US
US and European equity futures have so far brushed off the US administration’s new tariff measures. President Donald Trump announced yesterday that starting October 1, the US will impose a 100% tariff on any branded or patented pharmaceutical product not made in America, a 50% tariff on kitchen cabinets and bathroom vanities, 30% tariff on upholstered furniture, and a 25% tariff on heavy trucks made outside the US. We continue to believe that higher US tariffs is a downside risk to growth and upside risk to inflation.
USD is taking a breather after powering ahead for two straight trading sessions supported by an upward adjustment to the US swaps curve. We expect USD to stabilize around current levels until next week’s US jobs data. The labor market data is the most important driver for the Fed and the most critical data for monitoring downside risks to the economy now.
Turns out yesterday’s second-tier US economic data packed more punch than expected, thanks to big positive surprises: (i) Annualized Q2 real GDP growth was revised up 0.5pts to 3.8% q/q from the second estimate, primarily reflecting a solid upward revision to consumer spending (2.5% vs. 1.6%); (ii) Initial jobless claims for the week ended September 20 dropped to a 2-month low, confirming there’s no layoff spiral underway; (iii) Core capital goods orders (non-defense and excluding aircraft) unexpectedly increased in August, indicative of improving business investment activity.
Today’s August PCE data will offer a timelier read on consumer spending activity (1:30pm London, 8:30am New York). Real personal spending is expected at 0.2% m/m vs. 0.3% in July. Overall, real personal consumption spending is growing below trend. Rising job insecurity is likely to push households toward higher savings, retraining any meaningful pick-up in consumer spending.
We get a fresh update of the Atlanta Fed GDPNow model later today. As of September 17, the model estimates Q3 annualized growth at an above trend pace of 3.3%.
Meanwhile, consensus sees headline PCE deflator at 2.7% y/y vs. 2.6% in July and core PCE at 2.9% y/y vs. 2.9% in July. The Cleveland Fed’s Nowcast model forecasts headline and core at 2.8% y/y and 3.0% y/y, respectively. Attention will also be on the PCE non-housing services inflation as it is still running at a rate (3.3% y/y in July) a bit above what has been historically consistent with 2% inflation.
Clearly, progress towards the Fed’s 2% inflation goal is stalling, but upside risks to prices are not martializing. The policy-relevant headline PCE deflator has yet to reflect the rise seen in the ISM prices paid indexes, which may now be topping-out. More importantly, wage growth is running around sustainable rates consistent with the Fed’s 2% inflation goal given annual non-farm productivity growth of around 2%.
Bottom line: our base case is for the Fed to pivot more dovish by year-end, which will weigh on the USD and further fuel the rally in equity markets.
JAPAN
USD/JPY is trading near important psychological resistance at 150.00. Tokyo September CPI printed weaker than anticipated because of a drag from transitory factor. Both headline and core ex-fresh food CPI remained at 2.5% y/y (consensus for both: 2.8%), while core ex-fresh food & energy dropped 0.5pts to a six-month low at 2.5% y/y (consensus: 2.9%). The drag to prices reflected the Tokyo government’s move to broaden access to free daycare.
We are sticking to our view that the BOJ will resume normalizing rates in October (55% priced-in). Japan’s Tankan business survey points to an ongoing recovery in real GDP growth and underlying inflation is making good progress towards the BOJ’s 2% target. Bottom line: we doubt USD/JPY can sustain a break above 150.00 given that it’s already trading well-above the level implied by US-Japan 2-year bond yield spreads.
CANADA
USD/CAD is up near a 4-month high and eyeing key resistance at 1.3998 (200-day moving average). Canada’s July GDP by industry report is the domestic highlight (1:30pm London, 8:30am New York). Statistics Canada advance information indicates that real GDP rose 0.1% m/m in July after shrinking -0.1% in June.
At its last September 17 meeting, the Bank of Canada (BOC) cut the policy rate 25bps to 2.50% and signaled more easing is in the pipeline if the labor market shows ongoing weakness. As such, Canada’s September labor force survey (due October 10) should carry greater market impact than today’s GDP print. In the meantime, the swaps market is pricing 76% odds of a 25bps cut by year-end to 2.25%.
