The dollar put in a mixed performance against the majors last week JPY, CHF, and EUR outperformed while AUD, NZD, and NOK underperformed. Despite the soft jobs data, the dollar posted a strong turnaround and ended Friday much firmer. That firmness should carry over into this week, but whether it can be sustained will depend very much on the August inflation data. The Fed media blackout is now in effect but comments ahead of the weekend suggest there is no consensus yet on a 25 or 50 bp cut at this month’s FOMC meeting.

AMERICAS

The initial knee-jerk reaction to the soft jobs report was negative. UST yields plunged and dragged the dollar lower. However, the greenback staged a strong recovery throughout the day and posted bullish engulfing patterns against every major currency except for JPY and CHF. From a technical standpoint, further gains are likely. However, the fundamental backdrop will have to cooperate.

Fed easing expectations have intensified. The odds of a 50 bp cut this month remain stuck around 30%. However, the market is now pricing in nearly 125 bp of easing by year-end and 225-250 bp of easing over the next 12 months. Those are both up nearly 25 bp on the week.

August inflation data take center stage. CPI will be reported Wednesday. Headline is expected at 2.6% y/y vs. 2.9% in July, while core is expected to remain steady at 3.2% y/y. The increase in the ISM services and manufacturing prices paid indexes point to upside risk to the August CPI print. Regardless, the progress on inflation is encouraging and Fed officials are more concerned with downside risk to employment than upside risk to inflation. The Cleveland Fed’s Nowcast model sees headline and core at 2.6% and 3.2%, respectively. For September, the model sees headline and core at 2.4% and 3.1%, respectively. PPI will be reported Thursday. Headline is expected at 1.7% y/y vs. 2.2% in July, while core is expected to remain steady at 2.4% y/y.

New York Fed reports August inflation expectations Monday. Expectations have been edging lower across the entire spectrum, which should give the Fed confidence to start cutting rates this month. Of note, inflation breakeven rates are hovering near 2%, also reflecting a drop in market inflation expectations.

University of Michigan reports preliminary September consumer sentiment Friday. Headline is expected at 68.3 vs. 67.9 in August, which would represent a four-month high that’s consistent with healthy consumer spending activity. Strong household balance sheets also support solid consumption growth. Net worth-to-disposable personal income ratio rose to 776% of GDP in Q1, just under its all-time high at 835% of GDP in Q1 2022. Q2 data is due Thursday.

The next presidential debate will be held Tuesday. 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. Polls continue to suggest it will be a very tight contest.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank meets Thursday and is expected to cut rates 25 bp. We also expect the ECB to maintain its cautious easing guidance that “It will keep policy rates sufficiently restrictive for as long as necessary” and “follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction.” Attention will also be on the updated macroeconomic projection. Inflation is tracking the ECB projections, but sluggish eurozone economic activity suggests risks that the ECB tweaks lower its inflation and real GDP growth forecasts. This could lead to a downward adjustment to eurozone interest rate expectations, which would weigh on EUR. The swaps market continues to imply 50-75 bp of cuts by year-end.

IP data will be the only major data points. Spain and Italy report July IP Tuesday. Eurozone reports IP Friday and is expected at -2.8% y/y vs. -3.9% in June. Last week, German and French IP both came in weaker than expected.

U.K. monthly data dump begins. Labor market data will be reported Tuesday. The unemployment rate is expected to fall a tick to 4.1% for the three months ended in July, while average weekly earnings ex-bonuses are expected to fall three ticks to 5.1% y/y and would track a little above the Bank of England’s Q3 projection of 4.8% y/y. If so, the BOE will remain cautious from easing too aggressively. The swaps market continues to imply almost 50 bp of cuts by year-end.

July real sector activity will be reported Wednesday. GDP is expected at 0.2% m/m vs. flat in June, IP is expected at 0.3% m/m vs. 0.8% in July, services is expected at 0.2% m/m vs. -0.1% in June, and construction is expected at 0.2% m/m vs. 0.5% in June. The PMI readings indicate all three sectors of the economy (services, manufacturing, and construction) made positive contribution to monthly growth.

Bank of England releases its August inflation expectations survey. Expectations continue to fall across the spectrum, albeit slowly. As such, this should reinforce the BOE’s cautious approach to easing.

Norway reports August CPI data Tuesday. Headline is expected at 3.0% y/y vs. 2.8% in July, while underlying is expected at 3.2% y/y vs. 3.3% in July. If so, headline would accelerate for the second straight month to the highest since May and move further above the 2% target. Inflation is tracking below the Norges Bank’s forecasts. For Q3, the Norges Bank penciled in headline CPI at 3.9% and underlying CPI at 3.7%. More evidence of slowing inflation pressures will likely lead the Norges Bank to engineer a dovish pivot at next week’s policy-setting meeting. The swaps market sees almost 150 bp of cuts over the next 12 months.

Sweden reports August CPI data Thursday. Headline is expected at 2.1% y/y vs. 2.6% in July, CPIF is expected at 1.3% y/y vs. 1.7% in July, and CPIF ex-energy is expected to remain steady at 2.2% y/y. if so, CPIF would match the cycle low from June and move well below the 2% target. If the disinflation outlook remains unchanged, the Riksbank’s guidance is to cut the policy rate “two or three times during the second half of the year.” Governor Erik Thedeen pointed out last week “I see three additional cuts as most likely.” The swaps market is more aggressive and implies almost four cuts by year-end.

ASIA

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. Nakagawa speaks Wednesday. Tamura speaks Thursday.

Q3 BSI survey will be reported Thursday. Business conditions have stabilized in recent quarters, but headwinds are building.

Japan reports July current account data Monday. An adjusted surplus of JPY2.117 trln is expected vs. JPY1.776 trln in June. However, the investment flows will be of more interest. The June data showed that Japan investors were net sellers of U.S. bonds (-JPY2.099 trln), the most time since September 2022. Japan investors turned net buyers (JPY40.0 bln) of Australian bonds after five straight months of net selling and turned net buyers of Canadian bonds (JPY42.8 mln) again. Investors turned sellers of Italian bonds (-JPY12.8 bln) after two straight months of net buying. Overall, Japan investors turned total net sellers of foreign bonds (-JPY3.774 trln), the most since June 2022. With Japan yields likely to move even higher in H2, it’s possible that Japan investors will stop chasing higher yields abroad, but we think it’s still too early to say.

August machine tool orders will be reported Tuesday. Orders have been recovering, but much of that has been due to foreign orders as domestic orders have started to contract again.

RBA Assistant Governor Hunter speaks Wednesday. Hunter is expected to echo Governor Michele Bullock’s hawkish policy guidance and argue against near-term policy rate cuts. That said, the market is still pricing in nearly 90% odds of a rate cut by December.

RBNZ Assistant Governor Silk speaks Wednesday. Silk is expected to stick to the RBNZ dovish guidance. The RBNZ forecasts the Official Cash Rate (OCR) at 4.9% by year-end, 3.85% by end-2025, and 3.1% by end-2026. The market is even more dovish and is pricing in 75 bp of easing by year-end and 200 bp of total easing over the next 12 months.