Drivers for the Week of August 29, 2021

August 29, 2021
Here's a look at the main drivers in Developed Markets this week.
  • Markets are still digesting Jackson Hole; our broad U.S. macro calls will be tested this week; jobs data Friday is the main event; other indicators should show continued strength in the U.S. economy; Canada reports some key data this week
  • Eurozone inflation readings for August will be reported; eurozone will also report some real sector data; ECB asset purchases for the week ending August 27 will be reported; U.K. has a very quiet week
  • Japan has a busy week; Senior LDP member Kishida called for a new stimulus package worth “several tens of trillion yen” as soon as possible; Australia reports some key data this week

The dollar is hobbled after Powell’s speech. DXY has an outside down day Friday and is on track to test the August 13 low near 92.471. A break below would set up a test of the July 30 low near 91.782. Likewise, the euro is testing the August 13 high near $1.1805. A break above $1.1815 would set up a test of the July 30 high near $1.1910. Sterling is lagging and has only retraced a little over a third of its August drop. A break above $1.3795 and then $1.3835 is needed to set up a test of the July 30 high near $1.2985. USD/JPY remains heavy below 110 and a break of 109.70 and then 109.55 is needed to set up a test of the August 16 low near 109.10, We remain positive on the dollar but acknowledge that stronger U.S. data this week is needed to offset the impact of Powell’s speech and bring on the next leg of the rally.

AMERICAS

Markets are still digesting Jackson Hole. Did Chair Powell deliver any surprises? No. He said it could be appropriate to begin tapering this year. However, he said that tapering would not carry a direct rate hike timing signal and added that an ill-time policy move could be particularly harmful. We think Powell is right to remain cautious about rate hikes and we think that is what he is talking about in terms of an "ill-timed policy move." His colleagues are not worrying about tapering too soon (see below) and neither should he. Bottom line: we don't think anything has really changed and that tapering will depend on the data. We happen to be more upbeat about the U.S. economy and so we believe the tapering timeline remains intact. If August jobs data are strong, then the Fed should make a tapering announcement at the September 21-22 FOMC meeting.

Ahead of Powell’s speech Friday, hawkish comments poured in from numerous Fed officials. Harker, Bullard, Kaplan, Bostic, and Mester all made the case for tapering soon. This week, only Bostic is scheduled to speak on both Wednesday and Thursday. Of note, we originally had Bostic in the dovish camp but his comments Friday suggest he has moved into the hawkish camp. So by our unofficial count, that makes eleven Fed officials that are calling for imminent tapering: Clarida, Waller, George, Mester, Rosengren, Kaplan, Daly, Barkin, Evans, Bullard, and now Bostic. Noteworthy doves are dwindling and now only consist of Kashkari, Bowman, and Brainard.

We know the Dot Plots are imperfect but they are still worth discussing. In the June Dots, 11 saw the first hike in 2023, making that the median. By my calculations, only 3 need to move forward their expectations to 2022 to move up the median to that year in the September Dots. Such a hawkish shift is very possible given 11 Fed officials are calling for imminent tapering.

Our broad U.S. macro calls will be tested this week. As Powell reminded us, the data remain key. If the outlook changes and the U.S. economy slows significantly, then it would be a likely game-changer for the dollar. The Fed would have no choice but to adjust its expected tapering path significantly. Yet even then, the dollar may hold up better than expected since a U.S. recession would likely be part of a broader global downturn. It all goes back to relative performances.

Of course, jobs data Friday is the main event. Consensus currently sees 750k jobs added vs. 943k in July, while the unemployment rate is expected to fall two ticks to 5.2%. Average hourly earnings are seen steady at 4.0% y/y. Ahead of that, ADP jobs will be reported Wednesday and consensus sees 638k vs. 330k in July. Of note, continuing claims data for the BLS survey week rose to 2.862 mln from a revised 2.865 mln (was 2.82 mln) the previous week. While the weekly miss is disappointing, we note that continuing claims were still down -434k (-510k not SA) for the August survey week compared to the July survey week. As such, the labor market continues to heal.

We will also get some other important economic indicators this week. August Chicago PMI will be reported Tuesday and is expected at 68.0 vs. 73.4 in August. August ISM manufacturing PMI will be reported Wednesday and is expected at 58.5 vs. 59.5 in July. ISM services PMI will be reported Friday and is expected at 62.0 vs. 64.1 in July. Of note, Markit preliminary manufacturing PMI came in at 61.2 vs. 63.4 in July, services came in at 55.2 vs. 59.9 in July, and the composite came in at 55.4 vs. 59.9 in July.

Fed manufacturing surveys for August wrap up with Dallas reporting Monday. It is expected at 23.0 vs. 27.3 in July. So far, Kansas City Fed came in at 29 vs. 30 in July, Richmond Fed came in at 9 vs. 27 in July, Empire survey came in at 18.3 vs. 43.0 in July, and Philly Fed came in at 19.4 vs. 21.9 in July. Virtually all the survey and PMI readings were at or near record highs this summer and so some moderation is to be expected from these lofty levels. This does not mean the manufacturing sector is slowing sharply.

Other indicators should show continued strength in the U.S. economy. July pending home sales (0.4% m/m expected) will be reported Monday. June S&P CoreLogic house prices and August Conference Board consumer confidence (123.0 expected) will be reported Tuesday. July construction spending (0.2% m/m expected) and August auto sales (14.5 annualized expected) will be reported Wednesday. August Challenger job cuts, July trade data (-$71.0 bln expected), and factory orders (0.3% m/m expected) will be reported Thursday.

Canada reports some key data this week. Q2 current account data will be reported Monday. Q2 GDP will be reported Tuesday, with growth expected at 2.5% q/q annualized 5.6% in Q1. August Markit manufacturing PMI will be reported Wednesday. July building permits and trade data will be reported Thursday, followed by Q2 labor productivity Friday. For now, the Bank of Canada is on hold but will likely taper again before year-end. Next policy meeting is September 8 and no change is expected then.

EUROPE/MIDDLE EAST/AFRICA

Eurozone inflation readings for August will be reported. Germany and Spain report EU harmonized readings Monday. The former is expected at 3.4% y/y vs. 3.1% in July, while the latter is expected to remain steady at 2.9% y/y. France and Italy report EU harmonized readings Tuesday. The former is expected at 2.1% y/y vs. 1.5% in July, while the latter is expected at 2.1% y/y vs. 1.0% in July. Later that day, the eurozone reading will be reported and headline inflation is expected at 2.7% y/y vs. 2.2% in July. Eurozone PPI will be reported Thursday and is expected to accelerate to 11.0% y/y vs. 10.2% in June. The ECB hawks will be spooked by rising inflation but the doves are firmly in control right now and so policy is likely to remain loose for the time being.

The eurozone will also report some real sector data. Final eurozone August PMI readings will be reported. Manufacturing PMIs will be reported Wednesday, while services and composite PMIs will be reported Friday. France reports July consumer spending Tuesday and is expected to rise 0.2% m/m vs. 0.3% in June. Germany reports July retail sales Wednesday and are expected at -1.0% m/m vs. 4.5% in June. Eurozone retail sales for July will be reported Friday and are expected flat m/m vs. 1.5% in June.

ECB asset purchases for the week ending August 27 will be reported Monday. Net purchases were EUR16.6 bln for the week ending August 20 vs. EUR17.2 bln for the week ending August 13 and EUR16.4 bln for the week ending August 6. The ECB has been aiming for net weekly purchases of around EUR20 bln since the accelerated pace began in March, but have fallen a bit short due to thin market conditions over the summer. 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 slowed as expected to 7.6% y/y vs. 8.3% in June. This was the slowest since March 2020 and is extremely disappointing in light of ongoing ECB asset purchases.

U.K. has a very quiet week. Only major data to be reported are the final August PMI readings. Final manufacturing PMI will be reported Wednesday, followed by final services and composite PMIs Friday. The data have been coming in mixed recently, which we think justifies the dovish hold from the Bank of England on August 5. Next decision is September 23 and another dovish hold is likely.

ASIA

Japan has a busy week. July retail sales data will be reported Monday and are expected to rise 0.4% m/m vs. 3.1% in June. Labor market data and housing starts will be reported Tuesday. Unemployment is expected to remain steady at 2.9%, while the jobs-to-applicant ratio is expected to drop a tick to 1.12. August vehicle sales will be reported Wednesday. Final manufacturing PMI will also be reported Wednesday, followed by final services and composite PMIs Friday.

Senior LDP member Kishida called for a new stimulus package worth “several tens of trillion yen” as soon as possible. Kishida is a former Foreign Minister and will challenge Prime Minister Suga for leadership of the LDP next month. We fully expect Suga to announce a fiscal package soon to help boost the slumping economy and shore up his public support. For now, the Bank of Japan is on hold as it awaits fiscal stimulus. Next policy meeting is September 21-22 and no change is expected then.

Australia reports some key data this week. Q2 current account data, July building approvals, and private sector credit will be reported Tuesday. Q2 GDP will be reported Wednesday, with growth expected at 0.5% q/q vs. 1.8% in Q1. July trade data will be reported Thursday, with exports expected to rise 4% m/m vs. 4% in June and imports expected to rise 2% vs. 1% in June. Final manufacturing PMI will also be reported Wednesday, followed by final services and composite PMIs Friday. The Reserve Bank of Australia should proceed with tapering at its next policy meeting September 7. Some are calling for the RBA to delay tapering, as GDP could contract in Q3 due to the extended lockdowns.

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