The dollar put in a mixed performance against the majors last week. NOK, AUD, and CAD outperformed while JPY, NZD, and CHF underperformed. Data last week continued to underscore the relative outperformance of the U.S. economy, while central bank decisions continued to underscore the resulting monetary policy divergence. Both continue to favor the dollar and so we expect the rally to continue.

AMERICAS

Economic divergences widened in June. The preliminary June composite PMIs for the major economies came in as follows: Japan fell to 50.0 vs. 52.6 in May (lowest since December), Australia fell to 50.6 vs. 52.1 (lowest since January), UK fell to 51.7 vs. 53.0 in May (lowest since November), and eurozone fell to 50.8 vs. 52.2 in May (lowest since March). Contrast this with the U.S., whose composite rose to 54.6 (highest since April 2022).

As a result, monetary policy divergences continue to favor the dollar. The drop in the eurozone PMI supports our view that the ECB's "hawkish cut" this month was all about growth risks. The SNB cut rates for a second time last week, while the BOE delivered a dovish hold that sets up an August cut. Meanwhile, Fed officials continue to counsel patience, with most stressing that the bank needs to see more progress on inflation before contemplating a rate cut. The market continues to see November as the most likely meeting for a cut, though there are 70% odds of a cut in September. As always, it will come down to the data. Waller, Goolsbee, and Daly speak Monday. Cook and Bowman (twice) speak Tuesday. Barkin and Bowman speak Friday.

May PCE data Friday will be the data highlight. Both headline and core PCE are expected to ease to 2.6% y/y vs. 2.7% and 2.8% in April, respectively. The Cleveland Fed’s inflation Nowcast model also sees both headline and core PCE at 2.6% y/y in May. Looking ahead, the model sees June headline at 2.5% and core at 2.6%. The progress on inflation is encouraging but most Fed officials, including Chair Powell, cautioned markets not to overreact to a month or two of good data.

Personal income and spending will be reported at the same time. Income is expected to rise 0.4% m/m vs. 0.3% in April while spending is expected at 0.3% m/m vs. 0.2% in April. Real personal spending is expected at 0.2% m/m vs. -0.1% in April. Of note, so-called control group retail sales used for GDP calculations rose 0.4% m/m in May after dropping -0.5% the previous month (revised from -0.3%).

Consumer confidence will be closely watched. Conference Board confidence for June will be reported Tuesday. Headline is expected to fall two points to 100.0 and would be consistent with softer consumer spending activity. Nevertheless, positive real wage growth, rising house prices, and encouraging labor demand suggest household spending will remain an important tailwind to GDP growth. Final University of Michigan sentiment will be reported Friday and is expected at 66.0 vs. 65.6 preliminary.

Chicago Fed National Activity Index for May will be reported Tuesday. Headline is expected at -0.25 vs. -0.23 in April. If so, the three-month moving average would fall to -0.17 vs. 0.01 in April. Recall that when this average drops below -0.7, it signals imminent recession, and we are far from that threshold.

We get another revision to Q1 GDP Thursday. Growth is expected to be revised up a tick to 1.4% SAR. Of course, this is old news as markets look ahead to Q2 and Q3. The Atlanta Fed GDPNow model is currently tracking Q2 growth at 3.0% SAAR and will be updated Thursday after the data. Elsewhere, the New York Fed Nowcast model is tracking Q2 at 1.9% SAAR and Q3 at 2.2% SAAR and will be updated Friday.

June Chicago PMI will be reported Friday. Headline is expected at 40.0 vs. 35.4 in May, but this series has been diverging significantly all year from the nationwide readings. Last week, S&P Global preliminary June PMIs came in strong. Manufacturing came in at 51.7 vs. 51.0 expected and 51.3 in May, services came in at 55.1 vs. 54.0 expected and 54.8 in May, and the composite came in at 54.6 vs. 53.5 expected and 54.5 in May. Of course, the ISM PMIs are more widely followed but those won't be reported until the week of July 1 and so S&P Global has the last word for now.

Regional Fed surveys will continue rolling out. Dallas Fed manufacturing will be reported Monday and is expected at -15.0 vs. -19,4 in May. Philly Fed non-manufacturing, Richmond Fed manufacturing and services, and Dallas Fed services will all be reported Tuesday. Kansas City manufacturing will be reported Thursday and Kansas City services will be reported Friday.

Housing data will remain in focus. April FHFA and S&P CoreLogic house prices will be reported Tuesday. May new home sales will be reported Wednesday and are expected at 1.7% m/m vs. -4.7% in April. Pending home sales will be reported Thursday and are expected at 1.1% m/m vs. -7.7% in April. Last week, existing home sales came in at -0.7% m/m vs. -1.0% expected and -1.9% in April.

The first debate between President Biden and former President Trump takes place Thursday. The debate begins at 900 PM ET (0200 GMT). With a little more than four months before the November 5 election, polls continue to point to a tight race. However, the betting markets continue to price in a Trump win.

Canada highlight will be May CPI Tuesday. Headline is expected to fall a tick to 2.6% y/y, core trim is expected to fall a tick to 2.8% y/y, and core median is expected to remain unchanged at 2.6% y/y. If so, headline would be the lowest since March 2021 and further within the 1-3% target range. The Bank of Canada anticipates further easing in inflation, as three- and six-month measures of core inflation have been running lower than the y/y rates. Also, the breadth of price increases above 3% has declined closer to its historical average. The market sees nearly 60% odds of a cut in July, while a September rate cut is more than fully priced in.

Canada April GDP report will be reported Friday. GDP is expected to rise 0.3% m/m after stalling in March, while the y/y rate is expected at 1.0% vs. 0.6% in March. Of note, other measures of economic activity picked up in April and so there are modest upside risks to the GDP data. The Bank of Canada projects Q2 GDP growth of 1.5% SAAR.

EUROPE/MIDDLE EAST/AFRICA

Eurozone June CPI data start rolling out. France, Spain, and Italy report Friday. France’s EU Harmonised inflation is expected to fall a tick to 2.5% y/y, Spain’s is expected to fall three ticks to 3.5% y/y, and Italy’s is expected to rise a tick to 0.9% y/y. Germany reports next Monday while eurozone-wide CPI will be reported next Tuesday. As we have noted before, we believe the ECB’s hawkish cut was more about growth than inflation.

Yet the ECB is unlikely to cut rates at the July meeting. Currently, the market sees around 5% of a cut then, but rising to 70% in September. Most ECB officials have been pushing back against the notion even as they counsel a data-dependent approach to policy. Nagel, Villeroy, and Schnabel speak Monday. Stournaras and Nagel speak Tuesday. Centeno, Rehn, Panetta, Lane, and Kazaks speak Wednesday. Kazimir speaks Thursday. Villeroy speaks Friday.

ECB inflation expectations survey for May will be reported Friday. 1-year expectations are expected to fall a tick to 2.8% in April, while 3-year expectations are expected to remain steady at 2.4%. A further decline in inflation expectations would raise the odds of a September rate cut, which is currently 70% priced in by the swaps market.

Eurozone reports May money supply data Thursday. Broad monetary growth (M3) is expected to rise to a 13-month high of 1.6% y/y vs. 1.3% in April. Overall, credit dynamics are improving but remain very weak by historical standards.

German IFO business climate survey for June will be reported Monday. Headline is expected at 89.6 vs. 89.3 in May, with the expectations index expected at 90.7 vs. 90.4 in May and current assessment index expected at 88.5 vs. 88.3 in May. Germany’s growth outlook has improved a little bit but it’s too soon to tell if the recovery will be sustained. Indeed, Germany’s composite PMI fell in May to a two-month low of 50.6 vs. 52.4 in April due to a slower expansion in services and a deeper contraction in manufacturing. July GfK consumer confidence will be reported Wednesday and is expected at -19.5 vs. -20.9 in June.

The Bank of England publishes its financial stability report Thursday. The report is published twice a year in July and December. The December 2023 report highlighted that U.K. borrowers and the financial system have been broadly resilient to the impact of higher and more volatile interest rates. Since then, the expected BOE policy rate path has adjusted lower. Indeed, we look for the first cut in August, which will help further reduce U.K. household and corporate debt vulnerabilities.

Riksbank meets Thursday and is expected to keep rates steady at 3.75%. After starting the easing cycle with a 25 bp cut at the May 8 meeting, the Riksbank signaled a hold by noting that “the policy rate could be cut two more times during the second half of the year, in line with the March forecast.” Governor Thedeen said a June cut is unlikely under current circumstances, adding that SEK weakening is a concern that must be factored in. New macro forecasts will be published at this meeting. In the meantime, the swaps market has fully priced in a rate cut for September and nearly 70% odds of another one in November.

ASIA

Bank of Japan releases its summary of opinions Monday. At the June meeting, the bank delivered a dovish hold and failed to deliver the anticipated reduction in its purchase amount of JGBs. Instead, the BOJ said, “It will collect view from market participants and, at the next Monetary Policy Meeting (July 31), will decide on a detailed plan for the reduction of its purchases amount during the next one to two years or so.” Given its ongoing cautiousness, the market is now pricing in an even shallower tightening cycle, with 65 bp seen over the next three years vs. 75 bp before the meeting. This will continue to weaken the yen.

Indeed, USD/JPY has risen 7 straight days and 10 of the past 11. It ended last week at 159.80, the highest since April 29, when it traded at the cycle high of 160.15. Yet the pace of weakening has so far been orderly and so we think the BOJ will not feel compelled to intervene just yet as it will seem as if it's defending the 160 level, which would be the wrong message to send. If the pair breaks above 160 and the move starts to get disorderly and one-way again, then intervention risks would rise.

Japan highlight will be June Tokyo CPI Friday. The y/y rates for both headline and core (ex-fresh food) are expected to rise a tick to 2.3% and 2.0%, respectively. Core ex-energy is expected to ease a tick to 1.6% y/y, the lowest since August 2022. This would reinforce our view that underlying inflation is in a firm downtrend and that the bar for an aggressive BOJ tightening cycle remains high.

Key real sector data will also be imported. May department store sales will be reported Monday. Retail sales will be reported Thursday and are expected to remain steady at 2.0% y/y. IP and housing starts will be reported Friday and are expected at -0.1% y/y and -6.2% y/y, respectively. If so, both would improve from April. However, the drop in the composite PMI to 50.0 in June warns of growing headwinds and downside risks for the economy ahead.

Labor market data will also be reported Friday. Unemployment is expected to remain steady at 2.6%, while the job-to-applicant ratio is expected to remain steady at 1.26. The labor market remains relatively tight and yet wage pressures remain contained, giving little urgency to the BOJ to tighten more aggressively.

Australia highlight will be May CPI Wednesday. Headline is expected to rise two ticks to a five-month high of 3.8% y/y. The focus will also be on underlying inflation, as both CPI ex-volatile items & holiday travel and trimmed mean CPI are running above 4%. Overall, the RBA is in no rush to loosen policy as it expects that it will be some time before inflation is sustainably in the 2-3% target range. The swaps market has virtually rate cuts priced in for 2024 and around 70% odds of the first cut in February 2025.

June ANZ consumer and business surveys Wednesday are the New Zealand highlights. May business confidence fell to 11.2 and showed a clear weakening in activity and easing inflation pressure. The Own Activity Outlook index fell to a ten-month low at 11.8 while Cost Expectations, Pricing Intensions, and Inflation Expectations edged down near multi-year lows. Meanwhile, the consumer confidence index improved to 84.9 in May but remains at historical weak levels. The RBNZ has the first rate cut penciled in for Q3 2025, partly because New Zealand services inflation is receding slowly. In contrast, the market has fully priced in a cut this November. That’s about right in our view.