Drivers for the Week Ahead

  • Downward pressure on the dollar is likely to resume this week; FOMC meeting Wednesday will be very important
  • US data highlight will be August retail sales Wednesday; Fed manufacturing surveys for September will start to roll out; Canada has a busy week
  • UK has a busy week; BOE meets Thursday and is expected to deliver a dovish hold; UK-EU tensions are through the roof
  • Japan has an eventful week; BOJ meets Thursday and is expected to remain on hold; RBA minutes will be released Tuesday

Downward pressure on the dollar is likely to resume this week.  DXY traded last Wednesday at the highest level since August 12 but could not break above the key 94.00 area and is back closer to 93.00 now.  The euro found support below $1.18 but has so far been unable to challenge the high near $1.20 from last week.  We remain negative on the dollar, as Powell’s dovish message from Jackson Hole is likely to be reiterated at the FOMC meeting this week.  Sterling is likely to join the dollar in underperforming this week, as the BOE is also likely to deliver a dovish hold.

 

AMERICAS

The FOMC meeting Wednesday will be very important. Not for what it will do, but for what it will say. Policy settings are expected to remain steady but markets will be looking for more clarity and detail regarding the Fed’s new “Statement on Longer-Run Goals and Monetary Policy Strategy.” Under this new framework, the Fed will have much more discretion to allow higher inflation and tighter labor markets.  Markets will want to know what will go into the Fed’s new reaction function but we don’t think policymakers know yet themselves. The forward guidance may be tweaked slightly to reflect this new approach, though the underlying message of “lower for longer rates” will remain intact.

The Fed will release its updated Summary of Economic Projections. We do not think they will be changed significantly in either direction due to ongoing uncertainty surrounding the virus, fiscal stimulus, and thus the overall the economic outlook. The Beige Book report for this meeting was relatively uninspiring, noting increased economic activity across most Fed districts but generally modest and below levels prior to the pandemic.  Indeed, many districts noted a slowing pace of growth in tourism and retail after some recovery was seen.  Lastly, some districts reported slowing job growth and increased hiring volatility.

The Fed will most likely repeat its calls for more fiscal stimulus. Like us, however, the Fed is likely to be extremely disappointed. Talks are dead in the water and the likelihood of another package before the election is getting lower and lower. Reports suggest that the enhance unemployment benefits enacted by executive order are starting to run out, which will be another headwind on the economy. The Fed media embargo remains in effect and so there will be no more Fed speakers until Powell’s post-decision press conference.  Bullard then speaks Friday.

The dollar tends to weaken on FOMC decision days. Indeed, DXY has fallen on each one dating back to October 2019. Including emergency meetings, that’s a streak of nine. Stocks are a different matter during that same stretch, with the S&P rising five times and falling four times. MSCI EM has the same record (five gains, four losses), while MSCI EM FX fared slightly better (six gains and three losses). Lastly, both US 2- and 10-year yields have never risen on those occasions.

The US data highlight will be August retail sales Wednesday. Headline sales are expected to rise 1.0% m/m vs. 1.2% in July, while ex-autos are expected to rise 0.9% m/m vs. 1.9% in July. The so-called control group used to calculate GDP is expected to rise 0.3% m/m vs. 1.4% in July. No matter how you slice it, the US economy is clearly losing momentum. And unless another round of fiscal stimulus is seen before the election, the US numbers are likely to get worse.

Fed manufacturing surveys for September will start to roll out. Empire survey will be reported Tuesday and is expected at 6.5 vs. 3.7 in August. Philly Fed business outlook will be reported Thursday and is expected at 15.0 vs. 17.2 in August. These are the first snapshots for September and will help set the tone for other manufacturing data. August IP will also be reported Tuesday and is expected to rise 1.0% m/m vs. 3.0% in July.

Weekly jobless claims will be reported Thursday.  Initial claims are expected at 850k vs. 884k the previous week, while continuing claims are expected at 13.0 mln vs. 13.385 mln the previous week.  Adding regular and PUA initial claims shows nearly 2 mln are newly filing for unemployment every week and that’s not so good.  Similarly, regular continuing claims have stabilized around 13 mln but PUA continuing claims have risen sharply to almost 15 mln, the highest ever.  The total of the two is approaching 28 mln and also points to trouble. The August jobs data were solid, but the 1.371 mln jobs gain continues the sequential loss of momentum seen across most US economic indicators.

Other minor data will round out the week. August import and export prices (0.5% m/m and 0.4% m/m expected, respectively) will be reported Tuesday, followed by July business inventories (0.2% m/m expected) and TIC data Wednesday. August building permits and housing starts (+2.5% m/m and -1.4% m/m expected, respectively) will be reported Thursday. Q2 current account data (-$160 bln expected), August leading index (1.3% m/m expected), and preliminary September University of Michigan consumer sentiment (75.0 expected) will all be reported Friday.

Canada has a busy week. July manufacturing sales (9.0% m/m expected) and August existing home sales (8.0% m/m expected) will be reported Tuesday. August CPI will be reported Wednesday, with headline expected to rise 0.4% y/y vs. 0.1% in July and common core expected to rise 1.4% y/y vs. 1.3% in July. July wholesale trade and retail sales (3.5% m/m and 0.7% m/m expected, respectively) will be reported Friday. Last week, the Bank of Canada delivered a somewhat hawkish hold. No, it wasn’t threatening to hike rates anytime, but instead removed language about adding more stimulus if needed.

 

EUROPE/MIDDLE EAST/AFRICA

UK has a busy week. Labor market data will be reported Tuesday. For the three months ended July, employment is expected to fall -110k and the unemployment rate is expected to rise a couple ticks to 4.1%. August jobless claims will also be reported. August CPI will be reported Wednesday, with headline expected to drop to flat y/y from 1.0% in July and CPIH expected to drop to 0.3% y/y from 1.1% in July. August retail sales will be reported Friday, with headline sales expected to rise 0.7% m/m vs. 3.6% in July and sales ex-auto fuel expected to rise 0.3% m/m vs. 2.0% in July.

Bank of England meets Thursday and is expected to deliver a dovish hold. While this meeting is widely seen as a placeholder, we expect the bank to set the table for potential easing by year-end. It’s worth noting that BOE officials are already tilting dovish in recent weeks. This has led to speculation of negative rates picking up. The entire UK curve out to 7 years is now negative in anticipation, while the short sterling futures is pricing in a negative policy rate starting next June. While the July data has come in firm, markets are growing increasingly rattled by the rising odds of a no-deal Brexit and helps explain the BOE’s dovish tilt. Concerns are also riding high since government aid to several sectors is set to run out this fall.

Sterling has a mixed record on BOE decision days. Of the seven this year so far, it has risen against both the dollar and the euro on four and fallen on three. While we remain skeptical that the BOE will go negative, the subdued interest rate outlook and no-deal Brexit risks will continue to weigh on sterling.

Tensions between the UK and the EU are through the roof. The EU has given the UK until the end of this month to withdraw the controversial bill. If not, legal action has been threatened. This has spilled over into domestic political tensions. After the Johnson government submitted its so-called Internal Markets Bill, members of his own Tory party felt blind-sided and have pledged to derail the plan to change parts of the Withdrawal Agreement. Rebel Tory backbenchers have tabled an amendment that would prevent the government from rework parts of the Withdrawal Agreement. Reports suggest more than 30 would support it, while something like 40 are needed if one assumes the opposition remains united.

Eurozone reports July IP Monday and is expected to rise 4.2% m/m vs. 9.1% in June. Last week, July IP surged 9.3% m/m vs. 3.6% in Spain while Italy reported a 7.4% m/m gain vs. 3.5% m/m expected. On the other hand, France reported a 3.8% m/m gain vs. 5.0% expected while Germany reported a weaker than expected 1.2% gain.  Germany and France are by far the largest economies in the eurozone and so we see some slight downside risks to the headline IP reading. ZEW expectations will be reported Tuesday, while July trade data will be reported Wednesday. Final August CPI will be reported Thursday, while July current account will be reported Friday.

The European Central Bank delivered no surprises last week.  All policy settings and forward guidance were left unchanged, as expected.  However, the internal debate about the strong euro seems unsettled, with Lagarde showing little concern then and Lane showing somewhat more. Over the weekend, Rehn and de Guindos weighed in with Lane and expressed concerns about the exchange rate. Indeed, Lagarde also did a bit of a walk-back and said there would be no complacency about its price stability goal. Despite the conflicting comments, we think markets will look to buy the euro and so we expect the recent high near $1.20 to be tested and broken. We anticipate stronger ECB concern will be triggered by a concerted move towards the $1.25 area, which may align with another round of ECB stimulus towards year-end.

 

ASIA

Japan has an eventful week. August trade data will be reported Wednesday, with exports expected to fall -16.0% y/y vs. -19.2% in July and imports expected to fall -17.7% y/y vs. -22.3% in July. August national CPI will be reported Friday, with headline expected to fall a tick to 0.2% y/y and ex-fresh food expected fall -0.4% y/y vs. a flat y/y reading in July. If so, the core reading would be the lowest since November 2016 and further below the 2% target.

Bank of Japan meets Thursday and is expected to remain on hold. At this point, the bank is letting fiscal stimulus carry the load and so we are in a wait and see period. Indeed, we suspect that incoming Prime Minister Suga will look to shore up his credentials with another round of fiscal stimulus before year-end. The bank will release its updated macro forecasts in its Outlook Report at the next meeting October 29.  It can’t be happy with the rising deflationary risks and yet there is little it can do right now.

RBA minutes will be released Tuesday. At that meeting, the RBA left rates steady but expanded its Term Funding Facility for banks.  Banks can access additional funding equivalent to 2% of their outstanding credit for three years at a fixed rate of 25 bp.  The RBA also signaled willingness to ease further, noting that it “continues to consider how further monetary measures could support the recovery.” August jobs data will be reported Thursday.