Drivers for the Week Ahead

  • The dollar continues to climb
  • FOMC minutes will be released Wednesday; this week also sees the annual Fed symposium in Jackson Hole
  • US data this week is minor; the picture painted last week by the US data is a good one
  • Markit flash eurozone August PMI readings and ECB account of its July 25 meeting will be released Thursday
  • Key Asian trade data will be seen this week; Bank Indonesia meets Thursday and is expected to keep rates steady at 5.75%

The dollar continues to climb.  DXY is testing the 62% retracement objective of the early August drop near 98.207.  A break above would set up a test of the cycle high near 98.932 from August 1.  With the ECB sending dovish signals, the euro is on track to test its cycle low near $1.1025.  Sterling has found some traction despite rising risks of a hard Brexit, trading at its highest level since early August.  USD/JPY is searching for direction as it trades near the middle of the 105-107 range seen for most of August.

FOMC minutes will be released Wednesday.  The July 31 meeting saw the Fed embark on what Chair Powell termed a mid-cycle adjustment.  Given the lack of Fed speakers since the decision, these minutes take on greater importance in divining the Fed’s future rate path.

This week also sees the annual Fed symposium in Jackson Hole.  It will run from Thursday through Saturday and will feature senior policymakers and academics from around the world.  The subject is “Challenges for Monetary Policy.”  As of this writing, the agenda has not yet been released to the public, but we do know Fed Chair Powell will speak Friday. We will be sending out a primer on the Jackson Hole Symposium early this week.

US data this week is minor.  July existing home sales will be reported Wednesday.  Weekly jobless claims will be reported Thursday for the August BLS survey week, along with preliminary August Kansas City manufacturing survey, Markit flash PMI readings, and July leading index.  July new home sales will be reported Friday.

The picture painted last week by the US data is a good one.  Headline retail sales rose 0.7% m/m vs. 0.3% expected, while ex-autos rose 1.0% m/m vs. 0.4% expected.  The so-called control group used for GDP calculations jumped 1.0% m/m vs. 0.4% expected.  On top of that, the Empire and Philly Fed manufacturing surveys came in double what was expected.

Obviously, the data are dollar-positive.  With July core CPI rising a larger than expected 2.2% y/y and continued strength seen in the real economy, how can the Fed justify another cut in September?  We don’t think the Fed should cut just to satisfy the markets, but stranger things have happened.

Yet the US rates markets remain incredibly pessimistic.  WIPR suggests 100% odds of a cut September 18, with 32% odds of a 50 bp cut then.  Meanwhile, the Fed Funds futures strip shows 75 bp of easing nearly fully priced in for this year and nearly 50 bp more next year.

Markit flash August PMI readings Thursday are the data highlight for the eurozone this week.  Both manufacturing and services PMIs are expected to fall a couple of ticks, dragging the composite reading down to 51.2 from 51.5 in July.  In particular, weakness in Germany is expected to continue, with its composite expected to fall to 50.5 from 50.9 in July.

ECB publishes the account of its July 25 meeting Thursday.  At this point, easing is pretty much a done deal for the September 12 meeting and so the account probably won’t add much to the debate.  WIRP suggests 100% odds of a cut then, and odds of a larger 20 bp cut have risen to 64% from 42% at the start of last week.  ECB’s Rehn spoke last week of the need for a “significant” easing package in September.  He added that when working with markets, it’s better to overshoot than to undershoot.

Japan reported July trade Monday.  Exports contracted -1.6% y/y and imports by -1.2% y/y, both slightly better than expected.  July department store sales will be reported Wednesday.  Flash August PMIs will be reported Thursday.  July national CPI will be reported Friday, with headline expected to drop a tick to 0.6% y/y.  Ex-fresh food is seen steady at 0.6% y/y.  WIRP suggests 36% odds of a rate cut September 19 but rising to 68% October 31.

Canada reports June manufacturing sales Tuesday.  July CPI will be reported Wednesday, with headline expected to fall sharply to 1.7% y/y from 2.0% in June.  Common core is seen steady at 1.8% y/y.  June wholesale trade will be reported Thursday, followed by retail sales Friday.  They are expected to fall -0.2% and -0.3% m/m, respectively.  WIRP suggests 28% odds for a cut September 4, rising to 66% October 30.

RBA minutes will be released Tuesday.  At that meeting, the RBA said it wanted to see the impact of previous back-to-back hikes before moving again.  WIRP suggests 19% odds of a cut September 3 but rising sharply to 68% October 1.  Flash August PMIs will be reported Thursday.

Key Asian trade data will be seen this week.  Taiwan reports July export orders Tuesday, which are expected to contract -5.9% y/y vs. -4.5% in June.  This suggests little relief for exports over the next six months.  Korea then reports trade data for the first 20 days of August Wednesday.  Both are considered bellwethers for the region.

Bank Indonesia meets Thursday and is expected to keep rates steady at 5.75%.  While we think the bank intended to follow up its July cut with another one this month, the weak rupiah is problematic.  Meanwhile, the government proposed record spending next year in its budget presentation, whilst projecting a slightly smaller deficit equal to -1.76% of GDP vs. a planned -2% this year.