We believe the dollar uptrend remains intact. The greenback suffered last week from the perceived pivot in the Fed; we think Fed officials will not be happy with this interpretation and will push back against it this week. Jobs data this week will be key in reestablishing the Fed’s hawkishness.
AMERICAS
Markets are still digesting last week’s FOMC decision. Equity markets continue to trade like there was a dovish pivot, with the S&P tacking on another 4.0% gain last week after a 2.5% gain the week before. It wasn’t just the U.S., however, as the DAX, FTSE 100, and other major equity markets also took part in the rally. The swaps market is pricing in only 100 bp of tightening over the next 6 months that would see the Fed Funds rate peak near 3.50%, followed by 50 bp of easing over the subsequent 6 months. We cannot believe that the Fed would make such a quick pivot with inflation still well above target and the labor market at full employment.
On the other hand, U.S. rates market continues to price in gloom and doom. The 10-yearyield traded as low as 2.62% Friday, the lowest since April before ending the week near 2.65%, while the 2-year yield traded as low as 2.82% before ending the week near 2.88%. As a result, the 2- to 10-year curve remains in inversion near -24 bp while the 3-month to 10-year curve fell to 33 bp, the lowest since March 2020 and moving closer to inversion. This remains concerning to us and yet Fed officials have not really pushed back against the inversion trade in recent weeks.
Fed officials will fan out this week to spread the word. We do not think Fed officials will be very happy with the market’s dovish take on its decision last week and are likely to push back this week. As such, prepare for comments that tilt decidedly hawkish. Evans, Mester, and Bullard speak Tuesday. Mester speaks again Thursday. Over the weekend, uber-dove Kashkari reiterated that the Fed is focused on lower inflation, noting that “We are committed to bringing inflation down and we’re going to do what we need to do. We are a long way away from achieving an economy that is back at 2% inflation, and that’s where we need to get to.” We concur.
The July jobs report Friday is the main event. Consensus sees 250k jobs added vs. 372k in June, while the unemployment rate is expected to remain steady at 3.6% and average hourly earnings are seen falling two ticks to 4.9% y/y. Fed Chair Powell stressed labor market strength many times in his post-decision press conference, which supports our view that the Fed is not about to pivot while the economy remains at full employment. Ahead of that, JOLTS job openings for June will be reported Tuesday and expected at 11 mln vs. 11.254 mln in May. July Challenger job cuts and weekly jobless claims will be reported Thursday.
ISM reports its PMI readings for July. Manufacturing will be reported Monday. Headline is expected at 52.0 vs. 53.0 in June, while prices paid is expected at 73.5 vs. 78.5 in June and employment is expected at 48.2 vs. 47.3 in June. Services will be reported Wednesday. Headline is expected at 53.7 vs. 55.3 in June. Last week, Chicago PMI came in at 52.1 vs. 55.0 expected and 56.0 in June, and was the weakest since August 2020. Preliminary July PMI readings from S&P Global were also weak and so there are downside risks to ISM this week.
Other data will help round out the picture for the U.S. June construction spending will be reported Monday and is expected at 0.2% m/m vs. -0.1% in May. July vehicle sales will be reported Tuesday and are expected at 13.5 annualized vs. 13.0 in June. June factory orders will be reported Wednesday and are expected at 1.0% m/m vs. 1.6% in May. June trade data will be reported Thursday and is expected at -$80,0 bln vs. -$85.5 bln in May. June consumer credit will be reported Friday and is expected at $27.0 bln vs. $22.347 bln in May.
Canada highlight will also be July jobs data Friday. Consensus sees 15.0k jobs added vs. -43.2k in June, while the unemployment rate is expected to rise a tick to 5.0%. Ahead of that, July S&P Global manufacturing PMI will be reported Tuesday. June building permits and trade data will be reported Thursday. July Ivey PMI will be reported Friday. Bank of Canada meets September 7 and a 50 bp hike is fully priced in, with nearly 50% odds of a 75 bp move. Yet 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. Here too, we disagree with this pivot from the BOC.
EUROPE/MIDDLE EAST/AFRICA
ECB tightening expectations remain depressed despite CPI and GDP data last week. WIRP suggests 50 bp hikes are no longer priced in for the next meetings September 8 and October 27. Looking ahead, the swaps market is now pricing in 100 bp of tightening over the next 12 months that would see the deposit rate rise to 1.0%, with some odds seen of another 25 bp hike to 1.25% thereafter. This has fallen sharply despite still-high inflation readings, as weak data and the threat of gas shortages have raised recession concerns.
Eurozone has a fairly quiet week. Final July PMI readings will be reported, with manufacturing Monday. Italy and Spain will be reported for the first time and are expected to fall sharply from June to 49.0 and 50.0, respectively. This will be followed by services and composite Wednesday. Here too, Italy and Spain will be reported for the first time and their composite PMIs are expected to fall sharply from June to 49.7 and 51.5, respectively. June PPI and retail sales will be reported Wednesday. The former is expected at 35.7% y/y vs. 36.3% in May, while the later is expected flat m/m vs. 0.2% in May.
Some eurozone countries will report key data. Germany has a particularly busy week. June retail sales will be reported Monday and are expected at 0.3% m/m vs. 1.2% in May. Trade data will be reported Wednesday. Factory orders will be reported Thursday and are expect at -0.7% m/m s. 0.1% in May. IP will be reported Friday and is expected at -0.2% m/m vs. 0.2% in May. Italy reports June retail sales Wednesday. France, Spain, and Italy all report June IP Friday.
Bank of England meets Thursday and is expected to hike rates 50 bp to 1.75%. 50 bp hikes are no longer fully priced in for the subsequent meetings September 15 and November 3. Looking ahead, the swaps market is pricing in 150 bp of tightening over the next 6 months that would see the policy rate peak near 2.75%, down from 3.0% at the start of last week. Chief Economy Pill speaks Friday. Final U.K. July PMI readings will also be reported, with manufacturing Monday followed by services and composite Wednesday.
Tory member will begin voting for their next leader Monday. However, the process will be long and drawn out, with the final announcement to come September 5. Polls show her to be the clear frontrunner over Sunak and so we need to pay close attention to her economic policy plans. Right off the bat, we can expect tax cuts. A unilateral rewrite of the Brexit deal is also likely. However, what hasn’t gotten as much attention is her views on the Bank of England’s mandate. She said she plans to “revisit the mandate” but stressed that she would preserve the central bank’s independence. She added that no decisions have been made but a review is needed given that inflation remains high. Truss said that any review would include an examination of Quantitative Easing, but added that a mandate review would not impact the BOE’s independence.
Switzerland reports July CPI Wednesday. Headline is expected to remain steady at 3.4% y/y. Last week, the Swiss National Bank warned that it may take monetary policy action at any time. This was obviously some jawboning against recent franc strength. Ongoing FX intervention is a given but we are not sure what the SNB means in terms of monetary policy action. A change in the policy rate? A hike would only contribute to further currency strength while a cut seems unthinkable with inflation nearly double the 2% target. Long-term charts suggest EUR/CHF will eventually test the January 2015 low near .856172 but we don't think the bank will let it get that far. Next policy meeting is scheduled for September 22. Weekly sight deposit data Tuesday will show if the SNB intervened last week.
ASIA
Japan highlight will be June labor cash earnings and household spending data Friday. Nominal earnings are expected at 1.9% y/y vs. 1.0% in May, while real earnings are expected at -1.3% y/y vs. -1.8% in May. Spending is expected at 1.5% y/y vs. -0.5% in May. The issue of wages has moved to the forefront after Deputy Governor Amamiya said last week that he expects wage pressures to pick up next year. While he downplayed the need to tighten, we do know that others at the BOJ believe wage growth must pick up along with inflation in order to get a policy shift. Final July PMI readings will also be reported, with manufacturing Monday followed by services and composite Wednesday.
Reserve Bank of Australia meets Tuesday and is expected to hike rates 50 bp to 1.85%. The bank will release its Statement on Monetary Policy Friday that contains updated macro forecasts and adds December 2024 to the forecast horizon. WIRP suggests a 50 bp hike this week is only 75% priced in; similarly, a 50 bp hike September 6 is only partially priced in. The swaps market is pricing in 175 bp of tightening over the next 6 months that would see the policy rate peak near 3.1%, down from 3.6% at the start of last week and nearly 4.5% that was priced in at the start of this month. Final July PMI readings will also be reported, with manufacturing Monday followed by services and composite Wednesday. June trade data will be reported Thursday.
New Zealand highlight will be Q2 jobs data Wednesday. The unemployment rate is expected to fall a tick to 3.1%, driven by a 2.3% y/y increase in employment. If so, the rate would be another record low to data going back to 1985. Average hourly earnings are expected to rise 1.3% q/q vs. 1.9% in Q1. The RBNZ next meets August 17 and a 50 bp hike to 3.0% is fully priced in. Looking ahead, the swaps market is pricing in 125 of tightening over the next 6 months that would see the policy rate peak near 3.75%.
