• The U.S. labor market remains the driver for the Fed; easing expectations have picked up after this week’s soft data; ADP private sector jobs estimate will be reported; August ISM services PMI will also be reported; Fed Beige Book report was mixed; July JOLTS data were mixed; BOC cut rates 25 bp to 4.25%, as expected; snap elections in Canada this fall are increasingly likely
  
• Eurozone reported soft July retail sales; Germany reported firm July factory orders; ECB Governing Council member Holzmann speaks; U.K. August DMP inflation expectations rose
  
• Japan reported firm July cash earnings data; BOJ board member Takata sounded hawkish; Australia reported July trade data; RBA Governor Bullock stuck to the bank’s hawkish guidance; Malaysia kept rates steady at 3.0%, as expected; Philippines August CPI cooled

The dollar is soft ahead of ADP and ISM services PMI. DXY is trading lower for the second straight day near 101.182 after mixed JOLTS data got the ball rolling yesterday. The yen is outperforming again after firm wage data and hawkish BOJ comments (see below), with USD/JPY trading lower near 143.50. The euro is trading higher near $1.11 while sterling is trading higher near $1.3160. We believe the U.S. labor market remains solid despite the JOLTS data (see below), and so we continue to believe that market expectations for aggressive Fed easing remain overdone. We also continue to believe that the divergence story remains in place and should eventually support the dollar. Labor market reading today will be key in advancing our narrative, culminating with the Friday jobs report tomorrow. While we believe that the dollar remains vulnerable until the dovish Fed outlook changes, its recent resilience is encouraging.

AMERICAS

The U.S. labor market remains the driver for Fed expectations. The mixed JOLTS data yesterday (see below) took the wind out of the dollar’s sails as Fed easing expectations picked up. We get a steady stream of labor market data today and tomorrow that will be key for the dollar’s near-term outlook.

Fed easing expectations have picked up after this week’s soft data. The market now sees 100-125 bp of easing by year-end and nearly 225 bp of easing over the next 12 months, both up 25 bp since the start of this week. The odds of a 50 bp cut in September have risen to nearly 50% vs. 25-30% at the start of this week. Williams and Waller speak tomorrow. At midnight tomorrow, the media blackout goes into effect and there will be no Fed speakers until Powell’s post-decision press conference the afternoon of September 18.

ADP private sector jobs estimate will be reported. It is expected at 145k vs. 122k in July and comes a day ahead of the August jobs report. Bloomberg consensus for NFP stands at 165k vs. 114k in July, while its whisper number stands at 160k. The unemployment rate is expected to fall a tick to 4.2%, with the participation expected to remain steady at 62.7%. Average hourly earnings are expected to rise a tick to 3.7% in July, while the average workweek is expected to rise a tick to 34.3.

We see upside risk to August non-farm payrolls as some of the temporary factors that contributed to the soft July job report reverse. Fed Governor Bowman pointed out that “the rise in the unemployment rate in July was largely accounted for by workers who are experiencing a temporary layoff and are more likely to be rehired in coming months. Hurricane Beryl also likely contributed to weaker job gains, as the number of workers not working due to bad weather increased significantly last month.” August Challenger job cuts and weekly jobless claims will also be reported today.

August ISM services PMI will also be reported. Headline is expected to remain steady at 51.4. The already released regional Fed services business surveys point to downside risks. Keep an eye on employment (50.5 expected vs. 51.1 in July) and prices paid (56.0 expected vs. 57.0 in July). Of note, the US S&P Global services PMI rose to a 2-month high of 55.2 vs. 55.0 in July.

The Fed Beige Book report was mixed. On Overall Economic Activity: Economic activity grew slightly in three Districts, while the number of Districts that reported flat or declining activity rose from five in the prior period to nine in the current period. District contacts generally expected economic activity to remain stable or to improve somewhat in the coming months, though contacts in three Districts anticipated slight declines. On Labor Markets: Employment levels were generally flat to up slightly in recent weeks. Five Districts saw slight or modest increases in overall headcounts, but a few Districts reported that firms reduced shifts and hours, left advertised positions unfilled, or reduced headcounts through attrition – though accounts of layoffs remained rare. On balance, wages rose at a modest pace, in line with the slowing trend described in recent reports. On Prices: On balance, prices increased modestly in the most recent reporting period. However, three Districts reported only slight increases in selling prices. Looking ahead, contacts generally expected price and cost pressures to stabilize or ease further in the coming months.

July JOLTS data were mixed. Openings came in at 7.673 mln vs. 8.100 mln expected and a revised 7.910 mln (was 8.184 mln) in June. This was the lowest since January 2021. Furthermore, the openings rate fell to 4.6% vs. 4.8% in June and is nearing the 4.5% level that often precedes a significant rise in the unemployment rate. Hires rose to 5.521 mln vs. 5.248 mln in June, while the hires rate rose to 3.5% vs. 3.3% in June and the layoffs rate rose to 1.1% vs. 1.0% in June, suggesting that firms are still on net adding jobs. Bottom line: the headline looks weak but the details aren't so bad.

Growth remains robust in Q3. The Atlanta Fed’s GDPNow model is now tracking Q3 growth at 2.1% SAAR vs. 2.0% previously. Next update comes next Monday after the data. Elsewhere, the New York Fed's Nowcast model is tracking Q3 growth at 2.5% SAAR and will be updated tomorrow. It should also give its first estimate for Q4 at the same time. While both of the model estimates are down from their earlier highs, growth remaining above trend is quite impressive in light of the Fed’s tightening.

Bank of Canada cut rates 25 bp to 4.25%, as expected. It was the third straight 25 bp cut. The market saw small odds of a larger 50 bp cut but Governor Macklem said, “there was a strong consensus for a 25 bp cut.” Moreover, the BOC cautioned again about the upside risk to inflation from shelter and other services prices. Importantly, the BOC signaled again that more easing was in the pipeline which is a drag for CAD. BOC reiterated “If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate.” Updated macro forecasts will come at the next meeting October 23.

Canada August S&P Global services and composite PMIs will be reported. Earlier this week, its manufacturing PMI came in at 49.5 vs. 47.8 in July. All three have been below 50 for the past two months. Ivey PMI will be reported tomorrow.

Snap elections in Canada this fall are increasingly likely. Yesterday, New Democratic Party (NDP) Leader Singh scrapped a power-sharing deal he signed with Prime Minister Trudeau in March 2022, which had ensured the survival of the minority Liberal government. Soon after, Conservative leader Pierre Poilievre - who’s been leading in the polls over the past year by wide margin of between 15 and 20 ppt - confirmed that he will table a motion of no confidence against the Liberal government perhaps as soon as the week of September 16. The country could be plunged into an election campaign if the motion has majority support in parliament. Stay tune.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported soft July retail sales. Sales came in a tick lower than expected at 0.1% m/m vs. a revised -0.4% (was -0.3%) in June. The y/y rate came in at -0.1% vs. 0.2% expected and a revised -0.4% (was -0.3%) in June. Italy reports sales tomorrow, while German sales data have been delayed, with May data expected next week. Activity in the eurozone remains sluggish and should persuade the ECB to continue cutting rates.

Germany reported firm July factory orders. Orders rose 2.9% m/m vs. -1.7% expected and a revised 4.6% (was 3.9%) in June. As a result, the y/y rate improved to 3.7% vs. -1.9% expected and a revised -11.2% (was -11.8%) in June. This was the first positive y/y reading since December. German IP and trade data will be reported tomorrow. IP is expected at -3.5% y/y vs. -4.1% in June.

ECB Governing Council member Holzmann speaks. He remains one of the leading hawks on the GC and his comments today should reflect that. As things stand, ECB easing expectations remain intact. A 25 bp cut September 20 is fully priced in. While another cut in Q4 is also fully priced in, the odds of a third cut stand around 50%. Despite the ECB’s cautiousness, we believe the worsening growth outlook will eventually lead to more easing than what’s currently priced in.

U.K. August Decision Maker Panel inflation expectations rose. 1-year expectations picked up a tick to 2.6% while 3-year expectations picked up two ticks to 2.7%. Both had fallen to 2.5% in July, the lowest since this series began in 2022. Overall, the higher readings support the BOE’s gradual easing guidance. Indeed, the market is pricing in less than 30% odds of a cut at the next meeting September 19 in favor of November 7 move. We continue to expect a more muted BOE easing cycle than the ECB, which favors a lower EUR/GBP.

ASIA

Japan reported firm July cash earning data. Nominal earnings came in at 3.6% y/y vs. 2.9% expected and 4.5% in June, while real earnings came in at 0.4% y/y vs. -0.6% expected and 1.1% in June. Scheduled full-time pay came in at 3.0% y/y vs. 2.8% expected and 2.7% in June. This data is likely to keep the BOJ in tightening mode, but the pace will likely remain cautious.

Bank of Japan board member Takata sounded hawkish. Takata said that “It will be necessary to adjust the degree of easing” if inflation aligns with the bank’s projections. However, Takata signaled that the BOJ is in no rush to hike as “we must closely monitor and examine market developments for the time being” as the effects of the global turmoil in early August persist. The comments suggest the bar for a rate hike at the September 20 meeting remains very high. Indeed, the market is not pricing in the next hike until well into 2025, with only 25 bp of tightening seen over the next 12 months.

Australia reported July trade data. Exports rose 0.7% m/m s. a revised 1.4% (was 1.7%) in June, while imports fell -0.8%m/m vs. a revised 0.4% (was 0.5%) in June. In y/y terms, exports improved to -1.4% while imports worsened to 3.0%. Of note, exports to China slumped -16.1% m/m and -13.9% y/y, reflecting the ongoing weakness in the mainland economy. With iron ore and coal prices still sliding, we expected exports to remain under pressure in August and September.

RBA Governor Bullock stuck to the bank’s hawkish guidance. Bullock warned of the cost of high inflation and reiterated that “if the economy evolves broadly as anticipated, the Board does not expect that it will be in a position to cut rates in the near term.” Still, RBA cash rate futures continue to price in high odds (around 85%) of a 25 bp cut by December. We concur.

Bank Negara Malaysia kept rates steady at 3.0%, as expected. It noted that "At the current OPR level, the monetary policy stance remains supportive of the economy and is consistent with the current assessment of inflation and growth prospects." The bank said both headline and core inflation are expected to remain below 3% but warned that the outlook remains "highly subject to the implementation of further domestic policy measures." While the bank does not have an explicit inflation target, the fact that inflation has remained steady at 2.0% for three straight months despite the end of some fuel subsidies over the summer suggests it will lean more dovish in the coming months. The swaps market is pricing in 25 bp of easing over the next 12 months.

Philippines August CPI cooled. Headline came in at 3.3% y/y vs. 3.6% expected and 4.4% in July. This was the lowest since January and is back near the center of the 2-4% target range after one month above that range. At the last policy meeting August 15, the central bank cut rates 25 bp to 6.25% and Governor Remolona said “It’s one move. We may need further moves in the same direction” and added that another 25 bp cut was possible in either October or December. Remolona said “We’re somewhat more confident in the inflation numbers coming down than in the GDP numbers going up.” Next meeting is October 17 and if disinflation continues, another 25 bp cut is likely. The swaps market is pricing in 200 bp of easing over the next 6 months that would see the policy rate bottom near 4.25%.