The dollar put in a mixed performance against the majors last week. JPY, SEK, and AUD outperformed while CHF, NZD, and CAD underperformed. Whether the dollar can continue to gain will depend largely on what sort of message the Fed delivers this Wednesday. While we see risks of a 50 bp cut, the data this week should underscore that the U.S. economy remains quite robust in Q3 and that a 25 bp cut should suffice.

AMERICAS

The two-day FOMC meeting ends Wednesday with an expected 25 bp cut. However, a handful of analysts look for a larger 50 bp cut, while the market is pricing in nearly 50% odds of such a move, up from 10% after the PPI data. The market was thrown for a loop with an article by the so-called Fed Whisperer on Friday, where WSJ’s Timiraos wrote that it was going to be a close call between 25 or 50 bp this week. We favor a 25 bp cut but acknowledge real risks of 50 bp. The vote for the monetary policy action will be worth monitoring. The last time there was a dissent at the FOMC was at the June 2022 meeting. It’s worth noting that the Timiraos article suggested Powell’s colleagues were surprised by his dovish tone at Jackson Hole.

The new Dot Plots will be very important. We will clearly see a dovish shift in the Dot Plots. How big? Recall that in the June Dots, the 2024 median moved up to 5.125% from 4.625% in March, while the 2025 median moved from 3.875% to 4.125% and the 2026 median was unchanged at 3.125%. This time around, we expect the 2024 Dot to move back from 5.125% to 4.625%, indicative of three 25 bp cuts by year-end. Furthermore, the 2025 Dot will likely be adjusted lower by 75 bp to 3.375%, while the 2026 and longer-term Dots should remain unchanged at 3.125% and 2.75%, respectively.

Updated macro forecasts will also be key. We anticipate the FOMC to make modest tweaks to its macroeconomic projections. The 2024 growth forecast will likely be lifted one tick to 2.2%, in line with forward-looking indicators, while the 2024 unemployment forecast will likely be raised two ticks to 4.2% and PCE inflation forecast should be adjusted one tick lower to 2.5%, reflecting recent data.

Chair Powell’s post-decision press conference could generate plenty of fireworks. The base case is for Powell to stick to previous guidance that “the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” However, the risk of a dovish curve ball is high because of the cooling in labor market conditions.

The dollar tends to weaken on FOMC decision days. It has done so for six straight, 13 of the past 15, and 17 of the past 20. Think about that last one. This 20 meeting streak began with the March 2022 FOMC meeting, when the Fed first started its aggressive tightening cycle.

The U.S. data highlight will be August retail sales Tuesday. Headline is expected at -0.2% m/m vs. 1.0% in July, while ex-autos is expected at 0.2% m/m vs. 0.4% in July. Expectations for a weak headline reading are driven by a soft vehicle sales data already reported. The so-called control group used for GDP calculations is expected at 0.3% m/m, same as July. August business inventories and industrial production are also reported Tuesday.

In that regard, growth remains robust in Q3. The Atlanta Fed’s GDPNow model is tracking Q3 growth at 2.5% SAAR, up from 2.1% previously. It will be updated Tuesday after the data. Elsewhere, 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 Friday.

Regional Fed surveys for September will start rolling out. Empire manufacturing survey kicks things off Monday and is expected at -4.3 vs. -4.7 in August. New York Fed services will be reported Tuesday and stood at 1.8 in August. Philly Fed manufacturing will be reported Thursday and is expected at -1.0 vs. -7.0 in August.

Weekly jobless claims Thursday will be of interest. That’s because initial claims data will be for the BLS survey week containing the 12th of the month and are expected to remain steady at 230k. if so, the 4-week moving average would fall slightly to 230k and match the low since early June. Elsewhere, continuing claims are reported with a one-week lag and expected at 1.855 mln vs. 1.850 mln last week, which was the lowest since mid-June. There is no Bloomberg consensus yet for September NFP but its whisper number stands at 135k vs. 142k in August. From what we can tell, the labor market remains in solid shape.

Housing market data will also be of interest. NAHB housing market index for September will be reported Tuesday and is expected to rise a point to 40 after slipping in August for the fourth straight month to its lowest point of the year. August building permits (1.2% m/m expected) and housing starts (6.6% m/m expected) will be reported Wednesday. August existing home sales will be reported Thursday and are expected at -1.3% m/m vs. 1.3% in July. Overall, residential investment is forecast to remain a drag on growth in Q3. This could lead the construction sector to accelerate job cuts and worsen the slowdown in the labor market. However, it’s worth noting that total construction jobs account for 5.2% of total non-farm employment while residential construction jobs make up 1.2%.

Bank of Canada releases its summary of deliberations Wednesday. At that September 4 meeting, the bank cut rates 25 bp as expected for a third straight time to 4.25%. Governor Macklem pushed back against market pricing for a larger cut by noting “there was a strong consensus for a 25 bp cut.” Importantly, the BOC signaled again that more easing was in the pipeline and reiterated “If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate.”

Canada data highlight will be August CPI Tuesday. Headline is expected at 2.1% y/y vs. 2.5% in July, while both core median and core trim are expected to fall two ticks to 2.2% y/y and 2.5% y/y, respectively. If so, headline would be the lowest since February 2021 and basically back at the 2% target. For reference, the Bank of Canada (BOC) projects Q3 core inflation (average of trim and median CPI) at 2.5% and Q3 headline inflation at 2.3%. Slower inflation will boost the case for a jumbo 50 bp cut at the next October 23 BOC meeting. Currently, the market sees 35% odds of such a cut.

July retail sales Friday will also be important. Headline is expected at 0.6% m/m vs. -0.3% in June, while ex-autos is expected at 0.2% m/m vs. 0.3% in June. Statistics Canada’s advanced retail indicator suggests sales increased 0.6% m/m.

EUROPE/MIDDLE EAST/AFRICA

Markets are still digesting last week’s ECB decision. After the less dovish than expected message, unnamed officials said an October cut had not been ruled out. Odds of a cut then stand near 50%. We expect the battle between the hawks and the doves to remain in play. Over the weekend, Nagel and Wunsch sounded cautious. Panetta, Guindos, and Lane speak Monday. Holzmann, Vujcic, and Nagel speak Wednesday. Knot and Schnabel both speak twice Thursday. Lagarde speaks Friday.

Eurozone reports Q2 labor costs Monday. Growth in labor costs should moderate and the ECB wage tracker points to a sharper slowdown ahead. Of note, negotiated wages slowed sharply in Q2 to 3.5% y/y and supports the case for falling wage pressures.

Germany reports some key data. September ZEW survey will also be reported Tuesday. Both expectations and current assessment are expected to fall to 17.0 and -80.0, respectively. June retail sales came in Friday at -3.9% y/y, reflecting weakening consumer sentiment. August PPI will be reported Friday and is expected at -1.0% y/y vs. -0.8% in July.

Bank of England meets Thursday and is expected to keep rates steady at 5.0%. A majority of MPC members will likely want to wait for the upcoming October 30 government budget and the November 7 BOE Monetary Policy report before cutting rates again. Interest rate futures imply a low 25% probability of a 25 bp cut this week. Attention will be on the vote split and the target reduction in in the BOE’s stock of UK government bonds for the next 12 months.

The BOE’s decision to cut the policy rate in August was a close call. The vote split was 5-4, with the 4 dissenters supporting the case for no policy change. Notably, Governor Bailey voted with the majority for a cut while Chief Economist Pill preferred to maintain the rate at 5.25%. Haskel was another MPC member who voted to keep rates on hold in August but he’s since been replaced by Alan Taylor. The BOE is also expected to vote to reduce the stock of U.K. government bonds by GBP100bn over the next 12 months, driven by GBP87bn worth of maturing gilts. The past 12 months reduction in the stock of gilts was also set at GBP100bn but was equally split between maturities and sales. Overall, the BOE estimates quantitative tightening to have had little impact on gilt yields, the real economy, and market functioning.

U.K. data highlight will be August CPI Wednesday. Headline is expected to remain steady at 2.2% y/y, core is expected to pick up two ticks to 3.5% y/y, and CPIH is expected to remain steady at 3.1% y/y. Keep an eye on services inflation, which is expected to pick up four ticks to 5.6% y/y. A pick-up in services inflation should reinforce the case for a cautious BOE easing. For reference, the BOE projects headline CPI at 2.4% y/y and services CPI at 5.8% y/y in August. cycle.

August retail sales data Friday will also be important. Headline is expected at 0.4% m/m vs. 0.5% in July, while sales ex-auto fuel is expected at 0.5% vs. 0.7% in July. The y/y rates are expected at 1.3% and 1.1%, respectively. The recovery in real incomes and rising consumer confidence are expected to support consumption growth. Ahead of that data, September GfK consumer confidence will be reported Thursday and is expected to remain steady at -13.

Norges Bank meets Thursday and is expected to leave rates steady at 4.5%. The risk is the Norges Bank engineers a dovish pivot and opens the door for a rate cut by year-end. Inflation has been tracking below the bank’s forecasts the past few of months and the NOK import-weighted exchange rate (I-44) is higher than the Norges Bank assumed in June. Updated macro forecasts will be released, and the policy rate forecasts will be closely scrutinized to gage the start and extent of the easing cycle. In June, the Norges Bank projected steady rates of 4.50% until Q4 2024 and the first full 25 bp cut in Q2 2025. The swaps market sees the first cut in December and 150 bp of total easing over the next twelve months.

ASIA

The two-day Bank of Japan meeting ends Friday with a widely expected hold. The BOJ is also expected to reiterate plans to tighten policy further “if the outlook for economic activity and prices…will be realized.” BOJ Governor Ueda and other BOJ officials have cautioned recently that financial markets “remain unstable” which argues for a pause in the tightening cycle until further notice. The market is not pricing in the next hike until well into 2025, with only 25 bp of total tightening seen over the next 12 months.

Japan data highlight will be August national CPI earlier that day. Headline CPI inflation is expected to quicken to 3.0% vs. 2.8% in July y/y, while core (ex-fresh food) is expected to rise one tick to 2.8% y/y and core ex- energy is expected to rise one tick to 2.0% y/y. Bottom line: we doubt the BOJ will tighten more than is currently priced in as underlying inflation in Japan remains in a firm downtrend.

August trade and July core machine orders will be reported Wednesday. Exports are expected at 10.4% y/y vs. 10.2% in July, while imports are expected at 15.0% y/y vs. 16.6% in July. Core machine orders are expected at 2.5% y/y vs. -1.7% in June.

Australia highlight will be the August jobs report Thursday. Consensus sees 25k jobs added vs. 58.2k in July, while the unemployment is seen steady at 4.2% on an unchanged participation rate of 67.1%. RBA Assistant Governor (Economic) Hunter pointed out last week that “the labor market is still tight relative to full employment” and the RBA’s view is that “further falls in vacancies can still occur alongside a relatively modest increase in the unemployment rate.” The comments support the RBA’s case against near-term rate cuts. However, we expect the RBA to join the global easing cycle later this year because Australia underlying economic activity is weak and points to lower inflation pressures. RBA Assistant Governor Jones speaks Wednesday.

New Zealand highlight will be Q2 GDP data Thursday. Real GDP is expected to fall -0.4% q/q vs. 0.2% in Q1, while the y/y rate is expected at -0.6% vs. 0.3% in Q1. The ANZ’s past business activity index, which has the best correlation to GDP, remains very weak and consistent with a contraction in economic activity. The RBNZ projects real GDP to fall -0.5% q/q and -0.2% q/q in Q2 and Q3, respectively. A deeper downturn in New Zealand economic activity can raise the likelihood for 100 bp of easing by year-end vs. 75 bp currently priced in.

Q2 current account data Wednesday will also be important. The deficit is expected at -6.5% of GDP vs. -6.8% in Q1. If so, it would be the lowest since Q4 2020 but due in large part to the slowing economy.