• Next presidential debate will be held tonight and asset markets could react to the outcome; August NFIB small business optimism softened; Brazil reports August IPCA inflation
  
• Eurozone countries reported soft July IP data; U.K. reported labor market data; Norway reported soft August CPI data
  
• Japan reported soft August machine tool orders; Australia consumer and business sentiment measures grew more pessimistic; China reported mixed August trade data

The dollar is firm ahead of tonight’s presidential debate. Markets are likely to react to the debate outcome (see below). DXY is trading higher for the third straight day near 101.600 and remains on track to test the September high near 101.917. The yen continues to underperform after soft machine tool orders (see below), with USD/JPY trading higher near 143.20. The euro is trading flat near $1.1035 while sterling is trading higher near $1.3095 despite soft wage data (see below). While the U.S. labor market is weakening, it is by no means weak and so we continue to believe that market expectations for aggressive Fed easing remain overdone. The dollar’s recent resilience is encouraging but the fundamental data will have to come in firm in order for the greenback to see further gains. This week’s inflation data have taken on greater importance.

AMERICAS

The dollar’s resilience is noteworthy. Gains continue despite the ongoing dovish Fed easing expectations. The odds of a 50 bp cut this month remain stuck around 25-30%. However, the market is pricing in nearly 125 bp of easing by year-end that suggests 50 bp cuts at the November and December meetings. The market also sees 225 bp of easing over the next 12 months. This trajectory is simply not justified by the ongoing economic data and we continue to look for a repricing in the coming days and weeks. Tomorrow’s CPI data may help start the process.

The next presidential debate will be held tonight. It is the second one to be held but the first between Vice President Harris and former President Trump. It may also be the last debate, as the two candidates have been unable to agree on any others. The outcome of today’s debate can offer more insights on how financial markets could perform under a Trump or Harris presidency. Up until President Joe Biden announced he would leave the race on July 21, national polling average favored Trump to win in 2024 by a margin of about 3 percentage points. But polling momentum has shifted against Trump since Harris was tapped as the official Democratic presidential nominee. National polling average currently show Harris leading Trump by between 1 and 3 percentage points.

Still, the path to 270 electoral college votes is shaping-up to be a nail-biter. Some polls show Trump with slightly more states either solidly in his corner or leaning way (here), while others give Harris the edge (here). Meanwhile, both candidates have narrow leads in the seven key battleground states that total 93 electoral votes: the “Sun Belt” states of Arizona, Nevada, Georgia, and North Carolina and the “Blue Wall” states of Pennsylvania, Michigan, and Wisconsin.

Asset markets could react to the debate outcome. If Trump is the clear winner of the debate, we expect a slightly stronger USD and higher Treasury yields. Fiscal and trade policies under a Trump presidency are likely to be inflationary. This could force the Fed to keep policy restrictive for longer. However, Trump’s ambiguous currency policy is a USD headwind. If Harris is the clear winner of the debate, we expect an uneven reaction in USD and Treasury yields. Fiscal and trade policies under a Harris presidency are less likely to complicate the Fed’s price stability mandate than under a Trump administration.

The New York Fed reported August inflation expectations. 1-year expectations were steady at 3.0%, while 3-year expectations rose to 2.5% s. 2.3% in July. 5-year expectations were also steady at 2.8%. Expectations have been edging lower across the entire spectrum, albeit slowly, and remain well above the Fed’s 2% target. This should give the Fed confidence to start cutting rates this month, but at a very measured pace. Of note, inflation breakeven rates are hovering near 2%, also reflecting a drop in market inflation expectations.

August NFIB small business optimism softened. Headline came in at 91.2 vs. 93.6 expected and 93.7 in July. This was the first drop since March and basically gives back the July rise. In contrast, consumer confidence measures have mostly been edging higher. University of Michigan reports September consumer sentiment Friday and headline is expected at 68.3 vs. 67.9 in August.

Growth remains robust in Q3. The Atlanta Fed’s GDPNow model is now tracking Q3 growth at 2.5% SAAR, up from 2.1% previously. It will be updated next Tuesday after the data. The New York Fed’s Nowcast model is tracking Q3 growth at 2.6% SAAR and Q4 growth at 2.2% SAAR. Both estimates will be updated this Friday.

Brazil reports August IPCA inflation. Headline is expected at 4.27% y/y vs. 4.50% in July. If so, it would be the lowest since June and would move further within the 1.5-4.5% target range. At the last meeting July 31, COPOM kept rates steady at 10.5% and said that "an uncertain global scenario" required "diligent monitoring and even more caution." However, the bank did not give any hints of tightening cycle. Next meeting is September 18 and the market is pricing in a 25 bp hike to 10.75%. Looking ahead, the market is pricing in nearly 200 bp of tightening over the next 12 months that would see the policy rate peak near 12.5%.

EUROPE/MIDDLE EAST/AFRICA

Eurozone countries reported soft July IP data. Spain came in at -0.4% y/y vs. -0.2% expected and a revised 0.2% (was 0.3%) in June, while Italy came in at -3.3% y/y vs. -1.8% expected and -2.6% in June. Eurozone reports IP Friday and is expected at -2.6% y/y vs. -3.9% in June. Last week, German and French IP both came in weaker than expected and so we see downside risks to the headline eurozone reading. Soft data will keep the ECB in easing mode after the widely expected 25 bp cut this Thursday.

U.K. reported labor market data. Average weekly earnings ex-bonuses fell three ticks as expected to a two-year low of 5.1% y/y for the three months ending in July, while the policy-relevant private sector average weekly earnings ex-bonuses fell four ticks to a 26-month low of 4.9% y/y but still tracking a little above the BOE’s Q3 projection of 4.8%. Total average weekly earnings fell a tick more than expected to 4.0% y/y vs. a revised 4.6% (was 4.5%) previously and was the lowest since late 2020. Elsewhere, the unemployment rate matched consensus and dipped a tick to 4.1% during the same period, below the BOE’s Q3 forecast of 4.4%. Easing wage pressures should allow the BOE to continue cutting rates cautiously. The swaps market continues to imply about 50 bp of rate cuts by year-end, which seems about right.

Norway reported soft August CPI data. Headline came in two ticks lower than expected at 2.6% y/y vs. 2.8% in July, while underlying came in as expected at 3.2% y/y vs. 3.3% in July. Headline matched the cycle low from June and moved closer to the 2% target. Inflation continues to undershoot the Norges Bank’s forecasts. For Q3, it saw headline CPI at 3.9% y/y and underlying CPI at 3.7% y/y. Bottom line: we expect the Norges Bank to engineer a dovish pivot at next week’s meeting, which is a drag for NOK. The swaps market sees the first cut in December, along with 150 bp of total easing over the next twelve months.

ASIA

Japan reported soft August machine tool orders. Total orders fell -3.5% y/y vs. 8.4% in July and contracted for the first time since April. Domestic orders led the way at -9.9% y/y and have contracted three straight months, while foreign orders came in at -0.6% y/y and contracted for the first time since April. Orders had been recovering, but much of that had been due to stronger foreign orders, but that is no longer the case. With growing signs of softness in the economy, Bank of Japan tightening expectations remain steady. The market does not price in the next hike until well into 2025, with only 25 bp of tightening seen over the next 12 months. Indeed, reports suggest BOJ officials see no need to hike rates at next week’s meeting.

Australia consumer and business sentiment measures grew more pessimistic. The Westpac Melbourne Institute Consumer Sentiment Index fell -0.5% m/m in August to 84.6 vs. 85.0 in July, as consumers are becoming more concerned about the economic and job market outlook. Meanwhile, the NAB Business confidence index declined 5 points to -4, the lowest since November, while business conditions dropped 3 points to 3 on worsening employment conditions, the lowest since January 2022. The RBA continues to argue against near-term rate cuts because it is more worried about the cost of high inflation. However, we expect the RBA to join the global easing cycle and cut the cash rate by December (about 70% priced in).

China reported mixed August trade data. Exports came in at 8.7% y/y vs. 6.6% expected and 7.0% in July, while imports came in at 0.5% y/y vs. 2.5% expected and 7.2% in July. Export growth was the strongest since March 2023 but much of it was due to low base effects from last year. On the other hand, weak import growth suggests efforts to boost domestic demand have not yet succeeded.