• The Fed releases its Beige Book report; July JOLTS data will be important; BOC is expected to cut rates 25 bp to 4.25%; Chile cut rates 25 bp to 5.5%, as expected
  
• Eurozone and the U.K. reported final services and composite PMIs; ECB officials seem a bit divided; Poland is expected to keep rates steady at 5.75%
  
• Japan and Australia reported final services and composite PMIs; Australia also reported Q2 GDP data; Caixin reported August services and composite PMIs

The dollar is softening as the risk off episode plays out. DXY is trading lower for the first time since August 27 near 101.653 after trading yesterday at the highest since August 20. The yen is outperforming again due to a haven bid, with USD/JPY trading lower near 145.15. The euro is trading slightly higher near $1.1050 while sterling is trading flat near $1.3115. With the U.S. labor market still looking solid, 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. This week’s data will be key in advancing our narrative, culminating with the Friday jobs report. While we believe that the dollar remains vulnerable until the dovish Fed outlook changes, its recent resilience is encouraging.

AMERICAS

The price action from yesterday is carrying over into today. That said, the risk off impulses seem to have ebbed a bit. JPY and CHF are still outperforming, while the dollar is slightly softer. UST yields are down, as are global equity markets. However, U.S. equity futures are pointing to only modest losses at the open. Commodities are mixed, with Brent oil up nearly 1% even as iron ore and coal make new lows for this cycle. The selloff yesterday in tech stocks is mentioned as the likely cause of this risk off sentiment. However, it’s hard to pin such a widespread global flight to safety on just this one factor.

The Fed releases its Beige Book report. Attention will be on the District contacts’ view of the labor market. The July Beige Book showed most Districts reported employment was flat or up slightly, while a few Districts reported modest employment growth. Also watch out to see if more Districts are reporting weaker economic activity. For reference, the July Beige Book noted that a majority of Districts (7) reported some level of increase in activity. However, more Districts (5 vs. 2 previously) reported flat or declining activity than in the prior reporting period. This would be consistent with the economic data showing the labor market has softened a bit, which has likely translated into lower wage pressures and less pricing power for firms.

The dollar's resilience is quite impressive. We think a lot of it boils down to the fact that the market is currently at peak dovishness for the Fed, as easing expectations have been basically steady since Jackson Hole. The market still sees 100 bp of easing by year-end and 200 bp of easing over the next 12 months. The odds of a 50 bp cut in September are stuck around 30-35%. That said, a weak round of data this week would change this equilibrium but for now, the dollar is carving out a nice bottom.

July JOLTS data will be important. Job openings are expected at 8.100 mln vs. 8.184 mln in June. In June, the layoff rate dipped to 0.9%, matching the April 2022 low and indicating that firms are managing headcount through attrition rather than layoffs. Moreover, the job openings rate is near pre-pandemic levels at 4.9% and well above the 4.5% threshold that typically signals a worrisome rise in the unemployment rate. July trade and factory orders data will also be reported today.

ISM manufacturing PMI is worth discussing. Headline came at 47.2 vs. 47.5 expected and 46.8 in July and was the first rise since March. Employment rose to 46.0 vs. 43.4 in July while new orders fell to 44.6 vs. 47.4 in July. Of note, prices paid rose for the second straight month to 54.0 vs. 52.9 in July and is the highest since May. ISM services PMI will be reported Thursday. Headline is expected at 51.1 vs. 51.4 in July. Headline is projected to dip to 51.2 vs. 51.4 in July. The already released regional Fed services business surveys point to downside risks. Keep an eye on employment (51.1 in July) and especially prices paid (56.0 expected vs. 57.0 in July).

Growth remains robust in 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 also tracking Q3 growth at 2.5% SAAR and will be updated Friday. It should also publish its first estimate for Q4 at the same time. While both 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 is expected to cut rates 25 bp to 4.25%. However, 4 of the 34 analysts polled by Bloomberg see no change. In July, the BOC delivered a widely anticipated 25 bp rate cut and signaled more easing was in the pipeline as “ongoing excess supply is lowering inflationary pressures.” The swaps market has more than fully priced in a 25 bp cut along with a small (15%) probability of a 50 bp cut. We would fade the risk of a jumbo cut and expect a 25 bp rate cut as inflation is currently tracking the BOC’s Q3 forecasts.

Chile central bank cut rates 25 bp to 5.5%, as expected. The decision was unanimous and follows a hold in July that was also unanimous. The bank accentuated the negative, noting that spending is showing more weakness and that bank lending remains weak. CLP was the worst performer in EM yesterday but we think that was due mostly to lower copper prices, as the rate cut was largely priced in. August CPI will be reported Friday and headline is expected at 4.7% y/y vs. 4.6% in July. If so, it would be the fifth straight month of acceleration to the highest since November. However, it’s clear that the bank is more concerned about the sluggish economy and so rates should continue. The market is pricing in another 125 bp of easing over the next 12 months that would see the policy rate bottom near 4.25%.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported final services and composite PMIs. Headline services fell four ticks from the preliminary to 52.9, while the composite fell two ticks from the preliminary to 51.0. Looking at the country breakdown, the German composite fell a tick from the preliminary to 48.4 while the French composite rose four ticks from the composite to 53.1. Spain and Italy reported for the first time and their composite PMIs came in at 53.5 and 50.8, respectively. Much of the August improvement in the eurozone readings was driven by an Olympic bounce to France, which will quickly wear off.

ECB officials seem a bit divided. Governing Council member Kazaks pointed out again that “rates have to go lower” and added that “the discussion is only about how quickly and how strongly.” Executive Board member Cipollone warned “there is a real risk that our stance could become too restrictive.” Governing Council member Stournaras said that even after rate cuts, policy “will remain restrictive.” On the other hand, Governing Council member Simkus noted that “for the cut in September, I see quite a clear case” but stressed that “For cutting in October or by more than 25 bp, I find it quite unlikely.” The ECB is widely expected to deliver a 25 bp rate cut at the September 12 meeting while a follow-up cut in October is about 35% priced in. Despite the ECB’s cautiousness, we believe the worsening growth outlook could eventually lead to more easing than what’s currently priced in. Villeroy speaks later today.

The U.K. reported final services and composite PMIs. Headline services rose four ticks from the preliminary to 53.7, while the composite rose four ticks from the preliminary to 53.8. The U.K. economy, like the U.S., is in a bit of a sweet spot that will allow the Bank of England is likely to continue cutting rates cautiously. Next decision is September 19 and the market is pricing in only 25% odds of a cut in favor of November 7.

National Bank of Poland is expected to keep rates steady at 5.75%. At the last meeting July 3, the bank kept rates steady and Governor Glapinski said rates may be cut in 2026 at the earliest. Since then, inflation has continued to accelerate to 4.3% y/y in August, further above the 1.5-3.5% target range. However, Glapinski has softened his stance and said that a rate debate is warranted if the CPI drop is sustainable. Glapinski added that rate cut talk before 2026 cannot be ruled out. The swaps market is pricing in 100 bp of easing over the next 12 months, followed by 100 bp of further easing over the subsequent 12 months that would see the policy rate bottom near 3.75%.

ASIA

Japan reported final services and composite PMIs. Services came in at 53.7 vs. 54.0 preliminary, while the composite fell a tick to 52.9. This is still the high for the cycle. However, with rate rising and the yen strengthening, we do not think this bounce in the PMIs can be sustained and so the Bank of Japan is likely to remain cautious about tightening. The market does not price in the next hike until well into 2025, with only 20-25 bp of tightening seen over the next 12 months. Board member Takata speaks tomorrow.

Australia reported Q2 GDP data. Growth came in as expected at 0.2% q/q vs. a revised 0.2% (was 0.1%) in Q1, while the y/y rate came in a tick higher than expected at 1.0% vs. a revised 1.3% (was 1.1%) in Q1. However, the headline was skewed by the heavy hand of the government, which added 0.3 ppt to the quarterly change in GDP. Household consumption, machinery & equipment, and non-dwelling construction each subtracted -0.1 ppt from growth. Net exports contributed 0.1 ppt, while inventory destocking shaved -0.3 ppt off growth. Sluggish Australia private domestic demand activity reinforces the case for the RBA to start easing later this year. RBA Governor Michele Bullock will have an opportunity during her speech tomorrow to offer some fresh policy guidance.

Australia also reported final services and composite PMIs. Services came in at 52.5 and the composite came in at 51.7, and both were three ticks higher than the preliminary. With iron ore and coal prices continuing to sink due to the sluggish mainland China economy, we do not think the composite PMI can remain above 50 for too long.

Caixin reported August services and composite PMIs. Services came in at 51.6 vs. 51.8 expected and 52.1 in July, while the composite remained steady at 51.2. Over the weekend, official PMIs came in mixed. Manufacturing came in at 49.1 vs. 49.5 expected and 49.4 in July and non-manufacturing came in at 50.3 vs. 50.1 expected and 50.2 in July. This led the official composite to fall a tick to 50.1, the lowest since December 2022 which was right when China reopened. With very limited stimulus and support measures taken so far, we expect the economy to continue slowing. Indeed, reports suggest that financial regulators have proposed cutting interest rates on existing mortgages by around 80 bp in two stages in order to soften the blow for the lenders.