FX - The Week Ahead: At sub 102.00, a US “softer” landing backstopped by an “aggressive” Fed rate cut trajectory seems well discounted into US rates and DXY

Key takeaways from Fed Chair Powell’s speech at the Jackson Hole Symposium

• USD: Fed clearly targets a softer US landing, making it clear that policy is swerving to protect the US expansion - “the time has come for policy to adjust … we do not seek or welcome further cooling in labor market conditions…(with) appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2 percent inflation while maintaining a strong labor market.”
   
• USD: The Fed chief says the cooling of the labor market is “unmistakable,” but that his confidence has grown that inflation is on a “sustainable path” back to the Fed’s goal of 2%. Hence “we will do everything we can to support a strong labor market as we make further progress toward price stability…the current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions.”
   
• USD: Chair Powell said he believes preserving the expansion is possible and probable - after raising policy rates by 525 basis points, the Fed has dry powder to act boldly if greater downside risks come into focus. But the forceful language does not sharply shift the probability of a 25 or 50 basis point rate cut at the September 18^th Fed meeting. Rather, it helps boost confidence in risk assets by communicating the Fed will act as needed to preserve economic growth. Note that markets have been highly sensitive to each incremental data point that could inform the likelihood of a “hard” versus soft landing for the US economy following softer July employment data released on August 2.

Fed July Minutes show officials ready to cut

• USD: Minutes of the July FOMC meeting released earlier last week are the clearest indication yet that a rate cut is coming in September, with the “vast majority” of officials seeing policy easing as appropriate at the “next meeting”. “Several” officials support a cut in July, with more noting risks of a more significant labor market deterioration. With the unemployment rate subsequently rising from 4.1% to 4.3%, these officials’ concerns will have only grown.
   
• USD: The vast majority of FOMC members observe that, if the data continues to come in about as expected, it would likely be appropriate to ease policy at the next meeting. This ties in with Chair Powell’s comment at the July press conference that officials discussed the possibility of cutting rates that day. Minutes confirm this, with “several” noting the “plausible case for reducing the target range by 25bp at the July meeting or that they could have “supported such a decision”. Officials express more confidence in slowing inflation due to slowing shelter inflation, easing wage growth and consumer pushback to high prices. The Minutes also see a better balance between inflation and employment, noting upside risks to inflation have diminished while downside risks to employment have increased. “Some” even highlight the risk of a sharper deterioration, noting that as conditions in the labor market have eased, the risk has increased that continued easing could transition to a more serious deterioration.

US jobs revised downward and August PMIs show contraction in employment

• USD: Earlier last week, the BLS announces job gains from March 2023 to March 2024 are likely overstated by 818k, or about 68k per month. Less important than the backward revision is that current establishment payrolls data is likely upwardly biased. The downward revisions appear to be more than markets had expected - a 500k+ downward revision to establishment survey payrolls - which has run well above household survey of employment - was expected by markets. ​The downward revision means that the run rate of monthly job growth has been boosted upward by on average 68k per month.
   
• USD: US manufacturing PMI moving further into contraction but services PMI steady - data released earlier last week shows the US manufacturing PMI falling further into contraction in the August preliminary reading to 48.0 from 49.6, weaker than expectations with weakness driven by all the main subindices - the output index falls into contraction to 47.8 from 50.5 and the new orders index slides lower to 47.2 from 47.8. The employment index is also lower too, falling to 50.2 from 51.6, pointing to essentially stagnation in headcount. However, the input and output prices indices increase somewhat but remain within the pre-pandemic ranges. Meanwhile, the US services PMI increases modestly to 55.2 from 55.0. Within that, the new business index is modestly higher in the month but the employment index is weaker, falling to 48.7 from 51.7. Input and output prices indices also decline modestly. The takeaway from the August PMIs remains similar to July - the manufacturing sector continues to be generally weaker while the services sector remains in expansion for now. More importantly, the employment details look weaker for both manufacturing and services in August with services employment in contraction. Anecdotes in the report mention that the weakness in services is mainly due to difficulty in hiring, but the weakness in manufacturing is due to worries about the outlook.

July nationwide CPI on track for BoJ to deliver the next 25bp hike by December

• JPY: In data released Friday, Japan’s nationwide core CPI (excluding only fresh food) rises 2.7% YoY in July, up slightly from a 2.6% YoY advance in June and matching consensus expectations. This is the BoJ's preferred measure of core inflation and reflects an energy boost from the end of government subsidies for electricity and gas bills. Meanwhile, CPI excluding fresh food and energy, i.e., core-core CPI, rises 1.9% YoY in July, down from a 2.2% YoY advance in June, but also matching consensus expectations. The moderation is due to base effects while services inflation remains almost unchanged.
   
• JPY: Core inflation to slow in early autumn but focus will be on service prices — going forward, Citi Research expect core CPI (BoJ’s preferred measure) to rise 2.7% YoY in August and 2.2% YoY in September. The resumption of electricity and gas bill subsidies looks likely to slow core inflation temporarily to the lower-2% range from September. But Japanese businesses are still expected to pass higher labor costs to service prices in the price revision month of October. The stronger-than-expected Japan Q2 GDP outturn (data released mid-August) already provides further evidence of a wage-price spiral reinforcing itself on the back of the first positive real wage growth in 26 months. This would likely support the BoJ decision for the next rate hike and assuming the global economy, including the US heads towards a softer landing, Citi Research expect the next BoJ 25bp hike in December this year.

Week Ahead:

US – Personal incomes, spending, core PCE as well as consumer confidence in focus this week

• USD: US July PCE Price Index MoM – Citi: 0.1%, median: 0.2%, prior: 0.1%; PCE Price Index YoY – Citi: 2.5%, median: 2.6%, prior: 2.5%; Core PCE MoM – Citi: 0.2%, median: 0.2%, prior: 0.2%; Core PCE YoY – Citi: 2.7%, median: 2.7%, prior: 2.6% - while some details were mixed, elements of CPI and PPI inflation generally continued a trend of easing inflationary pressures. Core PCE inflation should rise a modest 0.15%MoM, technically rounding to 0.2% but with a clear risk of an increase that rounds to just 0.1%. Core PCE YoY should rise 2.7% due to particularly unfavorable base effects in the second half of the year but could remain at 2.6%. Core services prices excluding housing in PCE should rise a modest 0.17%MoM but core goods prices should decline by less in PCE than in CPI as part of the weakness in CPI was due to an unexpectedly large decline in used car prices, which receives a smaller weight in PCE. Overall, there are a number of reasons to expect further slowing in core inflation over the coming months, including easing shelter inflation, softening demand, slowing wage growth, and issues of residual seasonality implying softer inflation in H2.
   
• USD: US August Conference Board Consumer Confidence – Citi: 100.7, median: 100.0, prior: 100.3 – the Conference Board Consumer Confidence Index has moved up and down modestly in the most recent prints as the inflation rate has slowed but the high level of prices is weighing on consumers. Further weakness in the labor market would weigh on consumer sentiment more. The labor market differential will be one of the details that will be followed closely in the report. For the overall consumer confidence index, Citi Research expect it to increase modestly this month to 100.7 from 100.3, within the range of recent readings with risks to the downside as the labor market continues to cool and potentially weaken more significantly.
   
• USD: US July Personal Income – Citi: 0.2%, median: 0.2%, prior: 0.2%; Personal Spending – Citi: 0.6%, median: 0.8%, prior: 0.3%; Real Personal Spending – Citi: 0.4%, median: 0.4%, prior: 0.2% - personal income should rise 0.2%MoM in July, with a boost from government transfers likely due to Hurricane Beryl. But private payrolls are typically a leading indicator for the wages and salaries component of personal income and should be close to flat based on the flat move in payrolls. Personal spending should rise 0.6%MoM in nominal terms and 0.4%MoM in real terms, after July retail sales surprised to the upside. Real durable goods spending should grow 1.0%MoM, which could mechanically provide some boost to Q3 consumption growth. While softer than the 0.9%MoM in June, this increase is still a strong pace of consumption growth. However, the labor market has cooled considerably over the past few months, but this has not been reflected in weaker consumption data. Further weakening of the labor market presents skews risks towards less spending.

Europe – euro area HICP, employment, economic sentiment and German Ifo in focus this week

• EUR: Eurozone August HICP — last inflation data ahead of the September ECB meeting will likely show headline inflation approaching 2%, down from 2.6% in July to 2.2% YY in August mostly on base effects in energy. Core HICP inflation (ex-food and energy) should take a small step lower to 2.8% YY, up by 0.2% MM in SA terms (vs 0.3% in the previous three months). Meanwhile, eurozone unemployment should show a third consecutive small increase in the number of unemployed likely occurred in July, while the unemployment rate is stable at 6.5%. Euro Area HICP Inflation, August – Citi Forecast 2.2% YY, Consensus 2.2% YY, Prior 2.6% YY; Core HICP, August – Citi Forecast 2.8% YY, Consensus 2.8% YY, Prior 2.9% YY; Euro Area unemployment Rate, July – Citi Forecast 6.5%, Consensus 6.5%, Prior 6.5%.
   
• EUR: Euro Area growth watch – echoing developments in the PMIs in August, Citi Research expect the Olympics and a buoyant periphery to support euro area economic confidence just above the recession threshold, but Germany’s Ifo survey to show that the economy is deepening its decline. German Ifo Business Climate, August – Citi Forecast 86.5, Consensus 86.0, Prior 87.0; Ifo Expectations, August – Citi Forecast 86.2, Consensus 86.5, Prior 86.9; Ifo Current Assessment, August – Citi Forecast 86.8, Consensus 86.7, Prior 87.1; Euro Area Economic Sentiment, August – Citi Forecast 96.2, Consensus 95.8, Prior 95.8 (Olympics and periphery).

Japan – Tokyo CPI in focus this week

• JPY: Tokyo core CPI to increase 2.2% YoY in August – Citi Research expect core CPI in Tokyo (the CPI excluding fresh food) to increase 2.2% YoY in August, as in July. Energy prices look likely to pick up as earlier yen depreciation and rising resource prices are passed on to consumer prices. Meanwhile, CPI excluding fresh food and energy, i.e., core-core CPI, will probably increase 1.3% YoY in August, down from a 1.5% YoY rise in July.

Commodity Bloc – Australia July CPI , retail sales and Canadian Q2 GDP in focus this week

• AUD: Australia July CPI Indicator, YoY: Citi YoY forecast; 3.3%, Previous; 3.8% - the July monthly CPI is expected to be messy - a bunch of Federal electricity subsidies are unwinding, while $AU300 in new subsidies for all households are coming in. These large subsidies will impact headline inflation but of greater interest, and importance will be the other CPI basket items that are only measured in the first month of the quarter. Citi Research expect ongoing stickiness in these items. Overall, the risks are two-sided given the uncertainty around the subsidy estimates.
   
• AUD: Australia July Retail Trade: Citi MoM forecast; 0.2%, Previous; 0.5%, Citi YoY forecast; 2.8%, Previous; 2.9% - store traffic data and trading updates from some major retailers support another positive monthly retail trade growth result. The publication of another above average employment gain and delivery of the Stage 3 Tax Cuts into workers pockets also suggests that retail spending accelerated in the month. Overall, Citi Research forecast a 0.2% gain in July with a small upside risk to the overall retail trade forecast.
   
• CAD: Canada Quarterly GDP Annualized (Q2) – Citi: 1.6%, median: 1.8%, prior: 1.7% - Citi Research expect 1.6% QoQ SAAR real GDP by expenditure in Q2, a very similar pace to the 1.7% increase in Q1 and in line with the BoC’s latest forecast. Where there is room for disagreement with the BoC’s latest forecasts is in H2’24, when Citi Research expect activity to continue to slow, contrary to the BoC’s latest forecasts for an acceleration in growth. Consumption was somewhat surprisingly strong in both Q4-2023 and Q1-2024, but Citi Research expect a slowing in spending in Q2 due to a more rapid weakening in Canada’s labor market. Business investment could be somewhat stronger in Q2 but residential investment should decline. While exports picked up notably in June as oil shipments through the TransMountain pipeline began, weakness in trade earlier in the quarter suggest a drag from net exports in Q2. The stronger hand-off to Q3 implies exports could be supportive of growth in Q3, but strength in exports could be short-lived if demand in the US slows.

Asia EM – China August manufacturing PMI in focus this week

• CNH: China Manufacturing PMI August – Citi Forecast 49.6, Prior 49.4 – Citi Research expect a slight improvement in the manufacturing PMI, with a forecast increase to 49.6 in August. As China approaches end of the off-season, operation rates of asphalt and output of crude steel have rebounded since the end of July. However, the operating and shipment of cement remains at a low level. Extreme weather conditions such as heavy downpour could also cause some disruptions on production. The EPMI has recovered in August, showing a 2.7pp increase from last month. Export orders could also be affected by the new tariffs, and the container freight rate has declined by -4.9%% in the first two weeks of August.