Drivers for the Week Ahead

  • Despite last week’s setback, we remain dollar bulls
  • The US data highlight of the week will be August retail sales; August PPI will be reported Wednesday and CPI Thursday
  • ECB meets Thursday and is expected to cut rates and restart QE
  • The UK has a heavy data week that’s front-loaded; at this point, the fundamentals are secondary as all eyes are on Brexit
  • Despite some positive developments last week, we think the three key issues for risk assets have not been resolved yet
  • In EM, the central banks of Poland, Turkey, and Peru meet

Despite last week’s setback, we remain dollar bulls.  If you are a dollar bear, where else do you go?  We believe the US still stands out in a field of generally weak economies.  DXY retraced nearly two thirds of its August-September rally before seeing a bounce Friday.  The euro has fallen back towards $1.10 and remains heavy.  Likewise, sterling has given up some of its recent gains as the euphoria of lower hard Brexit risks wears off.  USD/JPY remains stuck near 107.

The US data highlight of the week will be August retail sales.  Headline is expected to rise 0.2% m/m vs. 0.7% in July, while ex-autos is expected to rise 0.1% m/m vs. 1.0% in July.  Lastly, the so-called control group used for GDP calculations is expected to rise 0.3% m/m vs. 1.0% in July.  Headline jobs data was disappointing, but the stronger than expected 3.2% y/y gain in average hourly earnings should continue to support consumption.

Ahead of that, August PPI will be reported Wednesday and CPI Thursday.  Headline is seen steady at 1.7% y/y while core PPI is seen rising a tick to 2.2% y/y.  While inflation really isn’t on anyone’s radar screen right now, we note that core CPI has crept up to the cycle high of 2.2% y/y in July and it is expected to tick higher to 2.3% in August.  Headline CPI is seen steady at 1.8% y/y.

Other minor US data will be reported.  July consumer credit will be reported Monday, followed by July JOLTS job openings Tuesday.  July wholesale trade and inventories will be reported Wednesday.  Weekly jobless claims and August budget statement will be reported Thursday.  Friday sees preliminary September University of Michigan consumer sentiment and July business inventories.

The US economy remains in solid shape, at least for now.  The Atlanta Fed’s GDPNow model is tracking 1.5% SAAR growth in Q3, down from 1.7% previously.  This is below trend (~2%) and below the revised 2.0% SAAR in Q2.  Elsewhere, the NY Fed’s Nowcast model is tracking 1.55% SAAR growth in Q3, down from 1.8% the previous week.  It also provided its first forecast for Q4 growth at 1.1% SAAR.  This bears watching.

The media embargo for the September 18 FOMC has gone into effect.  Last Friday, Powell gave markets the last peek at Fed thinking.  He noted that the US economy is in a good place.  He noted August jobs data was consistent with a solid labor market, though there are significant risks to this outlook as trade uncertainty is leading to some delayed investment.

As expected, Powell delivered a very balanced viewpoint and so we don’t think he’s promising anything.  WIRP suggests 100% odds of a cut September 18, with only 4% odds of a 50 bp move.  We do not think a cut next week is a done deal and will reserve judgment until after this week’s US data reports.

ECB meets Thursday and is expected to cut rates and restart QE.  While there has been pushback from the hawks at the ECB, we think Draghi will deliver an aggressive package of easing and updated staff forecasts should give him cover to do so.  WIRP suggests 100% odds of a cut, with 46% odds of a 20 bp move.

Just before the decision, the eurozone reports July IP.  Ahead of the meeting, Germany reports July trade and current account data Monday.  Risks are to the downside all around.  Germany reported extremely weak factory orders and IP data last week, as the eurozone’s largest economy slides towards recession.

The UK has a heavy data week that’s front-loaded.  It reports July GDP, IP, construction output, and trade Monday.  Tuesday, it reports labor market data.  The PMI readings have been generally weaker in recent months and so we see downside risks to the data.  Next BOE meeting is September 19.  WIRP suggests 1% odds of a cut then, rising to 18% November 7 and 32% December 19.

At this point, the fundamentals are secondary as all eyes are on Brexit.  Prime Minister Johnson saw another defection as Work and Pensions Secretary Hudd resigned over the weekend over his handling of Brexit.  Johnson is likely to continue his efforts this week to trigger early elections.  At this point, the base case seems to be a three-month delay in Brexit and elections in November.

The Scandies both report August CPI Tuesday.  Norway reports first, with headline inflation expected to ease a tick to 1.8% y/y and underlying expected to remain steady at 2.2% y/y.  Sweden reports next, with both headline and CPIF expected to remain steady at 1.7% y/y and 1.5% y/y, respectively.  Norges Bank is likely on hold for now, while the Riksbank surprised markets last week by maintaining its intent to hike rates again by late 2019 or early 2020.

Despite some positive developments last week, we think the three key issues for risk assets have not been resolved yet.  Hong Kong protests continue, while reports suggest the US and China remain far apart.  Even Brexit has likely been given only a three month reprieve.  We remain negative on EM until these key issues have been ultimately resolved.

In EM, the central banks of Poland, Turkey, and Peru meet.  Of the three, only Turkey is expected to move.  Market is all over the place, however, with analysts looking for cuts of 175, 225, 250, 275, 300, and 375 bp.  With the lira remaining surprisingly firm, we suspect the bank may deliver a dovish surprise.  However, we do not believe Erdogan’s professed plans for single digit interest rates and inflation will come to fruition anytime soon.