• Many Fed officials remain cautious; data highlight will be July PCE; personal income and spending will be reported at the same time; Chicago PMI will also be reported; Canada highlight will be Q2 GDP data
  
• Eurozone reported August CPI; ECB hawks are still controlling the cautious narrative; U.K. July money and credit data reinforce the BOE’s cautious easing policy guidance
  
• August Tokyo CPI ran hot; July labor market and real sector data were mixed; Australia reported soft July retail sales data; PBOC is pushing back against falling long-term yields; China reports official August PMIs Saturday local time

The dollar remains firm ahead of PCE data. DXY is trading higher for the third straight day near 101.424. If the gains are sustained after the data, DXY will post its first weekly gain since mid-July. The euro is trading flat near $1.1080 despite favorable CPI data that will allow the ECB to continue easing (see below), while sterling is trading flat near $1.3170. We see scope for EUR/GBP to continue falling. USD/JPY is trading higher near 145.25 despite higher than expected August Tokyo CPI data (see below). With the U.S. labor market looking solid, we continue to believe that market expectations for aggressive Fed easing remain overdone (see below). We also continue to believe that the divergence story remains in place (supported by the August PMIs) and should eventually support the dollar. While we believe that the dollar remains vulnerable until the dovish Fed narrative changes, its recent resilience is encouraging.

AMERICAS

Many Fed officials remain cautious. Bostic said that inflation has come down significantly from its 2022 peak but is “still far” from the 2% target. He added that “I’ve really been focused, laser focused on the short run, getting that inflation back in to target.” Market pricing for the Fed really hasn't changed. 100 bp of easing is still seen by year-end, with 200 bp total seen over the next 12 months. Odds of a 50 bp move in September are around 30%. With his focus on the labor market, it’s clear that the jobs data is the most important for policy. If we get a strong August NFP (above 200k), then we lean towards 25 bp. If we get a weak reading (below 100k), then we think a 50 bp cut becomes live. Anything in between and it’s a toss-up.

Data highlight will be July PCE. Headline is expected to remain steady at 2.5% y/y and core is expected to pick up a tick to 2.7% y/y. Of note, the Cleveland Fed’s Nowcast model estimates July headline and core PCE both at 2.6% y/y. For August, the Cleveland Fed estimates headline and core PCE at 2.4% y/y and 2.8% y/y, respectively. In other words, there is likely to be uneven progress in meeting the 2% target. However, it’s clear from Powell’s speech that disinflation has become an afterthought, with the focus now clearly on the employment mandate.

Personal income and spending will be reported at the same time. Income is expected to remain steady at 0.2% m/m while spending is expected at 0.5% m/m vs. 0.3% in June. Real spending is expected to pick up a tick to 0.3% m/m. Of note, control group retail sales used for GDP calculations came in a bit stronger than expected at 0.3% m/m in July after surging 0.9% the previous month. As long as jobs are being created, income will continue to grow and consumption will remain robust.

Weekly jobless claims are worth discussing. Initial claims came in at 231k vs. 232k expected and a revised 233k (was 232k) last week. As a result, the 4-week moving average fell to 232k vs. 236k last week and is the lowest since early June. Continuing claims were for the BLS survey week and came in at 1.868 mln vs. 1.870 mln expected and a revised 1.855 mln (was 1.863 mln) last week. There are still no signs of distress in the labor market, which is helping to support consumption. Bloomberg consensus for August NFP is at 160k vs. 114k in July, while its whisper number currently comes in at 150k.

Q2 GDP growth was revised up. Growth came in at 3.0% SAAR vs. 2.8% advance. Personal consumption was revised to 2.9% SAAR vs. 2.3% advance, while fixed investment was revised to 3.0% SAAR vs. 3.6% advance and government consumption was revised to 2.7% SAAR vs. 3.1% advance. Looking at the breakdown of the headline 3.0% SAAR growth, personal consumption contributed 1.95 ppt vs. 1.57 advance, fixed investment contributed 0.53 ppt vs. 0.64 advance, government consumption contributed 0.46 ppt vs. 0.53 advance, and net exports subtracted -0.77 ppt vs. -0.72 advance. Of note, private domestic demand grew 2.9% SAAR vs. 2.6% advance.

Momentum is carrying over into Q3. The Atlanta Fed’s GDPNow model is tracking Q3 growth at 2.0% SAAR and will be updated today after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q3 growth at 1.9% SAAR and will also be updated today. It should also publish its first estimate for Q4 at the same time. While both model estimates are down from their earlier highs, growth near trend remains quite impressive in light of the Fed’s tightening.

Chicago PMI will also be reported. Headline is expected to fall half a point to 44.8. However, this series has not tracked the national PMIs very well this past year and so it holds little value right now. Of note, S&P Global reported firm preliminary August PMIs. Manufacturing came in at 48.0 vs. 49.6 in July, services came in at 55.2 vs. 55.0 in July, and the composite came in at 54.1 vs. 54.3 in July. ISM PMIs will be reported next week. University of Michigan also reports final August consumer sentiment today.

Canada highlight will be Q2 GDP data. Growth is expected at 1.8% SAAR vs. 1.7% in Q1. The Bank of Canada has penciled in more modest growth of 1.5% SAAR, driven by government spending, household consumption, and business fixed investment. Regardless, the Q2 GDP report is unlikely to dent market pricing for an additional 75 bp of rate cuts by year-end, as inflation in Canada is easing rapidly.

Brazil reports July consolidated budget data. A primary deficit of -BRL5.5 bln is expected vs. -BRL40.9 bln in June. Central government budget data will be reported next week and a primary deficit of -BRL8.6 bln is expected vs. -BRL38.8 bln in June. Loose fiscal policy is forcing the central bank to tighten monetary policy sooner than it desired. Next COPOM meeting is September 18 and a 50 bp hike is over 80% priced in. Looking further out, 200 bp of total tightening is priced in over the next 12 months that would see the policy rate peak near 12.50%.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported August CPI. Headline came in as expected at 2.2% y/y vs. 2.6% in July, while core came in as expected at 2.8% y/y vs. 2.9% in July. Headline is the lowest since July 2021 and nearing the 2% target. Of note, services inflation came in at 4.2% y/y vs. 4.0% y/y. It has remained sticky around 4% since November 2023 and will keep the ECB in a cautious mood. France and Italy also reported CPI. France’s EU Harmonised inflation came in a tick higher than expected at 2.2% y/y vs. 2.7% in July, while Italy’s came in as expected at 1.3% y/y vs. 1.6% in July. Yesterday, Spain’s and Germany’s both came in lower than expected at 2.4% y/y and 2.0% y/y, respectively. Overall, the disinflationary process has picked up again after stalling the past few months and should allow the ECB to continue easing in September and beyond.

ECB hawks are still controlling the cautious narrative. Schnabel said that “Given that the path back to price stability hinges on a set of critical assumptions, policy should proceed gradually and cautiously. The pace of policy easing cannot be mechanical. It needs to rest on data and analysis.” Nagel said “We need to be careful and must not lower policy rates too quickly. We are not there yet. While our 2% target is in sight, we have not reached it.” While these comments suggest some discomfort with market pricing for 75 bp of easing by year-end, we believe the soggy growth outlook supports this rate path.

Eurozone countries reported retail sales data. Spain reported July sales at 1.0% y/y vs. a revised 0.4% (was 0.3%) in May. Germany reports May retail sales later today and are expected at 0.1% m/m vs. -0.2% in April. Lastly, France reported July consumer spending at -0.6% y/y s. -0.9% expected and a revised -1.1% (was -1.0%) in June. Eurozone retail sales will be reported next Thursday and are expected at 0.2% y/y vs. -0.3% in June.

U.K. July money and credit data reinforce the BOE’s cautious easing policy guidance. M4 money supply rose 2.1% y/y vs. 1.1% in June and is consistent with a gradual pick-up in economic activity. Moreover, net mortgage approvals for house purchases, which is an indicator of future borrowing, increased to 62,000 in July, the highest since September 2022.

U.K. house prices continue to recover. Nationwide reported a -0.2% m/m drop in prices in August vs. 0.2% expected and 0.3% in July. On a y/y basis, however, house prices rose 2.4% vs. 2.1% in July, which is the highest since December 2022. Other measures of house prices are also recovering, albeit modestly.

ASIA

August Tokyo CPI ran hot. Headline came in at 2.6% y/y vs. 2.3% expected and 2.2% in July, core (ex-fresh food) came in at 2.4% y/y vs. 2.2% expected and actual in July, and core ex-energy came in at 1.6% y/y vs. 1.4% expected and 1.5% in July. This was the fourth straight acceleration in core inflation to the highest since March. If this acceleration is mirrored in the national core CPI, it will put added pressure on the Bank of Japan to continue tightening. However, market is not pricing another hike until well into 2025.

July labor market data were mixed. The unemployment rate unexpectedly rose two ticks to 2.7%, while the job-to-applicant ratio unexpectedly rose a tick to 1.24. Both were expected to remain steady. Unemployment is the highest since March 2023 and suggests wage pressures will remain contained. July cash earnings will be reported next Thursday and are expected to fall significantly from the June spike.

July real sector data were also mixed. Retail sales came in two ticks lower than expected at 2.6% y/y vs. a revised 3.8% (was 3.7%) in June, IP came in as expected at 2.7% y/y vs. -7.9% in June, and housing starts came in at -0.2% vs. -1.0% expected and -6.7% in June. PMI readings remain firm but the hard data are showing some loss of momentum as we move through Q3.

Australia reported soft July retail sales data. Sales came in flat m/m vs. 0.3% expected and 0.5% in June. Timely transaction-based spending data and the RBA’s liaison discussions had pointed to subdued consumption growth. Those liaison contacts report that households are generally budget-conscious, trading down to cheaper items, concentrating spending in promotional periods and reducing non-essential spending. The data reinforce the case for an RBA rate cut by year-end, which is currently around 80% priced in.

August ANZ New Zealand consumer confidence was reported. Headline rose to 92.2 vs. 87.9 in July, driven by a rise in the future conditions index. This was the highest since February and follows the sharp rise in August ANZ business confidence reported yesterday. Nonetheless, consumer confidence remains well below the 20-year average of 114.0 and does not really move the dial on RBNZ easing expectations. The swaps market is still pricing in roughly 75 bp of easing by year-end, which is a headwind for NZD.

PBOC is pushing back against falling long-term yields. Reports suggest the bank sold long-dated bonds and bought short-dated bonds that resulted in net purchases of CNY100 bln. While it’s not strict Yield Curve Control (at least, not yet), we’d call it a Reverse Operation Twist. It’s reverse because the Fed’s Operation Twist involved buying long-dated bonds and selling short-dated bonds in an effort to flatten the yield curve and stimulate the economy via lower long-dated rates. We find the PBOC move a bit counter-intuitive, since policymakers are trying elsewhere to stimulate the economy. That said, it seems the PBOC is trying to discourage one-way market bets on yields that could lead to financial instability. The market will likely test the PBOC but when all is said and done, we suspect the PBOC will win this battle.

China reports official August PMIs Saturday local time. Manufacturing is expected at 49.5 vs. 49.4 in July, while non-manufacturing is expected at 50.1 vs. 50.2 in July. Caixin PMIs will be reported next week. Weakness in the mainland economy is likely to persist over the medium-term, as policymakers so far have refrained from taking the painful measures needed to address the huge debt overhang.

Korea reports August trade data Sunday local time. Exports are expected at 12.6% y/y vs. 13.9% in July, while imports are expected at 6.3% y/y vs. 10.5% in July. Much of the improvement is due to low base effects that will wear off in Q4 and beyond. Yen strength since mid-July should help boost Korean export competitiveness, but it will take some time before it shows up in the trade data.