Markets Tread Water Ahead of Powell

August 23, 2024

Win Thin

All eyes are on the Fed’s Jackson Hole Symposium; S&P Global preliminary August PMIs remained firm; Canada highlight will be June retail sales data
ECB published the account of its July decision; ECB officials are teeing up a September cut; ECB reported July inflation expectations; BOE Governor Bailey speaks at the Jackson Hole
Japan reported July national CPI data; BOJ Governor Ueda spoke; New Zealand reported weak Q2 real retail sales; China announced another measure to support the housing market

The dollar is treading water ahead of Powell’s speech. DXY is trading slightly lower near 101.435 as yesterday’s modest bounce after four straight down days ran out of steam. USD/JPY is trading lower near 146.10, sterling is trading higher near $1.3115, and the euro is trading lower flat $1.1120. All eyes are on Jackson Hole. While Powell is widely expected to signal a September cut, we see risks that he pushes back against the notion of an aggressive easing cycle (see below). We continue to believe that markets are once again getting carried away with its pricing for aggressive easing and so dollar bears could get caught flat-footed by a less dovish message from Powell today. We continue to believe that the divergence story remains in place (supported by the August PMIs) and should continue to support the dollar. However, it will likely take weeks for the current market narrative to run its course. Last week’s data provided a good start but more needs to be seen. Perhaps Powell can provide a spark today.

AMERICAS

All eyes are on the Fed’s Jackson Hole Symposium. This year’s topic is "Reassessing the Effectiveness and Transmission of Monetary Policy." The full agenda can be found here. Chair Powell will give opening remarks this morning at 10 AM ET and will be streamed on the Kansas City Fed’s YouTube channel here. Judging by recent Fed official comments as well as the FOMC minutes, Powell is likely to set the table for a rate cut in September. However, we expect Powell to stress the data-dependent nature of the Fed’s monetary policy decisions. As such, we believe the risks are tilted towards him pushing back against an aggressive easing path rather than him validating market pricing. Please see our Jackson Hole Preview here.

S&P Global preliminary August PMIs remained firm. 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. This was the second straight drop but remains close to the June peak of 54.8. ISM PMIs won’t be reported until the first week of September.

For those of you keeping score at home, here is a summary of the major August composite PMIs. The U.S. leads with 54.1, followed by the U.K. at 53.4, Japan at 53.0, Australia at 51.4, and eurozone at 51.2. Of these, we remain most pessimistic on the eurozone (Olympic bounce will fade) and Australia (weak China outlook). The U.S. and U.K. should remain at the top of the class, while we suspect Japan will eventually fade under the weight of the strong yen and higher JGB yields. China reports next Saturday local time; there's no consensus yet but we see downside risks to the composite, which stood at 50.2 in July. Bottom line: the divergence story continues to favor the dollar.

Weekly jobless claims were solid. Initial claims data were for the BLS survey week containing the 12th of the month and came in as expected at 232k vs. a revised 228k (was 227k) last week. The 4-week moving average fell to 236k vs. 237k last week. Continuing claims are reported with a 1-week lag and came in at 1.863 mln vs. 1.870 mln expected and a revised 1.859 mln (was 1.864 mln) last week. Bloomberg consensus for August NFP sees 155k vs. 114k in July, while its whisper number currently comes in at 150k.

Chicago Fed July National Activity Index was reported. Headline came in at -0.34 vs. 0.03 expected and a revised -0.09 (was 0.05) in June. As a result, the 3-month moving average was steady at -0.06 and remains far from the -0.7 threshold that signals recession. With ongoing concerns about the Fed being behind the curve, this series suggests that the economy is still holding up relatively well despite tight monetary policy.

Indeed, growth remains solid. The New York Fed’s Nowcast model is tracking Q3 growth at 1.8% SAAR and will be updated today, while its first estimate for Q4 will come at the end of August. Elsewhere, the Atlanta Fed’s GDPNow model is tracking Q3 growth at 2.0% SAAR and will be updated Monday after the data. While both model estimates are down from their earlier highs, growth near 2.0% SAAR remains quite impressive.

Housing data will be of interest. July new home sales are expected at 1.0% m/m vs. -0.6% in June. Yesterday, existing home sales came in as expected at 1.3% m/m vs. a revised -5.1% (was -5.4%) in June. Last week, the NAHB housing market index for August came in at 39 vs. 43 expected and a revised 41 (was 42) in July. This was the fourth straight drop and the lowest since December, suggesting that the housing market remains under pressure despite the recent drop in yields.

Canada highlight will be June retail sales data. Headline is expected at -0.3% m/m vs. -0.8% in May, while ex-autos is expected at -0.3% m/m vs. -1.3% in May. With the labor market continuing to soften in July, we expect consumption to also remain soft and should validate market pricing for 75 bp of easing by year-end.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank published the account of its July decision. It confirmed ECB President Lagarde’s post-meeting guidance that “there should be no pre-commitment to a particular rate path…The September meeting was widely seen as a good time to re-evaluate the level of monetary policy restriction. That meeting should be approached with an open mind.” Markets have been fully pricing in a 25 bp cut then for several weeks now.

ECB officials are teeing up a September cut. Vujcic said that “As long as data fall in line with our projections which foresee inflation to fall to 2% in 2025, that increases our confidence that we can gradually ease the restrictiveness of our monetary policy,” adding that “so far we have not seen any major surprises in the data in terms of our expectations or forecasts.” Yesterday, Kazaks noted that “given the data we have at the moment, I would be very much open for a discussion of yet another rate cut in September.” Kazaks added that “even if inflation over the next few months keeps moving sideways, it is consistent with further rate cuts.” Chief Economist Lane speaks Saturday at Jackson Hole.

ECB reported July inflation expectations. 1-year expectations came in steady at 2.8% while 3-year expectations picked up a tick to 2.4%. Both remain stuck well above the 2% target. While the ECB hawks won’t be happy about this, we do not think they will prevent the bank from cutting rates 25 bp at the September meeting.

Bank of England Governor Bailey speaks at the Jackson Hole Symposium. The data dump last week showed that the economic recovery continues even as the inflation outlook remains mixed. Recall that the vote to cut August 1 was 5-4, with Bailey voting with the majority. Alan Taylor will replace Jonathan Haskel (who voted to keep rates steady this month) as an external member of the MPC, starting September 2. That means Taylor will vote at the September 19 meeting.

ASIA

Japan reported July national CPI data. Headline came in a tick higher than expected and remained steady at 2.8% y/y, core (ex-fresh food) picked up a tick as expected to 2.7% y/y, and core ex-energy fell three ticks as expected to 1.9% y/y. Core accelerated for the fourth straight month and moved further above the 2% target. While this would seem to justify the BOJ’s hawkish hike last month, the bank has since executed a dovish pivot that has pushed out market expectations for the next hike well into 2025. We do not believe the CPI data will do anything to change that. August Tokyo CPI data will be reported next Friday, with headline expected to pick up a tick to 2.3% y/y, core expected to remain steady at 2.2%, and core ex-energy expected to fall a tick to 1.4% y/y.

BOJ Governor Ueda spoke. Appearing before parliament, Ueda said that “If we are able to confirm a rising certainty that the economy and prices will stay in line with forecasts, there’s no change to our stance that we’ll continue to adjust the degree of easing.” With regards to the market turmoil after the BOJ’s last hike, Ueda cited concerns about the U.S. economy as a chief culprit, adding that those “overdone” worries have since eased. Lastly, Ueda cautioned that financial markets “remain in unstable conditions,” suggesting the bar for a follow-up rate hike by year-end is high.

New Zealand reported weak Q2 real retail sales. Sales came in at -1.2% q/q vs. -0.9% expected and a revised 0.4% (was 0.5%) in Q1. The weak reading is consistent with RBNZ forecasts from last week’s meeting for GDP contracting -0.5% q/q in Q2 and -0.2% q/q in Q3 that would be followed by modest recovery of 0.1% q/q growth forecast for Q4. The poor retail sales activity reinforces the swaps market pricing for another 75 bp of rate cuts by year-end and is a headwind for NZD.

China announced another measure to support the housing market. The plan would reportedly have the government purchase unsold apartments and turn them into affordable housing. The government said it would then push forward with plans to rent and sell these public housing units as soon as conditions are right, according to Vice Minister of Housing and Urban-Rural Development Dong Jianguo. The ministry didn’t announce the planned size of the program. This appears to be separate from another measure that is being considered whereby the central government would provide new funding options for local governments to buy unsold homes. We doubt these measures will have much impact, as policymakers continue pushing on a string without tackling the huge debt overhang that must be addressed.

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