Drivers for the Week of September 11, 2022

September 11, 2022
Here's a look at the main drivers in Developed Markets this week.

Despite a hawkish Powell, the dollar saw broad-based weakness against the majors as the ECB grabbed the spotlight. We view this bout of dollar selling as corrective in nature and maintain our strong dollar call. Bottom line: the U.S. economy continues to outperform even as the Fed maintains its aggressive tightening path.


U.S. yields continue to rise. The 2-year yield is trading at a new cycle high near 3.56%, while the 10-year yield is trading near 3.31%, slightly below last week’s high near 3.36% but within sight of the June 14 high near 3.50%. This week’s inflation data will be key for the bond market even as heavy slate of issuance hits. On Monday, Treasury sells $41 bln of 3-year notes and $32 bln of 10-year notes. On Tuesday, it sells $18 bln of 30-year bonds. Hedging costs have been rising for foreign investors so it will be important to see if demand remains strong.

Fed officials remain hawkish. While Powell would not comment last week on the likely size of the September hike, he underscored the hawkish stance he took at Jackson Hole. Other Fed officials were more direct in calling for a 75 bp hike, including Bullard and Waller. WIRP suggests over 90% odds of a 75 bp hike September 21. If the market gives the Fed 75, it will take it. There are no Fed speakers this week as the media blackout went into effect midnight Friday. It remains in place until Chair Powell’s post-decision press conference on September 21.

U.S. inflation data take center stage. August CPI will be reported Tuesday. Headline is expected at 8.0% y/y vs. 8.5% in July, while core is expected at 6.1% y/y vs. 5.9% in July. If so, it would be the second straight month of deceleration from the 9.1% peak in June to the lowest since February. PPI will be reported Wednesday. Headline is expected at 8.8% y/y vs. 9.8% in July, while core is expected at 7.1% y/y vs. 7.6% in July. Even if there are downside surprises here, the Fed has made it clear that it will not react to one or two months of good inflation data and so the impact of the data on the September 20-21 FOMC meeting will be negligible.

August retail sales data Thursday will also be important. Headline is expected flat m/m vs. flat in July, while sales ex-autos are expected at flat m/m vs. 0.4% in July. The so-called control group used for GDP calculations is expected at 0.5% m/m vs. 0.8% in July. Can the U.S. consumer remain strong? Household earnings are getting squeezed but the labor market remains strong and consumer confidence is recovering. Of note, the Atlanta Fed’s GDPNow model is tracking 1.3% SAAR growth for Q3, down a tick from the previous reading. The next model update will be seen this Thursday.

September University of Michigan consumer sentiment Friday will be closely watched. Headline is expected at 60.0 vs. 58.2 in August, driven by improvements in both current conditions and expectations to 60.2 and 59.0, respectively. 1-year inflation expectations are seen falling two ticks to 4.6%, while 5 to 10-year expectations are seen steady at 2.9%.

Regional Fed manufacturing surveys for September start rolling out. Both the Empire and Philly Fed surveys kicks things off Thursday. The former is expected at -13.9 vs. -31.3 in August, while the latter is expected at 3.0 vs. 6.2 in August. August IP will also be reported Thursday and is expected at 0.1% m/m vs. 0.6% in July. For now, the manufacturing sector has remained resilient.

Other minor data round out the week. August budget statement will be reported Tuesday and is expected at -$220.0 bln vs. -$211.1 bln in July. Weekly jobless claims, August import/export prices, and July business inventories will be reported Thursday. July TIC data will be reported Friday.

Canada reports only minor data this week. July manufacturing sales will be reported Wednesday. August existing home sales will be reported Thursday. August housing starts and July wholesale trade sales will be reported Friday. Data have been softening recently and so bear watching.

Bank of Canada tightening expectations have fallen. It's clear from the bank's comments last week that is moving away from jumbo hikes and is instead seeing how the data come in. Extremely weak jobs data last Friday certainly justifies that decision to become more data-dependent. WIRP suggests nearly 60% odds of a 50 bp hike at the next meeting October 26, while the swaps market is pricing in 50 bp of tightening over the next 3 months that would see the policy rate peak near 3.75%. New macro forecasts will be released at that meeting.


The ECB was obviously the big story last week. What we saw was a well-anticipated 75 bp hike but absolutely nothing has changed that makes us believe the bank will hike rates to between 3.0-3.25% as the swaps market is pricing in. We think their base case forecast of no recession is way too optimistic and one will eventually prevent the ECB from hiking that aggressively. That said, no one should stand in the way of this move, which is also being exaggerated by position skew going into the ECB meeting. Let's allow the dust to settle this week but we’re not throwing in the towel on our strong dollar call. Of note, WIRP suggests another 75 bp hike is nearly fully priced in.

Eurozone has a quiet week. July IP will be reported Wednesday and is expected at -1.0% m/m vs. 0.7% in June. July trade data will be reported Thursday. In Germany, September ZEW survey will be reported Tuesday. Expectations are expected at -60.0 vs. -55.3 in August, while current situation is expected at -52.1 vs. -47.6 in August. Germany remains the weak link in the eurozone and the data are expected to continue weakening.

Bank of England meets Thursday and is expected to hike rates 75 bp to 2.5%. WIRP suggests such a move is about 75% priced in. Looking ahead, the swaps market is pricing in 275 bp of tightening over the next 12 months that would see the policy rate peak near 4.5%. Lat week’s BOE testimony before Parliament was decidedly tepid, bringing into question the bank’s ability to tighten policy as aggressively as the market is pricing. Updated forecasts were just released at the August meeting and the next batch isn’t due until the November 3 meeting.

The monthly U.K. data dump begins Monday. July GDP, construction output, IP, services index, and trade data will be reported. GDP is expected at 0.3% m/m vs. -0.6% in June, construction is expected at 0.5% m/m vs. -1.4% in June, IP is expected at 0.3% m/m vs. -0.9% in June, and services index is expected at 0.4% m/m vs. -0.5% in June. If the expected bounce materializes, it will only be a temporary one as the headwinds continue to build. Labor market data will be reported Tuesday. August CPI data will be reported Wednesday. Headline is expected to remain steady at 10.1% y/y, core is expected to pick up a tick to 6.3% y/y vs. 8.0% in July, and CPIH is expected to fall a tick to 8.7% y/y. Here too, any improvement is temporary. Lastly, August retail sales will be reported Friday. Headline is expected at -0.5% m/m vs. 0.3% in July, while sales ex-auto fuel are expected at -0.7% m/m vs. 0.4% in July.

Sweden reports August CPI Wednesday. Headline is expected at 9.7% y/y vs. 8.5% in July, CPIF is expected at 8.8% y/y vs. 8.0% in July, and CPIF ex-energy is expected at 6.9% y/y vs. 6.6% in July. WIRP suggests nearly 65% odds of a 100 bp hike to 1.75% at the next policy meeting September 20. At the last meeting June 30, the bank said it expects the policy rate to be 2.0% by Q2 23. Ingves said then that “At this point our basic assumption is that hiking the rate to somewhere around 2%” will move inflation back to the 2% inflation target “but if that isn’t enough we will continue increasing the policy rate further until we get inflation down to our target.” There are typically no updated macro forecasts or rate path at the September meetings. The June updates are clearly outdated and so we expect significant changes to be unveiled at the November 24 meeting that would move the Riksbank closer to market pricing. The swaps market is pricing in 275 bp of tightening over the next 12 months that would see the policy rate peak near 3.5%.


Japan reports key data this week. August machine tool orders will be reported Monday. August PPI and Q3 BSI business conditions survey will be reported Tuesday. July core machine orders will be reported Wednesday and are expected at -0.6% m/m vs. 0.9% in June. August trade data will be reported Thursday. Exports are expected at 24.1% y/y vs. 19.0% in July while imports are expected at 46.9% y/y vs. 47.2% in July. The external accounts continue to worsen as energy costs boost imports and weak global growth dampens exports.

The Bank of Japan meeting September 21-22 has taken on a bit less importance with USD/JPY trading well off the highs. While we expect this pair to resume its climb, markets may be reluctant to sell the yen ahead of that BOJ meeting on the off chance (very unlikely) that the bank does do some sort of pivot this month.

Australia highlight will be August jobs data Thursday. Consensus sees 35.0k jobs added vs. -40.9k in July, while the unemployment rate is expected to remain steady at the record low 3.4%. Ahead of that, September Westpac consumer confidence and August NAB business confidence will be reported Tuesday. WIRP suggests less than 10% odds of a 50 bp hike October 4, while the swaps market is pricing in 125 bp of tightening over the next 12 months that would see the policy rate peak near 3.60%, down from 3.75% at the start of last week and 4.0% at the start of the week previous.

New Zealand reports some key Q2 data. Current account data will be reported Wednesday and the deficit is expected at -7.5% of GDP vs. -6.5% in Q1. . GDP data will be reported Thursday, with growth expected at 1.0% q/q vs. -0.2% in Q1. After weak Q2 manufacturing activity and real retail sales were reported, we see downside risks to Q2 GDP. WIRP suggests a 50 bp hike to 3.5% October 5 is nearly fully priced in, while the swaps market is pricing in 100-125 bp of tightening over the next 6 months that would see the policy rate peak between 4.0-4.25%, down from 4.5% at the start of last week.

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