US Economy: In a Good Place

• US Q2 GDP growth was revised higher and the progress on inflation since April is encouraging.

• Eurozone August CPI, US July PCE, and Canada Q2 GDP are today’s highlights.

• Australia retail turnover was unchanged in July. New Zealand consumer confidence improves in August.

USD is consolidating yesterday’s gains triggered by cooler inflation in Germany and upward revision to US GDP growth. The US economy is in good shape. Q2 GDP growth was revised up to 3.0% SAAR from a preliminary estimate of 2.8% and underlying economic momentum was stronger. The growth contribution from private consumption expenditure was higher at 1.95pts vs. 1.57pts previously. Looking ahead, the Atlanta Fed’s GDPNow model projects solid Q3 growth of 2.0% SAAR.

The US Personal Income and Outlays report is the main domestic highlight today (1:30pm London). Headline and core PCE are both projected to rise 0.2% m/m. Year-over-year, headline PCE inflation is expected to remain at 2.5% for a second consecutive month while core PCE inflation is forecast to rise a tick to 2.7% y/y. The Cleveland Fed’s inflation Nowcast model sees headline PCE rising 0.2% m/m or 2.6% y/y while core PCE is forecast to rise 0.1% m/m or 2.6% y/y. Overall, the progress on inflation since April is encouraging but inflation remains far from the Fed’s 2% target.

US personal income is projected to rise 0.2% m/m for a second consecutive month, personal spending is expected to increase 0.5% m/m vs. 0.3% in June, and real personal spending is forecast to pick-up 0.3% m/m vs. 0.2% in June. As long as jobs are being created, income will continue to grow and consumption will remain robust.

Nonetheless, we need robust US jobs data next week for interest rate futures to significantly trim aggressive Fed funds rate cut bets (100bps by year-end) in favor of sustained USD strength. Fed officials are more concerned with downside risk to employment than upside risk to inflation.

EUR/USD is holding just above yesterday’s low of around 1.1056. The Eurozone August preliminary CPI is the spotlight (10:00am London). Headline CPI is expected to rise 0.2% m/m (vs. 0% in July) and ease to a 38-month low at 2.2% y/y vs 2.6% in July. Core CPI inflation is projected to fall one tick to 2.8% y/y. Attention will also be on services inflation as it has been sticky around 4% y/y since November 2023.

The risk to the Eurozone August CPI print is skewed to the downside following softer than expected inflation in Germany (actual: -0.2% m/m, consensus: 0%) and Spain (actual: 0% m/m, consensus: 0.2%). Of note, France EU harmonized CPI was a tick higher than expected at 0.6% m/m in August. Overall, the Eurozone disinflationary process is tracking the ECB’s 2024 projection and the ECB is widely expected to resume easing in September.

GBP/USD is trading sideways around 1.3170. UK nationwide house prices unexpectedly drops -0.2% m/m in August (consensus: +0.2%) after rising 0.3% in July. On a year-over-year basis, house prices are up 2.4% vs. 2.1% in July which is the highest since December 2022. July aggregate money growth is up next (9:30am London). The annual growth rate of sterling net lending to private sector companies and households (M4Lex) is expected to recover further in July consistent with a gradual pick-up in economic activity. This would reinforce the BOE’s cautious easing policy guidance and offer GBP support.

JPY showed little reaction to the data released from Japan overnight. The data continues to suggest that the bar for an aggressive BOJ tightening cycle is high as underlying price pressures remains low and economic activity is soft.

The Tokyo August CPI print, a leading indicator of the national CPI, overshot expectations but that largely reflects base effects (low readings from a year ago). Headline quickened four ticks to 2.6% y/y (consensus: 2.3%), core ex-fresh food rose two ticks to 2.4% y/y (consensus: 2.2%), and core ex-fresh food and energy increased one tick to 1.6% y/y (consensus: 1.4%). Meanwhile, Japan retail sales grew less than expected in July (actual: 0.2% m/m, consensus: 0.4%, prior: 0.6%) and the pick-up in industrial production was also more subdued than anticipated (2.8% m/m, consensus: 3.5%, prior: -4.2%).

CAD will take its cue today from Canada’s Q2 GDP report (1:30pm London). Consensus is looking for 1.8% SAAR real GDP growth vs. 1.7% in Q1. The Bank of Canada (BOC) has penciled-in more modest growth of 1.5% SAAR in Q2 driven by government spending, household consumption, and business fixed investment. Regardless, Canada’s Q2 GDP report is unlikely to dent market pricing for an additional 75bps of BOC policy rate cuts by year-end because inflation in Canada is easing rapidly.

AUD/USD is firm underpinned by the rally in Asian stocks and a continued recovery in iron ore future prices. But AUD upside momentum is limited partly because we expect the RBA to soon pivot away from its hawkish guidance. Australia households continue to curb non-essential spending, reinforcing the case for an RBA rate cut by year-end (25bps cut is 80% priced-in). Nominal retail turnover was unexpectedly unchanged in July (consensus: +0.3% m/m) after a mid-year sales activity boost of 0.5% in June. The only industry that had a rise in July was food retailing.

NZD/USD is range-bound just under yesterday’s multi-month high of around 0.6300. New Zealand ANZ consumer confidence index rose 4 points in August to a six-month high at 92.2 driven by an improvement in the future conditions index. Nonetheless, consumer confidence remains well below the 20-year average of 114.0 and does not move the dial on RBNZ easing expectations. The swaps market price-in roughly 75bps of additional RBNZ policy rate cuts by year-end which is a headwind for NZD.