Drivers for the Week of September 17, 2023

September 17, 2023
Here's a look at the main drivers in Developed Markets this week.

The dollar posted broad-based gains against the majors last week. The dollar bloc outperformed while the Scandies and sterling underperformed. We expect a hawkish hold from the Fed this week that leaves the door open for further tightening. On the other hand, virtually every other major central bank that’s meeting this week is expected to follow in the ECB’s footsteps and hike rates 25 bp whilst signaling a peak is near. This includes the Bank of England, Swiss National Bank, Norges Bank, and Riksbank, with the one exception being the Bank of Japan. With the U.S. data remaining relatively strong, we believe the dollar rally will continue.


As of this writing, the auto strike continues. Over the weekend, the UAW rejected a 21% pay raise offer from Stellantis (formerly Chrysler). Talks between the union and the automakers will reportedly resume Monday. As we wrote Friday, It's way too early to try and estimated the potential economic costs of the strikes. These costs will depend on both the breadth and the duration and right now, both are unknown.

The two-day FOMC meeting ends with a decision Wednesday. We expect a hawkish hold. Recent data have been mixed enough for the Fed to feel comfortable with another skip and WIRP suggests only 5% odds of a hike this week. Most likely, we will see the next hike November 1. By that November meeting, we will get one more each of the jobs report, CPI, PPI, and retail sales as well as two PCE readings. If things go the way we expect for the U.S., the current 30% odds of a hike then are way too low. Due to the media embargo, there are no Fed speakers this until Chair Powell’s press conference Wednesday afternoon.

We believe the Fed will be sufficiently hawkish so that markets don’t think it is done hiking. When all is said and done, headline inflation is creeping up towards 4% while core remains stuck near 4%. The economy is still growing above trend and the labor market remains extremely tight. Financial conditions are the loosest since early March 2022, before the Fed started hiking. Simply put, current conditions warrant further tightening, period.

New macro forecasts and Dot Plots will be released. Note that 2026 will be added to the forecast horizon. In light of recent data, we expect the growth and inflation forecasts to be revised up and the unemployment forecasts to be revised down. The Dot Plots will be very interesting. At the June meeting, 2 members saw no more hikes and 4 saw one more hike to 5.25-5.5% (which we got in July). 9 members saw a Fed Funds range of 5.5-5.75%, which implies one more hike from current levels, 2 saw a range of 5.75-6.0%, and 1 saw 6.0-6.25%. If the Fed hikes in November as we expect, we doubt that it will hike again in December if it sticks with its skip pattern. As such, we expect the Dot Plots to remain unchanged for 2023 but see a hawkish shift up for end-2024 and end-2025 from the current 4.625% and 3.375%, respectively. Fed Funds futures are pricing in an end-2024 rate of 4.625% and an end-2025 rate of 4.25%.

Preliminary S&P Global September PMI readings will be reported Friday. Headline manufacturing is expected at 48.2 vs. 47.9 in August, services is expected at 50.6 vs. 50.5 in August, and the composite is expected at 50.3 vs. 50.2 in August. The ISM PMIs are much more widely followed and have been coming in much stronger than the S&P Global readings.

Regional Fed surveys for September will continue rolling out. New York Fed services index will be reported Monday. Philly Fed manufacturing index will be reported Thursday and is expected at -1.0 vs. 12.0 in August. Last week, the Empire manufacturing survey came in at 1.9 vs. -10.0 expected and -19.0 in August.

Housing data will hold some interest. September NAHB housing market index will be reported Monday and is expected to remain steady at 50. August building permits and housing starts will be reported Tuesday and are expected at 0.2% m/m and -1.0% m/m, respectively. Existing home sales will be reported Thursday and are expected at 0.7% m/m.

Weekly jobless claims Thursday will be of interest. That’s because initial claims are for the BLS week containing the 12th of the month, and are expected at 225k vs. 220k last week. Continuing claims are reported with a one-week lag and so next week’s reading will be for the BLS survey week. These are expected at 1.695 mln vs. 1.688 mln last week. Bloomberg consensus for NFP has started out at 155k, while its whisper number is currently at 171k. Our understanding is that because the striking workers were still on payroll when the survey week began, September jobs data should not be impacted.

Otherwise, it’s a quiet very weak for U.S. data. July TIC data will be reported Monday. Q2 current account data and August leading index will be reported Thursday.

Bank of Canada releases the summary of its deliberations Wednesday. At the September 6 meeting, the bank kept rates steady at 5.0% but the message was hawkish. It remained “concerned” about sticky inflation and is prepared to hike again if needed. The bank said the hold was driven by signs that excess demand was easing as well as the expected lagged impact of past tightening. It noted that the labor market was easing gradually but that wage growth remains high. WIRP suggests 25% odds of a hike at the next meeting October 25, rising to top out near 60% in Q1.

Canada reports some key data. August CPI will be reported Tuesday. Headline is expected at 3.8% y/y vs. 3.3% in July. If so, headline would accelerate for the second straight month to the highest since April and further above the 2% target. Core trim is expected to rise a tick to 3.7% y/y while core median is expected to remain steady at 3.7% y/y. July retail sales will be reported Friday. Headline is expected at 0.4% m/m vs. 0.1% in June, while sales ex-auto are expected at 0.5% m/m vs. -0.8% in June.


Markets are still digesting last week’s dovish message from the ECB. While the bank couldn’t come right out and say it, we believe it has signaled the end of the tightening cycle. The key phrase in the statement, which Madame Lagarde emphasized several times in her press conference, was “Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” We think the discussion at the ECB has now shifted from how high to how long. WIRP suggests 20% odds of another hike October 26, then rising to top out near 65% in Q1. The first cut is still seen around mid-2024.

The split between the hawks and doves remains. After the decision, Holzmann and Vasle would not rule out further hikes. On the other hand, Guindos, Simkus, and Muller said further hikes were unlikely. As usual, Lagarde was stuck in the middle and said she cannot say that rates have peaked. That said, the acrimony seems to be growing as reports suggest Lagarde seized her colleagues’ phones ahead of the meeting to prevent any leaks. Guindos speaks Monday. Elderson speaks Tuesday and Wednesday. Schnabel and Lane speak Thursday. Guindos speaks again Friday.

More European politicians are complaining about tight ECB policy. Italy has been the loudest, with some complaints also coming from Portugal. Now, French Finance Minister Le Maire has joined the chorus with a very succinct “Enough is enough!” These comment are of course unhelpful but illustrate just how ECB rate hikes are hurting the eurozone growth outlook. While Germany is getting hit the hardest right now, Italy is likely to get more market attention in the coming months. Peripheral spreads have already started to widen and this should continue.

Preliminary eurozone September PMI readings will be reported Friday. Headline manufacturing is expected at 44.0 vs. 43.5 in August, services is expected at 47.7 vs. 47.9 in August, and the composite is expected to remain steady at 46.7. If so, it would be the fifth straight month that the composite has fallen. Looking at the country breakdown, the German composite is expected at 44.9 vs. 44.6 in August and the French composite is expected to remain steady at 46.0. Italy and Spain won’t report until the final September readings due out in early October.

Bank of England meeting ends with a decision Thursday. We expect a dovish message from the BOE, similar to what we got from the ECB last week. Let’s face it, the U.K. is facing the same stagflation risks as the eurozone and policymakers there are in the same bind. WIRP suggests odds of a 25 bp hike are around 85%. For a time over the summer, a 50 bp hike was largely priced in and so the change is noteworthy. Odds of a second 25 bp hike are around 15% November 2 and then rise to top out near 55% February 1. However, the first cut is still not priced in until H2 2024. Updated macro forecasts won’t come until the November 2 meeting. August public sector net borrowing and September GfK consumer confidence will also be reported Thursday.

August CPI will be reported Wednesday. Headline is expected at 7.1% y/y vs. 6.8% in July, core is expected at 6.8% y/y vs. 6.9% in July, and CPIH is expected at 6.6% y/y vs. 6.4% in July. If so, this would be the first acceleration in headline since February and would move it further above the 2% target.

Retail sales will be reported Friday. Headline sales are expected at 0.5% m/m vs. -1.2% in July, while sales ex-auto fuel are expected at 0.7% m/m vs. -1.4% in July. The y/y rates are expected to improve to -1.2% and -1.3%, respectively. With unemployment rising , we do not expect this bounce in consumption to persist.

Preliminary U.K. September PMI readings will be reported Friday. Headline manufacturing is expected at 43.4 vs. 43.0 in August, services is expected at 49.0 vs. 49.5 in August, and the composite is expected at 48.7 vs. 48.6 in August. If so, it would be the first rise in the composite since April but still well below the key 50 boom/bust level.

CBI reports September industrial trends survey. Total orders are expected at -18 vs. -15 in August. Its distributive trades survey will be reported next week.

Swiss National Bank meets Thursday and is expected to hike rates 25 bp to 2.0%. A handful of analysts see no change and WIRP suggests odds of a hike at only 67%. 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%.” Since that meeting, the Swiss franc has gained nearly 2.5% vs. the euro, which has helped push inflation down and perhaps precluded the need for further tightening after this week.

Norges Bank meets Thursday and is expected to hike rates 25 bp to 4.25%. At the last policy meeting August 17, Norges Bank hiked rates 25 bp to 4.0% and said rates “will most likely be raised further in September” but gave no further forward guidance. We take Norges Bank at its word and look for a hike at the September 21 meeting. Updated macro forecasts and expected rate path will be released.

Riksbank meets Thursday and is expected to hike rates 25 bp to 4.0%. 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 and noted that the weak krona is contributing to high inflation. The expected rate path then saw the policy rate peaking at 4.05% in Q2 2024 vs. 3.65% in the April forecasts and staying there through Q2 2025 before falling to 3.75% by Q2 2026 vs. 3.35% in April. Updated macro forecasts and expected rate path will be released. WIRP suggests 20% odds of a 25 bp hike at the next meeting November 23. Governor Thedeen speaks twice Friday.


Two-day Bank of Japan meeting ends with a decision Friday. No change is expected, especially after reports emerged last week that BOJ policymakers were concerned with how markets took Governor Ueda’s recent comments. Rather than signaling an imminent change as markets heard, BOJ officials felt that his comments indicated little change in the bank’s existing policy stance and we concur. As we pointed out last week, Ueda did not say he thinks wages will rise enough to warrant tightening, just that the bank will know more by year-end. Updated macro forecasts won’t come until the October 30-31 meeting.

August national CPI will be reported Friday. Headline is expected at 3.0% y/y vs. 3.3% in July, while core (ex-fresh food) is expected at 3.0% y/y vs. 3.1% in July. If so, core would be the lowest since September but still well above the 2% target. Core ex-energy is expected to remain steady at the cycle high of 4.3% y/y, which shows how energy subsidies have helped pushed down headline inflation while underlying price pressures remain strong.

August trade data will be reported Wednesday. Exports are expected at -2.3% y/y vs. -0.3% in July, while imports are expected at -20.0% y/y vs. -13.6% in July. If so, exports would contract back-to-back for the first time since late 2020.

Preliminary Japan September PMI readings will be reported Friday. The composite PMI has risen two straight months to the highest since May but other signs suggest this improvement cannot be sustained.

Reserve Bank of Australia releases its minutes Tuesday. At the September 5 meeting, the bank kept rates steady at 4.10% but warned that further tightening may be required. It said the rate pause will provide more time to assess the impact of previous hikes. Consistent with its August forecasts, the RBA still saw inflation returning to the 2-3% target range by late 2025 and unemployment rising gradually to 4.5% by late 2024. Next meeting is October 3 and no change is expected. WIRP suggests 20% odds of a November 7, rising to top out near 40% in Q1.

Preliminary Australia September PMI readings will be reported Friday. The composite PMI has fallen four straight months to the lowest since December but signs of recovery in China suggest this deterioration may slow.

New Zealand reports key Q2 data. Current account data will be reported Wednesday and is expected at -8.0% of GDP vs. -8.5% in Q1. If so, it would be the second straight quarter of improvement from the -9.0% peak in Q4. GDP data will be reported Thursday. Growth is expected at 0.4% q/q vs. -0.1% in Q1, while the y/y rate is expected at 1.3% vs. 2.2% in Q1. If so, it would be the first quarter of growth after two straight q/q contractions. Next RBNZ meeting is October 4 and no change is expected. WIRP suggests 30% odds of a November 29, rising to top out near 50% in Q1.

August trade data will be reported Friday. Exports have been sinking due to the slowdown in mainland China.

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