FX - The Week Ahead: Japan’s strengthening fundamentals could allow a faster pace of BoJ rate hikes than currently discounted in market rates

Japan Q2 GDP (flash) rebounds on easing supply constraints and wage hikes

• JPY: In data released late last week, Japan’s real Q2 GDP (first estimate) rises 0.8% QoQ and 3.1% QoQ annualized, overshooting consensus expectations for +0.6% QoQ and +2.3% QoQ annualized. With the impact of an auto production suspension easing, the economy rebounds from negative growth in the first quarter. More importantly, total employment income in real terms also rebounds as wages start to reflect spring negotiation results. As a result, private consumption proves stronger than consensus expected and bodes well for economic growth in the third quarter. Citi Research expect that a full-scale recovery of the Japanese economy will depend on the wage hike effect on consumer spending from Q3 onward.
   
• JPY: Citi Research expect continued high growth in Q3, expecting GDP to grow 2.8% QoQ annualized in Q3. Domestic demand, consumer spending in particular, looks likely to rebound further on the back of wage hikes achieved in spring negotiations as well as a fixed-sum personal tax cut. If things develop as expected, domestic data would likely reinforce grounds for additional rate hikes by the BoJ. Assuming a soft landing for the US economy, Citi Research expect market conditions to stabilize and allow the BoJ to hike rates in December. In a risk scenario where the US economy enters a recession in the second half of this year, Citi Research pencil in a delayed rate hike in April 2025.

Week Ahead:

US – Fed Chair Powell’s Jackson Hole speech and Fed Minutes in focus this week

• USD: This week, markets will hear from Chair Powell at the Jackson Hole conference on Friday. The last time Chair Powell spoke was during the July FOMC press conference when he dovishly hinted at Committee consensus building around a September policy rate cut and highlighted that the Fed is watching for weaker-than-expected labor market data. There has been a shift in Fed officials’ narrative after the July CPI print with even Atlanta Fed President Bostic saying he is open to a September cut.
   
• USD: July FOMC meeting minutes will also be released this Wednesday though minutes will be less important and stale compared to Chair Powell's Jackson Hole speech later on Friday. At the July presser, Chair Powell mentioned that there had been a real discussion about delivering a cut at the July meeting and minutes should provide a bit more clarity on how many Fed officials thought it was appropriate to discuss cutting the policy rate then. Minutes will also likely highlight that Fed officials' confidence on inflation slowing had been building.
   
• USD: US August (flash) S&P US Manufacturing PMI – Citi: 49.4, median: 49.9, prior: 49.6; S&P US Services PMI – Citi: 55.2, median: 54.0, prior: 55.0 - S&P Manufacturing PMI has been somewhat stronger than ISM Manufacturing over the last year but in the July release, it dipped into contractionary territory again with broad based declines across the sub-components. The employment subcomponent fell in July but remains in expansionary territory, which has not aligned well with the weakness in manufacturing payrolls in recent months. For the August preliminary report, Citi Research expect S&P Manufacturing PMI to fall modestly to 49.4 with downside risks. The Services PMI, which measures business activity, has remained comfortably in expansionary territory as services consumption has generally been growing in real terms. Citi Research expect that S&P Services PMI will increase modestly to 55.2 from 55.0 in the August preliminary release.

Europe, UK – Euro area and UK August (flash) PMIs in focus this week

• EUR: Euro area manufacturing PMI August (flash) – Consensus 45.8, Prior 45.8; Euro area services PMI August (flash) – Consensus 51.7, prior 51.9; Euro area composite PMI August (flash) – Consensus 50.1, Prior 50.2; ECB publishes euro area negotiated wages indicator for Q2; ECB 1Yr inflation expectations for July – Prior 2.8%, ECB 3Yr inflation expectations for July – Consensus 2.3%, Prior 2.3%
   
• GBP: S&P Global UK manufacturing PMI August (flash) – Consensus 52.1, Prior 52.1; S&P Global UK services PMI August (flash) – Consensus 52.8, Prior 52.5; S&P Global UK composite PMI August (flash) – Consensus 52.9, Prior 52.8; UK Gfk consumer confidence for August – Consensus -12, Prior -13

Japan – Nationwide CPI and customs – clearance trade balance in focus this week

• JPY: Nationwide CPI to rise 2.6% YoY in July — Citi Research expect nationwide core CPI (excluding only fresh food) to increase 2.6% YoY in July, as in June. Energy’s contribution probably expanded as government subsidies for electricity and gas bills ended, while CPI excluding fresh food and energy likely slowed from a 2.2% YoY advance in June to a 1.8% YoY increase in July. Citi Research assume the impact of price hikes a year ago dropped off in July and await the pass-throughs of rising labor costs to emerge in service prices.
   
• JPY: Customs-clearance trade deficit likely decreased in July — the customs-clearance trade balance likely came to a ¥177.4bn deficit before seasonal adjustment and a ¥677.5bn deficit after it in July (+¥224.0bn and -¥816.8bn, respectively in June). The deficit after seasonal adjustment likely decreased on higher exports. Citi Research projections suggest both real exports and real imports grew on an MoM basis. Exports were firm in the flash data for the first 20 days in July. Chinese and South Korean trade data show that Japan’s exports to these countries have increased, possibly reflecting higher exports of tech-related goods.

Commodity Bloc – NZ Q2 and Canada June retail sales in focus this week

• NZD: NZ Q2 Real Retail Trade: Citi QoQ forecast; -0.9%, Previous; 0.5%, Citi YoY forecast; -3.0%, Previous; -2.6% - the surprise 0.5% increase in real retail trade in Q1 shouldn’t be repeated. In nominal terms, Citi Research expect retail trade to decline by 0.7%. This means that real retail trade likely fell by 0.9%, equating to a 3.0% yearly decline. Such a result would be back in the realm of the quarterly declines prior to the surprise positive Q1 result. For the RBNZ, a decline in real Q2 retail trade would support their decision to reduce the OCR.
   
• CAD: Canada June Retail Sales (Jun) – Citi: 0.1%, median: -0.3%, prior: -0.8%; Retail Sales ex Auto – Citi: 0.1%, median: -0.3%, prior: -1.3% - Canada’s retail sales data has been particularly volatile recently, with core retail sales (excluding autos and gas) falling substantially in May. Citi Research expect a modest rebound in June with total sales and sales excluding autos both rising 0.1%MoM. This would be modestly stronger than Statistics Canada’s preliminary estimate for a 0.3% decline. Core retail sales could be even stronger, at least in nominal terms, still, with a weak handoff from spending in Q1 and the notable pullback in sales in May, total goods consumption is likely to be subdued in Q2 at close to flat on the quarter. While BoC officials expect that a pick-up in household consumption will help drive stronger growth in the second half of the year, Citi Research remain skeptical that rate cuts will boost spending much in the near-term. Rather, a further weakening in the labor market alongside a slowdown in the US will likely present a larger downside risk and keep spending weak.

Asia EM – China LPR and Singapore CPI in focus this week

• CNH: China 5-Year Loan Prime Rate (%): Citi Forecast 3.85, Consensus 3.85, Prior 3.85; 1-Year Loan Prime Rate (%): Citi Forecast 3.35, Consensus 3.35, Prior 3.35 - China’s 1yr and 5yr LPRs could stay unchanged in August without a cut in 7D Reserve Repo earlier this month. That said, there still appears room for 10-20bps LPR cut within the year. The PBoC has explicitly pledged more policy support post soft activity data for June. A deposit cleanup since April could also expand room for a cut.
   
• SGD: Singapore CPI (%YoY) July - Citi Forecast 2.6, Consensus 2.7, Prior 2.4; CPI (%MoM): Citi Forecast -0.1, Prior -0.2; Core CPI (%YoY): Citi Forecast 2.9, Prior 2.9