77.4 and 67.3, respectively. As such, we see downside risks to the Conference Board reading this week.
Other minor data round out the U.S. picture. June FHFA and S&P CoreLogic house price indices will be reported Tuesday. July advance trade balance (-$90.0 bln expected), wholesale/retail inventories, and pending home sales (-1.0% m/m expected) will be reported Wednesday. July construction spending (0.5% m/m expected) and August vehicle sales (15.5 mln annual rate expected) will be reported Friday.
Canada highlight is Q2 GDP data Friday. Growth is expected at 1.2% annualized vs. 3.1% in Q1. Q2 current account data will be reported Thursday and is expected at -CAD11.2 bln vs. -CAD6.17 bln in Q1. If so, it would be the largest deficit since Q1 2020. August S&P Global manufacturing PMI will be reported Friday. The economy is showing signs of slowing but inflation picked up in July and so the Bank of Canada will remain on alert. WIRP suggests 25% odds of a hike September 6, rising to 60% October 25 and topping out around 70% December 6.
EUROPE/MIDDLE EAST/AFRICA
Eurozone August CPI data will be the highlight. Germany and Spain report Wednesday. Germany’s EU Harmonised inflation is expected at 6.4% y/y vs. 6.5% in July, while Spain’s is expected at 2.3% y/y vs. 2.1% in July. France and Italy report earlier Thursday. France’s EU Harmonised inflation is expected at 5.4% y/y vs. 5.1% in July, while Italy’s is expected at 5.6% y/y vs. 6.3% in July. Eurozone reports later Thursday, with headline expected at 5.1% y/y vs. 5.3% in July and core expected at 5.3% y/y vs. 5.5% in July. If so, headline would be the lowest since January 2022 and core would be the lowest since May.
The European Central Bank publishes the account of its July 21 meeting Thursday. At that meeting, it hiked 25 bp but the forward guidance shifted less hawkish as the ECB said inflation will drop further over the remainder of the year. Madame Lagarde highlighted downside risks, noting that the economy is likely to remain weak in the short run as the near-term outlook has deteriorated. More importantly, she said the ECB has an open mind about its decisions in September and beyond, adding that September could be a hike or a pause, but not a cut. Recall that at the June meeting, Lagarde said that the ECB is not “thinking about” pausing. At Jackson Hole, Lagarde refrained from talking about a pause. Nagel and Holzmann speak Monday. Schnabel and Guindos speak Thursday.
European Central Bank tightening expectations remain subdued. WIRP suggest odds of a 25 bp hike stand near 35% September 14, rise to 50% 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 at the July ECB meeting 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. Eurozone reports July M3 data Monday. It is expected at 0.0% y/y vs. 0.6% in June. If so, it would be the weakest since May 2010.
Germany reports some key data. September GfK consumer confidence will be reported Tuesday and is expected at -24.5 vs. -24.4 in August. July retail sales will be reported Thursday and are expected at 0.3% m/m vs. -0.6% in June. August unemployment rate will be reported Thursday and is expected to rise a tick to 5.7%. Elsewhere, Spain reports July retail sales Tuesday and are expected at 6.7% y/y vs. 6.4% in June. France reports July consumer spending Thursday and is expected at 0.3% m/ vs. 0.9% in June. France already reported July retail sales at -2.1% y/y vs. -2.0% in June.
Final eurozone August manufacturing PMIs will be reported Friday. Italy and Spain report for the first time and both are expected to rise a full point from July to 45.5 and 48.8, respectively. Final services and composite PMIs will be reported next Tuesday.
U.K. has a quiet week. July consumer credit will be reported Wednesday. Final August manufacturing PMI and August nationwide house prices will be reported Friday.
Bank of England tightening expectations remain subdued. WIRP suggests less than 10% odds of a 50 bp hike September 21, while a 25 bp hike November 2 is largely priced in. The odds of one last 25 bp hike top out near 60% in February. At Jackson Hole, Broadbent warned that rates need to stay higher for longer. Chief Economist Pill speaks Thursday.
Switzerland reports August CPI Friday. Headline is expected to fall a tick to 1.5% y/y. If so, it would be the lowest since and further below the 2% target. At the last policy meeting June 22, the Swiss National Bank downshifted to a 25 bp hike but signaled that further tightening would be needed. President Jordan said “We are not at the end - most likely there could be more rate hikes necessary in order to bring inflation on a permanent basis below 2%.” WIRP suggests odds of a 25 bp hike of around 33% September 21 and rise to around 70% December 14 and fully priced in June 20. No more hikes are priced in after that.
Sweden reports Q2 GDP data Tuesday. GDP is expected to contract -1.2% q/q vs. 0.6% in Q1 and -1.1% y/y vs. 0.8% in Q1. If so, the y/y drop would be the worst since Q4 2020. At the last policy meeting June 29, the Riksbank hiked rates 25 bp to 3.75% and said rates would be hiked at least one more time this year as the weak krona is contributing to high inflation. WIRP suggests a 25 bp hike at the next meeting September 21 is fully priced in. Looking ahead, another 25 bp hike in H1 2024 is nearly priced in that would see the policy rate peak near 4.25%.
ASIA
Japan reports key real sector data for July. Labor market data will be reported Tuesday. Both the unemployment rate and the job-to-applicant ratio are expected to remain steady at 2.5% and 1.30, respectively. Retail sales, IP, and housing starts will be reported Thursday. Sales are expected to fall a tick to 5.5% y/y, while IP is expected to drop significantly to -1.4% y/y vs. 0.0% in June. Housing starts are expected at -1.3% y/y vs. -4.8% in June. Final August manufacturing PMI will be reported Friday.
Bank of Japan Governor Ueda was dovish at Jackson Hole. He said “We think underlying inflation is still a bit below our target of 2%. This is why we are sticking with our current monetary easing framework.” While core inflation was 3.1% y/y in July, Ueda said it “is expected to decline toward the end of the year.” Tamura speaks Wednesday and Nakamura speaks Thursday. Both are likely to echo this dovish sentiment. Next policy meeting is September 21-22 and no change is expected then.
Australia highlight is July CPI data Wednesday. Headline inflation is expected at 5.2% y/y vs. 5.4% in June. If so, it would be the lowest since February 2022 but still well above he 2-3% target range. WIRP suggests no change is priced in for either the September 5 or October 3 RBA meetings. However, the odds of a hike November 7 are 20% and top out near 40% in Q1. Bullock speaks Tuesday.
Australia reports other key data. July retail sales will be reported Monday and are expected at 0.2% m/m vs. -0.8% in June. Building approvals will be reported Wednesday and are expected at -0.5% m/m vs. -7.7% in June. Private sector credit will be reported Thursday and is expected at 0.3% m/m vs. 0.2% in June. Final August manufacturing PMI will be reported Friday. Recent data have come in on the soft side as the slowdown in China and RBA tightening hit.
