Early in the Morning, Factory Whistle Blows

September 03, 2024

Early in the Morning, Factory Whistle Blows

  • USD is firmer ahead of US August ISM manufacturing index. Pay attention to the employment sub-component of the index.
  • Swiss inflation remains benign and GDP growth outperforms.
  • BOJ Governor Kazuo Ueda sticks to the hawkish guidance.

USD is up against most major currencies, except JPY. European and US equity futures are up slightly ahead of the open. The US August ISM manufacturing index is today’s highlight (3:00pm London).

The ISM manufacturing index is projected to recover to 47.5 vs. 46.8 in July. Pay attention to the employment sub-component of the index because the Fed is increasingly concerned with downside risk to employment. In July, the Employment Index fell 5.9pts to near a four-year low at 43.4. A worsening manufacturing employment outlook will likely be a short-term drag on USD and Treasury yields. Regardless, Friday’s August non-farm payrolls report will be the main market mover this week. Please see our Drivers for the Week Ahead for an in-depth look at what markets are facing this week.

CHF was volatile following Switzerland’s soft August CPI print and stronger Q2 GDP growth. Headline dipped two ticks to 1.1% y/y (consensus: 1.2%) while core CPI matched consensus and printed at 1.1% y/y for a third consecutive month. Overall, inflation is undershooting the Swiss National Bank’s (SNB) Q3 projection of 1.5% and remains well within the bank’s stability range of 0 and 2%.

Bottom line: the SNB has scope to ease further. The swaps market has more than fully priced-in a 25 bp cut at the September 26 meeting and implies 32% odds of a 50 bp cut. We would fade the risk of a jumbo SNB cut in September as Swiss economic activity is encouraging. Swiss GDP real GDP rose more than expected by 0.7% q/q in Q2 (consensus: 0.5%, prior: 0.5%) to be up 1.8% y/y. For reference, the SNB anticipates GDP growth of around 1% this year.

GBP ignored the UK BRC same retail sales report. Same store sales increased 0.8% y/y in August after rising 0.3% y/y in July boosted entirely by food sales. Overall, the recovery in UK real incomes and rising consumer confidence are expected to support consumption growth. Bottom line: the more encouraging UK growth outlook relative to the Eurozone favors a lower EUR/GBP.

Bank of England Deputy Governor – Financial Stability - Sarah Breeden moderates a panel titled “Global supervisory cooperation in times of turbulence” (1:45pm London). For reference, Breeden voted with the majority of MPC members to cut the BOE policy rate 25bps in August. Hawkish ECB Governing Council member Joachim Nagel also speaks later today (5:45pm London). Nagel cautioned last week “We need to be careful and must not lower policy rates too quickly.”

JPY is outperforming and JGB yields ticked-up across the curve. Bank of Japan (BOJ) Governor Kazuo Ueda sticks to the hawkish guidance that the BOJ will raise interest rates further if the economy and prices move in line with BOJ projections. Nevertheless, Japan muted monetary base growth is not inflationary and argues for a gradual BOJ tightening cycle. The monetary base (includes domestic money in circulation and current account deposits at the BOJ) grew 0.6% y/y in August versus 1% in July. The swaps market implies 25bps of BOJ rate hikes over the next 12 months. We doubt the BOJ will tighten more than is currently priced-in, which will limit JPY upside momentum.

AUD is underperforming and catching-up to the recent plunge in iron ore prices. China’s ongoing property slump and poor manufacturing activity are weighing on iron ore prices. In Australia, the already released GDP input data point to unimpressive underlying Australian economic growth in Q2. This should reinforce money market pricing for the RBA to start easing later this year and further undermine AUD.

Tomorrow, Australia real GDP is expected to rise 0.2% q/q vs. 0.1% in Q1 largely driven by higher government spending. Total public demand is expected to contribute 0.4pts to the quarterly change in GDP. Net exports and inventory restocking are also projected to contribute positively to growth. In contrast, private domestic demand will likely be a drag to growth judging from the contraction in retail sales volume and private capital expenditure.

Australia’s current account deficit widened more than expected to A$-10.7bn in Q2 (consensus: A$-5.0bn, prior: A$-6.3bn). This is the largest quarterly current account deficit since Q2 2018, reflecting continued falls in bulk commodity prices and higher income paid to non-residents. Regardless, Australia’s current account deficit is small at -0.7% of GDP and is not a drag on AUD.

New Zealand’s terms of trade index increased 2.0% q/q (consensus: 2.7%, prior: 5.1%) to the highest level since Q3 2023. Resilient whole milk powder prices suggest the terms of trade will remain a modest tailwind to growth. The swaps market continues to price-in roughly 75bps of additional RBNZ policy rate cuts by year-end which is a headwind for NZD.

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