Drivers for the Week of August 15, 2021

August 15, 2021
Here's a look at the main drivers in Developed Markets this week.
  • July retail sales data Tuesday will be the data highlight this week; regional Fed manufacturing surveys for August will start rolling out; FOMC minutes will be released Wednesday; the U.S. fiscal outlook remains cloudy; Canada reports some key data this week; with the economy in good shape, Canadians will go to the polls September 20
  • ECB asset purchases for the week ending August 13 will be reported Monday; U.K. reports some key data this week; Norges Bank meets Thursday and is expected to keep rates steady at 0.0%
  • Japan has a busy week; RBNZ meets Wednesday and is expected to hike rates 25 bp to 0.50%; RBA minutes will be released Tuesday

The dollar is trying to recover from Friday’s sell-off. DXY has retraced about half of the August rally. Support near 92.50 had held so far but a break below 92.321 would set up a test of the July 30 low near 91.782. We believe markets overreacted to the consumer confidence data Friday and look for the dollar to claw back some of its recent losses. The euro is running into resistance near $1.18 while sterling is having trouble trading much above $1.39. USD/JPY is finding support just above 109.50 but a break below that would set up a test of the July 4 low near 108.70. We remain positive on the dollar, as stronger U.S. data and hawkish Fed comments are likely to reassert themselves on the market this week.

AMERICAS

Markets are still digesting the inflation data from last week. Headline CPI inflation was steady at 5.4% y/y, while core eased a couple of ticks to 4.3% y/y. However, headline PPI inflation picked up half a percentage point to 7.8% y/y and core picked up even more to 6.2% y/y, which suggests further upside pressures ahead to CPI. The Fed’s preferred inflation measure of core PCE will be reported August 27 and rose 3.5% y/y in June. It is way too early to sound the all clear on inflation, which we believe will remain elevated for far longer than markets are anticipating. This is especially true given what we see as growing wage pressures.

Yet the march higher in U.S. Treasury yields came to a halt Friday. At 1.38%, last week’s high for the 10-year yield was the highest since July 14 and it was seemingly on track to test that day’s high near 1.42%. However, weak consumer sentiment data Friday led to a big reversal and this week will be key for determining how deep this reversal goes. The massive drop in University of Michigan consumer sentiment to 70.2 in August from 81.2 in July certainly bears watching. This was the lowest reading since 2011, with both current conditions and expectations falling sharply. Of note, 1.38% is a key retracement objective and a break above that would set up a test of the June 25 high near 1.54%.

July retail sales data Tuesday will be the data highlight this week. Headline sales are expected at -0.2% m/m vs. 0.6% in June, while sales ex-autos are expected at 0.2% m/m vs. 1.3% in June. The so-called control group used for GDP calculations is expected at -0.2% m/m vs. 1.1% in June. It’s worth noting that the absolute levels of most retail sales categories were at or near record highs in June. As such, we would not be too concerned about a modest drop in July as strong jobs growth should continue to support consumption in H2. However, markets will be extremely sensitive to any larger than expected drop in sales given the massive drop in consumer confidence this month.

Regional Fed manufacturing surveys for August will start rolling out. Empire survey kicks things off Monday and is expected at 28.5 vs. 43.0 in July. Philly Fed follows Thursday and is expected at 24.0 vs. 21.9 in July. July IP will be reported Tuesday and is expected to rise 0.5% m/m vs. 0.4% in June. Overall, the U.S. manufacturing sector remains strong and this week’s data should confirm this. Virtually all the survey and PMI readings are at or near record highs. Some moderation is to be expected but that does not mean the economy is slowing sharply.

FOMC minutes will be released Wednesday. It’s clear that the tapering discussions are picking up, as it was finally mentioned in the official statement. Since that July 27-28 meeting, more and more Fed officials are tilting hawkish and so the minutes will be of great interest ahead of the Jackson Hole Symposium next week. We expect a very hawkish tilt will emerge from these minutes. Powell and Kashkari speak Tuesday, followed by Kaplan Friday. Last week, Kaplan emphasized his hawkish leanings by saying he would support the Fed announcing tapering in September and then beginning to taper the following month. He was joined by George, who said that "With the recovery under way, a transition from extraordinary monetary policy accommodation to more neutral settings must follow." We believe the ranks of the hawks will continue to grow, raising the odds of another hawkish shift in the September Dot Plots to show median lift-off expectations moving up to 2022.

The fiscal outlook remains cloudy. Reports suggest House Speaker Pelosi has offered a compromise procedural vote this week on the $550 bln infrastructure bill to mollify moderates in her caucus that demanded that it be passed first before they will consider the so-called “human infrastructure” bill worth $3.5 trln. If the traditional infrastructure bill can then pass a full House vote the week of August 23, then Democratic lawmakers would then begin work on passing the “human infrastructure” bill. If that is passed by the House, then it will need all 50 Democrats vote for it under budget reconciliation. Of course, this is a mighty big “if.” Elsewhere, the budget ceiling showdown is likely to continue after Senate Minority Leader McConnell continues to tell the Democrats not to expect any help on raising the ceiling. Stay tuned.

Weekly jobless claims data Thursday will be very important. That is because the initial claims data will be for the BLS survey week containing the 12th of the month. Continuing claims data are reported with a one-week lag and so next week’s reading will be important. Initial claims are expected at 365k vs. 375k the previous week, while continuing claims are expected at 2.80 mln vs. 2.866 mln the previous week. Last week’s readings were both cycle lows for the pandemic and so further improvement this week would support our view that the labor market continues to heal. Of note, JOLTS job openings rose to a record 10.1 mln in June, which shows continued strength in labor demand. As such, it’s no surprise that average hourly earnings continue to move higher, hitting 4.0% y/y in July.

Other minor data are expected to show continued strength in the economy. June TIC data will be reported Monday. June business inventories (0.8% m/m expected) will be reported Tuesday. July building permits (1.0% m/m expected) and housing starts (-2.6% m/m expected) will be reported Wednesday. July leading index (0.7% m/m expected) will be reported Thursday.

Canada reports some key data this week. July CPI will be reported Wednesday. Headline inflation is expected to pick up to 3.4% y/y vs. 3.1% in June, while common core is expected to pick up a tick to 1.8% y/y. June retail sales will be reported Friday. At the last meeting July 14, the Bank of Canada delivered another round of tapering, reflecting the “continued progress towards recovery.” The bank updated its inflation forecasts then to 3.0% (2.3% in April) in 2021, 2.4% (1.9%) in 2022, and 2.2% (2.3%) in 2023. The BOC also confirmed it is likely to hike rates in H2 2022, though exactly when is still unclear. At this point, we think it’s more likely to happen on the earlier side. Next policy meeting is September 8 and perhaps the bank will provide some more clarity on future policy. Other minor data will be reported this week, starting with June manufacturing and wholesale trade sales and July existing home sales Monday. July housing starts will be reported Tuesday.

With the economy in good shape, Canadians will go to the polls September 20. Prime Minister Trudeau has called an early election in an effort to cash in on what has so far been a successful navigation of the pandemic. Polls show his Liberal Party with support in the mid-30s, which is seen as near the threshold to regain majority control of parliament. Polls show half of Canada believe the Trudeau government has done a good job of managing the pandemic vs. 23% that say it has done poorly and 26% that are neutral. Polls also suggest that nearly 75% believe their personal finances are better or no worse than they were two years ago. This is a good backdrop for Trudeau, who lost the majority in 2019 elections and has been ruling as a minority government.

EUROPE/MIDDLE EAST/AFRICA

ECB asset purchases for the week ending August 13 will be reported Monday. Net purchases were EUR16.4 bln for the week ending August 6 vs. EUR10.7 bln for the week ending July 30 and EUR22.8 bln for the week ending July 23. The ECB has been aiming for net weekly purchases of around EUR20 bln since the accelerated pace began in March, but there have been several outliers on both sides. The bank is expected to discuss changes to its asset purchases at the next meeting September 9 but a consensus may not be reached until the December meeting. Otherwise, the eurozone has a quiet week as Q2 GDP and employment data will be reported Tuesday.

U.K. reports some key data this week. Labor market data will be reported Tuesday, with unemployment expected to remain steady at 4.8% in June even as earnings are seen rising. July CPI will be reported Wednesday. Headline inflation is expected to ease to 2.3% y/y vs. 2.5% in June, while CPIH is expected to fall a tick to 2.3% y/y. July retail sales and public sector net borrowing data will be reported Friday, with headline sales expected to rise 0.2% m/m vs. 0.5% in May. Last week’s data were mixed. Industrial and construction output unexpectedly contracted in June, while GDP and services grew slightly stronger than expected.

No wonder the Bank of England just delivered a dovish hold August 5. It warned that inflation could reach as much as 4% but would then return close to the 2% target. New inflation forecasts are 4.0% (2.5% in May) in 2021, 2.5% (2.0%) in 2022, and 2.0% (2.0%) in 2023, which suggest the BOE is no hurry to hike and that there is no need to hike aggressively. Recent softness in the real sector is likely to support the bank’s decision to tilt dovish.

Norges Bank meets Thursday and is expected to keep rates steady at 0.0%. At the last meeting June 17, it delivered a hawkish hold by saying that that it would “most likely” hike rates in September. The previous rate path suggested hikes would start in Q4. Governor Olsen later suggested that the bank could hike rates 25 bp per quarter, which is much more hawkish than its previous guidance. Since the June meeting, inflation has ticked higher but real sector data have come in a bit soft. As such, we see no need for Norges Bank to move up its planned rate hike, which should come as planned at the next policy meeting September 23. Norway reports July trade data Monday and Q2 GDP data Friday.

ASIA

Japan has a busy week. Q2 GDP will be reported Monday and is expected to grow 0.1% q/q vs. -1.0% in Q1. It would not take much to get a downside surprise that leads to another quarter of contraction. July trade data and June core machine orders will be reported Wednesday. Exports are expected to rise 39.2% y/y vs. 48.6% in June while imports are expected to rise 35.2% y/y vs. 32.7% in June. Orders are expected at -2.9% m/m vs. 7.8% in May. July national CPI will be reported Friday. Headline is expected at -0.5% y/y while core (ex-fresh food) is expected at -0.4% y/y, and underscore the deflationary risks that persist in Japan. That is why the Bank of Japan has signaled that it is on hold until at least FY24, if not longer.

Reserve Bank of New Zealand meets Wednesday and is expected to hike rates 25 bp to 0.50%. At the last meeting July 14, it announced an end to QE. At the same time, the RBNZ said that given the balance of risks, the RBNZ said its “least regret” policy is to withdraw stimulus sooner rather than later. Since the July meeting, Q2 CPI and labor market data have surprised to the upside and markets are now pricing in nearly three hikes by year-end. Next meetings are October 6 and November 24. At the May 26 meeting, the bank resumed its practice of publishing its cash rate forecasts after a pause of more than a year. The expected rate path then saw the average OCR rising to 0.67% by end-2022, implying 1-2 hikes, and then to 1.78% by mid-2024, the end of the forecast period. New forecasts and projections will be released this week and the expected rate path will clearly be moved forward significantly.

Reserve Bank of Australia minutes will be released Tuesday. The bank delivered a hawkish surprise at last week’s meeting. Despite market expectations that it would reverse course, the bank said it would go ahead with its planned tapering next month and conduct a review of its QE policy around mid-November. Many thought the bank would delay tapering due to the economic fallout of the current lockdowns and so the minutes will be of great interest. Next policy meeting is September 7 and no change is expected then as the bank begins its scheduled tapering, with a review planned for mod-November. Australia then reports July jobs data Thursday. A -46.2k drop in jobs is expected due to the lockdowns, with the unemployment rate seen rising a tick to 5.0%.

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