Drivers for the Week of August 22, 2021

August 22, 2021
Here's a look at the main drivers in Developed Markets this week.
  • All eyes are on the Kansas City Fed’s Jackson Hole Symposium this week; some are looking for Fed Chair Powell to make an explicit tapering announcement; July personal spending, income, and core PCE data Friday will be the highlight; regional Fed manufacturing surveys for August will continue to roll out
  • The eurozone has a fairly quiet week; ECB asset purchases for the week ending August 20 will be reported Monday; U.K. also has a fairly quiet week
  • Japan has a fairly quiet week; BOJ next meets September 21-22 and no change is expected; Australia also has a fairly quiet week; AUD is typically the canary in a coal mine for a drop in risk appetite and so it bears watching

The dollar is likely to remain bid ahead of the Jackson Hole Symposium this week. DXY traded at new highs for this move Friday near 93.729. Next targets are the November 2020 high near 94.302 and the September 2020 high near 94.742. EUR broke below $1.17 to trade at new cycle lows near $1.1665 but has since recovered. It remains on track to test the November 2020 low near $1.16. Sterling is finally playing catch-up and nearing a test of the July 20 low near $1.3570. After that is the January low near $1.3450. The growing risk-off sentiment last week led USD/JPY to reverse and the pair is still trading back below 110. Overall, hawkish risks from Jackson Hole and solid U.S. data should keep the dollar rally going this week.

AMERICAS

All eyes are on the Kansas City Fed’s Jackson Hole Symposium this week. It begins Thursday and ends Saturday. On Friday, it was announced that it was shifting to all-virtual “due to the recently elevated Covid-19 health-risk level in Teton County, Wyoming” rather the original plan for modified in-person meetings. This year’s topic is "Macroeconomic Policy in an Uneven Economy" and the full agenda will be made available at www.kansascityfed.org at 7 PM CT/8 PM ET on August 26. Last year’s symposium was all virtual and the topic was "Navigating the Decade Ahead: Implications for Monetary Policy." As a result of the preparations, there are no scheduled Fed speakers this week ahead of the symposium.

Some are looking for Fed Chair Powell to make an explicit tapering announcement at Jackson Hole. While it is certainly possible, we think the September 21-22 FOMC meeting is a more likely venue. New macro forecasts will be released then. More importantly, the Fed will have gotten another jobs report on September 3 that will hopefully be strong enough to trigger tapering. It’s clear that once tapering starts, the Fed wants to get it over quickly, perhaps in the span of six months rather than twelve. As such, our current call is for an explicit tapering announcement at the September FOMC, tapering of $20 bln in USTs and $10 bln in MBS at each meeting starting November 3, and completion by March 2022. If the economy continues to develop as the Fed expects, then this would allow for rate a waiting period of 6-9 months before lift-off in Q4 2022.

Of note, reports suggest Treasury Secretary Yellen has told senior White House officials that she supports Powell’s reappointment as Fed Chair. President Biden has reportedly not made a decision yet, with some saying a choice will be made around Labor Day. Powell’s four-year term ends in February and we wholeheartedly believe he should remain in his post. Some progressives have been clamoring for someone less “Wall Street” but Biden could throw them a bone with his picks to replace Vice Chairs Quarles and Clarida, whose terms are ending. There is also an open seat on the Board of Governors and so Biden has a chance to reshape the Fed’s makeup quite significantly. While regulation of the financial sector could become tougher, we cannot fathom another Fed Chair that could be more dovish than Powell and so monetary policy is unlikely to shift much.

FOMC minutes released last week were a bit of a Rorschach test. Those with dovish leanings thought the minutes were dovish, while those (including us) with hawkish leanings thought they were hawkish. In truth, the minutes contained a little bit of everything, which is not surprising given that we know the internal debate about tapering continues. What has also become clear is that since that July 27-28 FOMC meeting, more and more Fed officials have become more vocal about tapering sooner rather than later. To us, the most telling observation was that “Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee's "substantial further progress" criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum-employment goal.”

July personal spending, income, and core PCE data Friday will be the highlight. Retail sales for the month came in much weaker than expected, but some believe that this reflects a switch towards services consumption. If so, this would be picked up in the personal spending data. Consensus sees a 0.4% m/m gain vs. 1.0% in June, while personal income growth is seen picking up a tick to 0.2% m/m. Core PCE is expected to pick up a tick to 3.6% y/y. If so, this would be the highest since May 1991. The recent drop in energy and commodity prices may help limit headline inflation going forward, but we continue to heed Bullard’s warning that core PCE could exceed 2.5% for longer than expected.

Regional Fed manufacturing surveys for August will continue to roll out. Richmond Fed reports Tuesday and is expected at 25 vs. 27 in July. Kansas City Fed reports Thursday and is expected at 25 vs. 30 in July. Last week, Empire survey came in at 18.3 vs. 28.5 expected and 43.0 in July, while the Philly Fed came in at 19.4 vs. 23.1 expected and 21.9 in July. Virtually all the survey and PMI readings are at or near record highs. Some moderation is to be expected from these lofty levels but that does not mean the economy is slowing sharply. Overall, the U.S. manufacturing sector remains strong. Of note, IP came in much stronger than expected in July, up 0.9% m/m vs. 0.5% expected, driven by continued strength in manufacturing production (1.4% m/m vs. 0.7% expected).

Weekly jobless claims data Thursday will be very important. That is because the continuing claims data are for the BLS survey week containing the 12th of the month. Initial claims are expected at 350k vs. 348k the previous week, while continuing claims are expected at 2.78 mln vs. 2.82 mln the previous week. Last week’s readings were both new cycle lows for the pandemic and the signs so far point to another strong jobs report for August. Consensus is currently 750k vs. 943k in July but this will obviously change as we get more clues. 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.

We get another look at Q2 GDP Thursday. Growth is expected to be revised up two ticks to 6.6% SAAR. Yet this is old news and markets are already looking ahead to Q3 and Q4. The Atlanta Fed GDPNow model shows 6.1% SAAR vs. 6.2% previously. That's down slightly from the 6.5% reported for Q2 but is still well above the NY Fed's Nowcast reading of 3.48% SAAR for Q3 vs. 3.79% previously. Of note, BBG consensus is 6.9% SAAR for Q3 and is then seen slowing to 5.6% in Q4, 3.8% in Q1, and 3.0% in Q2.

Other data are expected to show continued strength in the U.S. economy. Markit reports its preliminary PMI readings for August Monday. Headline manufacturing is expected at 62.3 vs. 63.4 in July, while services is expected at 59.2 vs. 59.9 in July. July Chicago Fed National Activity Index will also be reported (0.11 expected) Monday, along with existing home sales (-0.5% m/m expected). New home sales (3.3% m/m expected) will be reported Tuesday. Durable goods orders (-0.3% m/m expected) will be reported Wednesday. Advance goods trade (-$90.6 bln expected), wholesale and retail inventories, and final University of Michigan consumer sentiment (70.6 expected)will all be reported Friday.

EUROPE/MIDDLE EAST/AFRICA

The eurozone has a fairly quiet week. Preliminary PMI readings for August will be reported Monday. Headline manufacturing is expected at 62.0 vs. 62.8 in July, services is expected at 59.5 vs. 59.8 in July, and the composite is expected at 59.6 vs. 60.2 in July. Both the German and French composites are expected to drop around half a point to 62.0 and 56.1, respectively. Germany reports August IFO business climate survey Wednesday, which is expected at 100.4 vs. 100.8 in July. This will be followed by September GfK consumer confidence Thursday, which is expected at -0.5 vs. -0.3 in August. France reports August business and manufacturing confidence Thursday and consumer confidence Friday. Similarly, Italy reports August manufacturing and consumer confidence Friday. All are expected to ease from July.

ECB asset purchases for the week ending August 20 will be reported Monday. Net purchases were EUR17.2 bln for the week ending August 13 vs. EUR16.4 bln for the week ending August 6 and EUR10.7 bln for the week ending July 30. 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 16 meeting. Of note, July eurozone M3 will be reported Thursday and is expected to rise 7.6% y/y vs. 8.3% in June. If so, this would be the slowest since March 2020 and would be extremely disappointing in light of ongoing ECB asset purchases.

U.K. also has a fairly quiet week. Preliminary PMI readings for August will be reported Monday. Headline manufacturing is expected at 59.5 vs. 60.4 in July, services is expected at 59.1 vs. 59.6 in July, and the composite is expected at 58.7 vs. 59.2 in July. CBI releases the results of its August surveys. Industrial trends survey will be reported Monday, followed by the distributive trade survey Wednesday. Recent data have come in mixed ahead of the expire of the government’s job furlough program next month, which is likely causing some concerns for U.K. policymakers.

No wonder the Bank of England just delivered a dovish hold August 5. It warned then that inflation could reach as much as 4% but would then return close to the 2% target. As it is, July CPI came in lower than expected at 2.0% y/y. The inflation forecasts from that meeting are 4.0% (2.5% in May) in 2021, 2.5% (2.0%) in 2022, and 2.0% (2.0%) in 2023, which underscore the fact that the BOE is no hurry to hike and that there is no need to hike aggressively. Along with the soft CPI readings, the recent softness in the real sector data is likely to support the bank’s decision to tilt dovish.

ASIA

Japan has a fairly quiet week. Preliminary PMI readings for August and July department store sales will be reported Monday. July supermarket sales will be reported Tuesday. August Tokyo CPI will be reported Friday. Headline is expected at -0.4% y/y vs. a revised -0.4^(was -0.1%) in July, while core (ex-fresh food) is expected at -0.1% y/y vs. a revised -0.3% (was +0.1%) in July. If so, this would bode ill for the national readings that month even as July data last week showed ongoing deflation risks. National headline came in at -0.3% y/y and core at -0.2% y/y. While both were a bit better than expected, revisions to the data show the longest stretch (12 months) of core deflation since the 28-month month period that ended in June 2011.

The Bank of Japan next meets September 21-22 and no change is expected. Indeed, the bank is most likely on hold for the foreseeable future. Its latest forecasts see core inflation remaining well below the 2% target through FY23, which means that policy won’t be tightened until FY24 at the earliest. New forecasts will be released at the October 27-28 meeting but are not expected to show any material change with respect to inflation. With Suga’s popularity still under water, we still expect another fiscal package in the coming weeks.

Australia also has a fairly quiet week. Preliminary PMI readings for August will be reported Monday. July retail sales will be reported Friday and are expected at -2.1% m/m vs. -1.8% in June. The economy is likely to underperform in H2 as nationwide daily new cases of Covid have made new record highs for two straight days, which means lockdowns are unlikely to end anytime soon. Next RBA meeting is September 7 and no change is expected. The bank has already signaled that it will begin tapering that month despite the lockdowns, which it views as temporary.

AUD is typically the canary in a coal mine for a drop in risk appetite and so it bears watching. AUD traded Friday at new lows for this cycle around .7105 and is on track to test the November 2020 low near .6990. Of note, AUD is the worst performing major currency YTD at -7.3%, followed by SEK at -6.6% YTD. With sterling’s recent swoon, all major currencies are now down YTD against the dollar. Despite the RBNZ’s about face last week, the AUD/NZD has recovered from a brief spike above 1.05 to trade back at the cycle lows just above 1.04.

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