The dollar was broadly firmer against the majors last week. Those same drivers supporting the greenback are likely to remain intact, along with potential risk off impulses from the deepening energy crisis in Europe.

AMERICAS

The U.S. economy remains on firm footing. The jobs report was solid, as were Chicago and ISM manufacturing PMI readings. After a weak Q2 reading of -0.6% SAAR, GDP growth has picked up and the Atlanta Fed’s GDPNow model is currently tracking 2.6% SAAR for Q3. What this means is that the Fed is on track to continue hiking rates aggressively. In turn, this supports our ongoing strong dollar call.

Data highlight will be August ISM services PMI Tuesday. Headline is expected at 55.4 vs. 56.7 in July. Keep an eye on employment and prices paid, which stood at 49.1 and 72.3 in July, respectively. ISM manufacturing PMI came in strong than expected, but we note that S&P Global readings have come in on the weak side of ISM in recent months.

The Fed releases its Beige Book report Wednesday. The last Beige Book was released July 13 and the Fed ended up hiking 75 bp at the July 26-27 FOMC meeting. Since then, headline inflation has eased from 9.1% in June to 8.5% in July, while jobs grew a combined 841k in July and August. Survey data suggests price pressures are falling while supply chains are improving. We think this current backdrop will give the Fed cover to hike another 75 bp at the September 20-21 FOMC meeting.

Meanwhile, Fed officials will remain hawkish. Barkin, Mester, Brainard, and Barr speak Wednesday. Powell speaks Thursday. Evans, Waller, and George speak Friday. At midnight Friday, the media blackout goes into effect and there will be no Fed speakers until Chair Powell’s post-decision press conference on September 21.

There are only a handful of minor data reports this week. July trade data will be released Wednesday and is expected at -$70.3 bln vs. -$79.6 bln in June. Weekly jobless claims and July consumer credit will be reported Thursday. July wholesale trade sales and inventories and Q2 household net worth will be reported Friday.

Bank of Canada meets Wednesday and is expected to hike rates 75 bp to 3.25%. WIRP suggests 50% odds of a larger 100 bp move. At the last meeting July 13, the bank delivered a hawkish surprise with a 100 bp hike to 2.5% vs. 75 bp expected. Governor Macklem said then that “By front-loading interest rate increases now, we are trying to avoid the need for ever higher interest rates down the road. This argues for getting our policy rate quickly to the top end.” He added that he believes that’s “slightly” above the neutral range, which the central bank estimates between 2-3%. The swaps markets is pricing in 125-150 of tightening over the next 12 months that would see the policy rate peak between 3.75-4.0%.

Canada also reports some key data. July trade and August Ivey PMI will be reported Wednesday. August jobs data and Q2 capacity utilization will be reported Friday. Consensus sees a 15.0k gain in employment vs. -30.6k in July, with the unemployment rate seen rising a tick to 5.0%.

EUROPE/MIDDLE EAST/AFRICA

The European energy crisis continues. Late Friday, Gazprom said the Nord Stream 1 pipeline to Europe won’t reopen as planned over the weekend due to a leak that was detected at a gas turbine that pumps gas into the pipeline. Gazprom said it needs to fix the leak before gas flows can restart but did not indicate how long that may take. Coming just hours after the G-7 agreed on a plan to cap Russian oil prices, the signal sent by Moscow is unmistakable. It seems very likely that Russia will continue wielding its energy exports as a weapon against the West as winter approaches. Meanwhile, EU officials are expected to discuss emergency measures this week.

European Central Bank meets Thursday and is expected to hike rates 75 bp. WIRP suggests nearly 65% odds of a 75 bp hike and if expectations remain this high at the meeting, the ECB will likely take the plunge. Higher than expected August CPI readings certainly make the case for more aggressive tightening and it seems more and more on the Governing Council are leaning towards this outcome. While the energy crisis adds another wrinkle to the process, we think it is too early yet for it to impact ECB policy right now. New macro forecasts will be released.

The eurozone reports some key data. Final August services and composite PMIs will be reported Monday. Italy and Spain report for the first time and their composite PMIs are expected at 48.0 and 525, respectively. July eurozone retail sales will also be reported Monday and are expected at 0.4% m/m vs. -1.2% in June.

Individual eurozone countries also report some key data. Germany reports July factory orders Tuesday and are expected at -0.5% m/m vs. -0.4% in June, while the y/y rate is expected at -13.5% vs. -9.0% in June. IP will be reported Wednesday and is expected at -0.5% m/m vs. 0.4% in June, while the y/y rate is expected at -2.0% vs. -0.5% in June. Italy reports July retail sales Wednesday and is expected at 0.3% m/m vs. -1.1% in June. France reports July IP Friday and is expected at -0.5% m/m vs. 1.4% in June, while the y/y rate is expected at -0.1% vs. 1.4% in June.

The Tories will announce their next leader Monday. Foreign Secretary Truss is leading former Chancellor Sunak handily in all opinion polls. In making her final argument to Tory members, she pledged not to raise taxes nor to ration energy. She specifically ruled out any windfall taxes on energy companies. Reports suggest Truss is preparing an emergency mini-budget in her first month as Prime Minister but no details have been revealed yet. However, we do know that she has pledged immediate tax cuts in an effort to jump-start the economy.

Bank of England officials testify to Parliament’s Treasury Committee Wednesday. Governor Bailey, Chief Economist Pill, and MPC members Mann and Tenreyro will testify. They will of course come under heavy criticism for allowing inflation to rise so much above target. Tightening expectations continue to rise, as WIRP suggests nearly 70% odds of a 75 bp hike to 2.5% September 15. 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%, up from 4.0% just two weeks ago. We note that one of Truss’ other campaign promises is to launch a review of the BOE’s mandate, which is exactly the wrong thing to in this current environment.

Otherwise, U.K. has a quiet week. Final August services and composite PMIs will be reported Monday. BOE/Ipsos inflation survey for August will be reported Friday.

Norway reports some key data. August CPI Friday will be the main event. Headline is expected at 7.0% y/y vs. 6.8% in July, while underlying is expected at 4.9% y/y vs. 4.5% in July. Ahead of that, July IP and Q2 current account data will be reported Wednesday and July GDP will be reported Thursday. At its last meeting August 18, Norges Bank hiked rates 50 bp to 1.75%, as expected, and said that rates “will most likely be raised further in September” without indicating the likely size. Updated macro forecasts and expected rate path will be released at the September 22 meeting. We expect another 50 bp hike, with some risks of hawkish surprises for both the rate path and the rate hike. Of note, the June rate path saw the policy rate peaking near 3.1% in 2024 vs. 2.5% previously. This is now consistent with market pricing, as the swaps market is pricing in 125 bp of tightening over the next 12 months that would see the policy rate peak near 3.0%.

ASIA

Japan has a busy week. Final August services and composite PMIs will be reported Monday. July cash earnings and household spending will be reported Tuesday. Nominal earnings are expected at 1.8% y/y vs. 2.0% in June, while real earnings are expected at -1.2% y/y vs. -0.6% in June. BOJ officials have been focusing on the need to see significant wage gains along with getting inflation sustainably at the 2% target in order to consider liftoff. If wages fall back in July as expected, the bank will feel vindicated in its decision to maintain ultra-loose policy for the foreseeable future. Next BOJ meeting is September 21-22 and no change is expected then. July leading index will be reported Wednesday. Final Q2 GDP data will be reported Thursday.

July current account data Thursday will be of interest. The adjusted balance is expected at JPY51 vs. JPY838 bln in June. However, the investment flows will be of most interest. June data showed that Japan investors were net sellers of U.S. bonds for the eighth straight month and the -JPY3.72 trln total was the biggest since April 2020. Japan investors were small net buyers (JPY8 bln) of Australian bonds and were net sellers of Canadian bonds (-JPY337 bln) for the fifth straight month. They were small net sellers of Italian bonds (-JPY32 bln) for the second straight month. All in all, the data suggest Japan’s life insurers sold a net JPY1.56 trln in July while pension funds sold a net JPY866 bln, both record highs. This repatriation would help explain the 6.5% drop in USD/JPY from mid-July through early August.

Reserve Bank of Australia meets Tuesday and is expected to hike rates 50 bp to 2.35%. Of note, WIRP suggests only 65% odds of a 50 bp move while the swaps market is pricing in 210 bp of tightening over the next 12 months that would see the policy rate peak near 4.0%. Since updated macro forecasts were just released at the August 2 meeting, we won’t see the next update until the November 1 meeting.

Australia also has a busy week. Final August services and composite PMIs will be reported Monday. Q2 current account data will be reported Tuesday. Q2 GDP data will be reported Wednesday. Growth is expected at 1.5% q/q vs. 0.8% in Q1, while the y/y rate is expected at 4.1% vs. 3.3% in Q1. July trade data will be reported Thursday.

New Zealand reports Q2 manufacturing activity Thursday. Volume fell -3.5% q/q in Q1 and there are clearly risks of another drop. This reading is key for the economic outlook after Q2 real retail sales unexpectedly fell -2.3% q/q vs. -0.9% in Q1, raising the risk that Q2 GDP also contracts again after -0.2% q/q in Q1. GDP data will be reported September 15. Despite the weak sales data, WIRP suggests a 50 bp hike to 3.5% October 5 is nearly fully priced in, while the swaps market is pricing in 150 bp of tightening over the next 12 months that would see the policy rate peak near 4.5%.