6 CB meetings this week including the Fed FOMC where markets expect a pause but will watch the dot plot        

Longer term consumer inflation expectations easing

• USD: University of Michigan inflation expectations decline -the University of Michigan sentiment index for September (preliminary) declines to 67.7 from 69.5 with weakness largely led by the drop in the current conditions sub-index to 69.8 from 75.7. Meanwhile, the expectations index increases modestly to 66.3 from 65.5. The more important inflation indicators show the 1Yr inflation expectations median declining surprisingly, to 3.1% from 3.5%, and the 5-10Yr expectations median to 2.7% from 3.0%. The unexpected drop in inflation expectations will be encouraging news for the Fed and reinforces the case for no hike at this week’s meeting. But rising gasoline prices mean inflation expectations are likely to be revised higher in the final September report and/or to rise again in October.
• USD: PPI shows building pressure on goods, but softer August PCE inflation  - data released earlier last week shows PPI final demand rising 0.7%MoM in August, a stronger increase than expected due to a very strong increase in energy prices. PPI excluding food and energy also rises (as expected) by 0.2%MoM as do the  core measures of PPI that additionally exclude trade services prices by 0.3%. The data appears to signal the end of the disinflationary forces on goods prices from supply chain normalization and falling commodity prices though the specific components relevant for PCE inflation remain on the softer side. Based on elements of CPI and PPI, Citi Research expect a 0.14%MoM increase in core PCE inflation, with core services prices ex-housing at 0.17%MoM, and the YoY core PCE reading moderating to 3.8%.

A modest pickup in retail sales and industrial production but with the latter weighed down ahead by the US auto workers strike

• USD: In data released earlier last week, US total retail sales increase by 0.6%MoM in August, stronger than the 0.1% increase expected by consensus though July retail sales are revised down, rising 0.5% instead of 0.7%MoM. Meanwhile, control group sales increase by just 0.1%MoM, though above consensus expectations for a 0.1%MoM decline. While the strength in nominal retail sales in August is mainly due to rising gasoline prices, a modest decline in real terms in August even after some modest downward revisions to July points to goods consumption growth being stronger in Q3 compared to Q2.
• USD: Rising manufacturing production to be halted by strike – in data released Friday, US industrial production rises 0.4%MoM in August, slightly stronger than consensus expectations for 0.1% but is revised lower in July to 0.7% from 1.0%. Meanwhile, the largest subset of manufacturing production rises just 0.1%. There has been some modest pick-up in industrial sector activity recently, and while this could continue based on strengthening in goods demand, the strike of auto workers is likely to complicate data starting September.

Week Ahead: FOMC Sept meeting, US Aug Housing Starts, Existing Home Sales, Sept S&P US Manufacturing PMI, Bank of England policy rate, Euro Area Recession Watch, Swiss National Bank Policy Rate, Riksbank Policy Rate, Norges Bank Policy Rate, Japan Customs Clearance Trade Balance, Nationwide core CPI, NZ Q2 GDP Citi QoQ forecast, Canada August CPI NSA MoM, BoC September Summary of Policy Deliberations, July Retail Sales, China 1-Year Loan Prime Rate

US: FOMC to pause, August housing and September PMIs also in focus this week

• USD: September FOMC meeting - consensus expectations are for the Fed to keep policy rates unchanged at this week's FOMC meeting. Citi Research also do not expect a material change in the statement language and expect the key sentence that reads "in determining the extent of additional policy firming that may be appropriate…" to remain unchanged. The Fed will also publish an updated Summary of Economic Projections. Citi Research expect substantial upward revisions to US GDP projections for 2023 and potentially modest downward revisions to the unemployment rate forecast. On the other hand, core PCE forecasts will likely be lowered by a couple of tenths. This combination of revisions would be relatively neutral, and Fed officials will likely preserve optionality by keeping the 2023 median dot unchanged at 5.6%. Citi Research also expect the 2024 dot to stay unchanged at 4.6%. Chair Powell will likely strike a neutral tone during the press conference, highlighting continued data dependence in determining the need to tighten further or hold the policy rate constant in upcoming meetings.
• USD: US August Housing Starts – Citi: 1477k, median: 1440k, prior: 1452k; Housing Starts MoM – Citi: 1.7%, median: -0.8%, prior: 3.9%; Building Permits – Citi: 1436k, median: 1450k, prior: 1443k; Building Permits MoM – Citi: -0.5%, median: 0.5%, prior: 0.1% - Citi Research expect a continued increase in housing starts in August, rising to 1477k with modest increases in both single family and multifamily construction. However, permits could moderate very slightly to 1436k but generally remain within the recent range. While new housing construction activity is well-off the lows of last year, substantial further upside could still be limited by high rates and high prices weighing on demand.
• USD: US August Existing Home Sales – Citi: 4.18m, median: 4.10m, prior: 4.07m; Existing Home Sales MoM – Citi: 2.7%, median: 0.7%, prior: -2.2% - existing home sales should rebound moderately in August, rising to 4.18 million from 4.07 million in July. While a notable increase after recent declines, this level of sales would still be well-off the highs of the last few years and even below the level of sales reached earlier this year as demand improved modestly. Existing home sales will be slightly lagged to reflect current demand conditions and could decline again in September in line with falling mortgage applications throughout the last few weeks. This decline in demand is likely in large part due to the substantial increase in mortgage rates with the climb in longer-end yields in August.
• USD: US September S&P US Manufacturing PMI – Citi: 48.2, median: NA, prior: 47.9; S&P US Services PMI – Citi: 52.1, median: NA, prior: 50.5 - after declining last month, Citi Research expect the S&P US Manufacturing PMI to increase modestly in the September preliminary report. There are downside risks to this number however, as the UAW strike will have a negative impact on auto production. Citi Research  expect S&P Services PMI to increase to 52.1 from 50.5 which would bring S&P PMI more in line with ISM Services PMI. This increase would point to services activity growing at a slightly stronger pace in September after staying roughly flat in August. Services activity should continue to expand in the near term.

Euro area and UK:  4 central bank meetings (BoE, SNB, Riskbank, Norges Bank), euro area and UL flash PMIs and UK CPI in focus this week

• GBP: BoE: One and done — Citi Research and the OCIS team expect the MPC to back a final 25bps move this week, the fifteenth in succession. Another move is possible for November, but unlikely with signs that economic weakness is beginning to broaden. The MPC is  in the process of transitioning to a more forward-looking policy approach. This is far from simple. A pause as early as this week is also plausible, but with services inflation above 7% (as well as forecast) and regular pay growth above 8%, this should pull the majority in favor of a move this week. Instead, the MPC may lean on the benefit of a forecast round and MPR to explain any potential hold. Guidance changes will likely be limited. Bank of England Policy Rate – Citi Forecast 5.5%, Consensus 5.5%, Prior 5.25% (one and done)
• GBP: UK CPI, retail sales and PMI (flash): Watch out for give-back effects — UK CPI this week is expected to print in line with the Bank’s August forecast, with headline CPI at 7.1%. Citi Research expect core CPI to print at 6.7%. UK: CPI Inflation, August – Citi Forecast 7.1% YY, Consensus 7.0%, Prior 6.8% YY (BoE: 7.1% YY (Aug MPR)); CPI Core, August – Citi Forecast 6.7% YY, Consensus 6.8%, Prior 6.9% YY (services still adding, goods weighing); UK Retail Sales, August – Citi Forecast 0.4% MM, Prior 0.7% MM (CHAPS indicator improving); Ex Auto Fuels, August – Citi Forecast 0.5% MM, Prior 0.8% MM; UK PMI Manufacturing, September – Citi Forecast 43.2, Consensus 43.4, Prior 43.0; PMI Services, September – Citi Forecast 49.8, Consensus 49.1, prior 49.5 (recession coming, but not quite yet…)
• EUR: Euro Area Recession Watch — Citi Research expect a smaller decline in euro area PMIs than in August, with some of the oil price rise digested. Better news on external demand could help, with resilience in the US and stimulus in China opening the potential for further manufacturing stabilization. September could mark the end of the last re-opening effects in tourism, however, and trigger a further decline in services PMIs. Euro Area PMI Manufacturing, September – Citi Forecast 43.7, Consensus 43.5, Prior 43.5 (stabilization); PMI Services, September – Citi Forecast 47.0, Consensus 47.8, Prior 47.9 (contagion); PMI Composite Output, September – Citi Forecast 46.5, Consensus 46.2, Prior 46.7 (steady shrinkage).
• EUR: SNB: Still fighting global inflation — in June, the SNB hiked, although domestic inflation and growth did not warrant it, with the result that the SFR strengthened further. The economy is stagnating and inflation is even more comfortably in the target zone, but Citi Research expect the SNB to hike one last time by 25bp to 2% to stave off threats from global inflation. SNB Policy Rate – Citi Forecast 2.00%, Consensus 2.00%, Prior 1.75%.
• EUR: Riksbank: Too many challenges — the krona is at all-time lows, boosting future inflation and causing loosening financial conditions, flat growth but no signs of spare capacity though easing but inflation overshooting will likely keep the central bank in tightening mode. Citi Research expect a 25bp hike to 4% this week and a higher rate path to show at least another 25bp hike by 1Q-24. Citi Research also add a 25bp hike at the November meeting into their baseline. Riksbank Policy Rate – Citi Forecast 4.00%, Consensus 4.00%, Prior 3.75% (not the last hike?).
• EUR: Norges Bank: In a somewhat more comfortable position — the Norges Bank’s hiking cycle started exactly two years ago, before most others, and it should be in a more comfortable position than the Riksbank to deliver its last hike next week, by 25bp. Upside risks remain in Norway too, but these are more likely to be managed via a high-for-longer type of communication – the first rate cut would be pushed out beyond the current 3Q-24 – rather than with additional hikes. Norges Bank Policy Rate – Citi Forecast 4.25%, Consensus 4.25%, Prior 4.00% (likely last hike).

Japan: Customs – clearance trade balance & nationwide core CPI in focus this week

• JPY: Trade deficit likely to narrow modestly in August —Japan’s customs-clearance trade balance likely came to a ¥890.2bn deficit before seasonal adjustment and a ¥443.9bn deficit after it in August (-¥66.3bn and -¥557.2bn, respectively in July). The trade deficit after seasonal adjustment likely decreased modestly. Citi Research’s projections point to MoM declines for both real exports and real imports. With global manufacturing activity remaining weak, real exports of tech-related goods probably continued to lack momentum. Based on August trade data in China and South Korea, Japan’s exports to Asia probably remained weak.
• JPY: Nationwide core CPI to increase 3.0% YoY in August — Citi Research expect nationwide core CPI (excluding only fresh food) to rise 3.0% YoY in August after a 3.1% YoY increase in July. Reflecting earlier declines in LNG prices, the negative contribution of energy items likely increased in August. Citi Research pencil in a 4.2% YoY increase for the CPI excluding fresh food and energy, down from a 4.3% YoY advance in July. Rapid price hikes a year ago have been keeping a lid on YoY inflation. However, businesses probably continued to pass higher costs on to consumers for food and daily necessaries. Citi Research expect overall CPI to increase 3.1% YoY in August after a 3.3% YoY rise in July.

Commodity Bloc:  NZ expected to return to positive growth in Q2 but negative growth once again thereafter; Canada CPI, retail sales and BoC minutes also in focus

• NZD: NZ Q2 GDP Citi QoQ GDP forecast;0.5%, Previous; -0.1%; Citi YoY GDP forecast: 1.2%, Previous; 2.2% - after two quarters of negative growth, Citi Research expect the external sector to temporarily produce one quarter of positive growth in Q2. Citi Research expect total GDP to increase by 0.5% in Q2, which would translate into a yearly slowdown from 2.2% to 1.2%. Coincidentally, Citi’s Q2 GDP forecast matches the RBNZ’s forecast. So there would be no surprise to the Bank if growth was to put an end to New Zealand’s technical recession. However, Citi Research forecast a return to slightly negative growth in the second half of 2023 from the impact of tight monetary policy on domestic activity that should slightly outweigh on average favorable net-exports.
• CAD: Canada August CPI NSA MoM (Aug) – Citi: 0.4%, median: 0.2%, prior: 0.6%; CPI YoY – Citi: 4.1%, median: 3.8%, prior: 3.3% - Citi Research expect a solid 0.4%MoM increase in headline CPI in August, with base effects implying the YoY reading climbs to 4.1%. Part of the strength in August will be due to further increases in energy prices. A pick-up in mortgage costs with higher interest rates should help support shelter prices. But the most substantial upside risks to CPI in August is likely to be due to various services prices. The most important elements of August inflation data will be the core inflation measures. The 3-month run rate of core inflation has been stably in a 3.5-4% range for a year, implying that annual measures will also remain around this range in August. Higher 3-month inflation would understandably increase the chance of further BoC rate hikes, possibly as soon as October.
• CAD: BoC September Summary of Policy Deliberations - in communications this year, and the increasingly uncertain nature of upcoming BoC decisions means, markets will be paying close attention to the September summary. The summary of July deliberations had highlighted a slowing in wage growth, an early hopeful sign that inflation could be easing, that has since picked back-up. Discussion of this lack of progress in easing underlying inflation, as highlighted in the statement, would likely be featured in the September minutes. This could sound hawkish but would be largely unsurprising. Markets will be most focused on – (1) any indication of how long the Governing Council would wait to see inflation ease before concluding higher rates are necessary, and (2) how encouraged they are by softer activity data as a signal that inflation will come down.
• CAD: Canada July Retail Sales (Jul) – Citi: 0.1%, median: 0.4%, prior: 0.1%; Retail Sales ex Auto – Citi: 0.5%, median: 0.3%, prior: -0.8% - spending could remain soft in July with a modest 0.1%MoM increase. This would be softer than Statistics Canada’s preliminary estimate of a 0.4% increase, although Citi Research expect a stronger 0.5% increase in sales excluding autos. Total sales could be weighed on by a slight decline in autos. Still-modest overall spending would be an encouraging sign for the BoC as higher rates act to dampen demand and cool inflationary pressures.

Asia EM: No further change seen in China’s policy rates

• CNH: China 1-year Loan Prime Rate (%) – Citi Forecast 3.45, Consensus 3.45, Prior 3.45; 5-year Loan Prime Rate (%) – Citi Forecast 4.20, Consensus 4.20, Prior 4.20 – Citi Research  remove their policy rate cut call for the rest of the year and see no change in policy rates including LPRs in the coming months. Mortgage rates can now go below 5Y LPR anyway, even in tier-1 cities. Instead, the focus of the central bank could shift towards liquidity management and credit growth from rate cuts.