This week we will have inflation data from the US and Eurozone as well as Q2 GDP from the US and Canada with official PMI data from China on Saturday.
USD
Minutes from the last FOMC meeting saw “several” members wanting to deliver rate cut at the current meeting (July) while a “vast majority” of members see September rate cut as appropriate. Members want more evidence that inflation is sustainably falling to their 2% target. NFP revision for the Q1 saw 818k less jobs.
Fed Chair Powell delivered a dovish message at the Jackson Hole meeting. He stated that “The time has come for policy to adjust. The direction of travel is clear”. Powell mentioned that upside risks to inflation declined and shifted focus to the labor market, the second part of their dual mandate. Rate cuts are coming but whether it will be a 25bp or a 50bp cut will depend on the incoming data, particularly on August NFP number that will be published on September 6. If we get a weak headline number and another tick up in the unemployment data we could see a 50bp rate cut. Powell has channeled its inner Draghi by saying that they will do whatever it takes to protect the labor market.
The yield on a 10y Treasury started the week at 3.89%, rose to 3.91% and finished the week at around 3.81%. The yield on 2y Treasury started the week at 4.06%, reached the high of 4.09% then fell below 4% during the week. Spread between 2y and 10y Treasuries started the week at -17bp and finished the week at -9bp as curve proceeded to steepen. The 2y10y is inverted for over two years. FedWatchTool sees the probability of a 25bp rate cut at September meeting at around 64% while probability of a 50bp rate cut is around 36%. Markets are fully pricing in November and December rate cuts making it a total of three rate cuts in 2024.
This week we will have a second estimate of Q2 GDP and Fed’s preferred inflation metric PCE.
Important news for USD:
Thursday:
GDP
Friday:
PCE
EUR
Preliminary PMI data for the month of August saw divide between sectors intensify further. Manufacturing declined to 45.6 from 45.8 in July as both German and French readings came in much weaker than expected at 42.1. Services printed 53.3, up from 51.9 the previous month, helped by Paris Olympics which catapulted French services to 55. Composite managed to improve to 51.2 from 50.2 in July with French reading returning to expansion with a 52.7 print while German reading fell deeper into contraction with a 48.5 reading. The report notes that although there was increase in prices in manufacturing sector, input costs in the services sector rose at a slowest pace in over three years. This data point should be welcomed by the ECB. Another data point that will make ECB happy is negotiated wage growth which eased to 3.55% in Q2 after a surge of 4.74% in Q1. Inflation pressures from the demand side will subside. Both final headline and core CPI numbers for the month of July were unchanged at 2.6% y/y and 2.9% y/y respectively.
This week we will have preliminary August CPI which is expected to increase on the back of base effects.
Important news for EUR:
Friday:
CPI
GBP
Preliminary August PMI data showed manufacturing improve to 52.5 from 52.1 in July while services rose to 53.3 from 52.5 the previous month and thus lifted composite to 53.4 from 52.8 in July. The report highlights improvements in job creation and lower inflation as inflation pressures in services sector moderated and input prices fell to the lowest levels seen in over three-and-a-half years.
AUD
RBA meeting minutes had many hawkish moments in them. First, we saw members discuss rate hike at their August meeting but decided to keep cash rate on hold as it would bring better risk balance. Second, members expressed that cash rats will have to stay steady for an “extended period”. Lastly, they have agreed that it is unlikely that we will see rate cuts in the short term. Members now see increasing risks that inflation will not return to target in a reasonable time frame and they are prepared to further hike rates if inflation risks “materially” increase.
PBoC has decided to leave 1-year and 5-year LPRs unchanged at 3.35% and 3.85% respectively as was widely expected. 1-year LPR is used as a benchmark for most new and outstanding loans while 5-year LPR is used as a benchmark for mortgages. As a reminder, both rates were cut by 10bp last month in an attempt to loosen financial conditions and boost economic activity.
NZD
Second dairy auction for the month of August saw a jump in prices by 5.5% led by increase of 7.2% for whole milk prices. This is a third consecutive auction of rising dairy prices. Retail sales for the Q2 fell by more than expected with headline number printing -1.2% q/q and -3.6% y/y vs 0.4% q/q and -2.4% y/y in the Q1. Core retail sales dropped by 1% q/q after increasing by 0.4% q/q in the previous quarter.
CAD
July CPI data showed inflation continuing to decline. Headline CPI printed 2.5% y/y as expected, down from 2.7% y/y in June. All three core measures also showed declines with median printing 2.4% y/y down from 2.6% y/y, common at 2.3% y/y, down from 2.4% y/y and trim at 2.7% y/y down from 2.9% y/y the previous month. The inflation report showed that price drops were broad based and with BoC firmly on a rate cutting path this just cements another rate cut in September.
This week we will have Q2 GDP data.
Important news for CAD:
Friday:
GDP
JPY
Preliminary August PMI saw improvements across all three metrics. Manufacturing came in at 49.5 vs 49.1 in July while services printed 54 after a 53.7 reading the previous month. This helped push composite to 53 from 52.5 in July. Digging into the details of report we saw strong output and new orders for the economy while new export orders showed stronger decline indicating weak domestic demand for Japanese products. Employment index showed weaker growth for the services sector but there was stronger growth in manufacturing sector. On the inflation front output prices showed weaker inflation with inflation dropping to the lowest level since November of last year while input prices showed stronger inflation.
CPI for the month of July for the country of Japan as a whole saw headline print unchanged at 2.8% y/y for the third straight month. Ex fresh food component ticked up to 2.7% y/y as expected while ex fresh food, energy component declined to 1.9% y/y from 2.2% y/y in June. This is the first time that category is below 2% in over twenty months. BoJ Governor Ueda spoke in front of the parliament and stated that fears regarding US economy were the main reason for drops in the market. He added that decision on the July rate hike was appropriate given the economic circumstances but the future path of monetary policy remains uncertain. Ueda mentioned that real rates will remain negative and that will help support the economy.
CHF
SNB total sight deposits for the week ending August 16 came in at CHF464.9bn vs CHF463.1bn the previous week. Another week of increases but not out of the ordinary as deposits remain within well-established range, moving further from the bottom of the range.
