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Drivers for the Week Ahead

  • The dollar is likely to remain under pressure after Powell’s dovish message at Jackson Hole
  • August jobs data Friday will be the data highlight of the week
  • The Fed releases its Beige Book report Wednesday; Powell will face many questions about the Framework Review that he unveiled at Jackson Hole
  • Messy EU politics couldn’t have come at a worse time; Germany has a heavy data week; eurozone final August manufacturing PMIs will be reported Tuesday
  • The political landscape in Japan just took a big jolt; RBA meets Tuesday

The dollar is likely to remain under pressure after Powell’s dovish message at Jackson Hole. DXY is trading at the lowest level since August 18 and further losses are likely. The move is being led by sterling, which is trading at new highs for the year near $1.3370. The euro is lagging a bit but is likely to break above the August high near $1.1965, while USD/JPY remains heavy and likely to fall further.

AMERICAS

August jobs data Friday will be the data highlight of the week. Consensus is currently 1.518 mln vs. 1.763 mln in July, with unemployment expected to ease to 9.8% from 10.2% in July. Initial claims rose in the BLS survey week containing the 12th of the month, while continuing claims fell in that week. As such, it’s anyone’s guess right now how the final reading will come.

Ahead of that, we will get some more clues. August ISM manufacturing PMI will be reported Tuesday and is expected to rise three ticks to 54.5. August Chicago PMI came in weaker than expected at 51.2 and so we see downside risks to the ISM reading. The ISM employment component stood at 44.3 in July and it will be closely watched for signs of improvement. ADP reports its private sector jobs number Wednesday, with consensus currently at 950k. August ISM services PMI will be reported Thursday and is expected to fall nearly a full point to 57.2. The employment component stood at 42.1 in July and so this too will be closely watched for signs of improvement.

As of this writing, stimulus talks remain deadlocked. Reports suggest House Speaker Pelosi and White House Chief of Staff spoke by phone but nothing concrete has emerged yet. Other reports suggest Pelosi signaled willingness to cut another $200 bln from the House package, taking it down to $2.2 trln. However, Republicans have so far been unwilling to offer anything more than the $1 trln already on the table. The longer the process takes, the greater the headwinds on Q3 (and quite possibly Q4) growth.

The Fed releases its Beige Book report Wednesday for the upcoming FOMC meeting September 16. What’s changed since the July 29 meeting? Most of the hard US data have continued to slow, suggesting that the rising virus numbers have had an impact. The Fed will likely acknowledge this. Clarida and Bostic speak Monday, followed by Brainard Tuesday. Williams, Mester, and Daly speak Wednesday, while Evans speaks Thursday. The media embargo goes into effect Saturday and so there will be no more Fed speakers until Powell’s post-decision press conference.

Powell will face many questions then about the Fed’s Framework Review that he unveiled at Jackson Hole. The change in policy was formalized in its statement on Longer-Run Goals and Monetary Policy Strategy. The FOMC now “seeks to achieve inflation that averages 2% over time.” The Fed now focuses on “shortfalls” in employment from its maximum level, rather than “deviations” as previously stated. To us, this is another nail in the coffin of the Phillips Curve, with the Fed no longer as worried about wage pressures as the economy approaches full employment as it used to be.

By moving to average inflation targeting, we feel that the Fed has further muddied the waters. Yes, the clear signal is that rates will stay lower for longer, with the Fed no longer committed to preemptive tightening. However, markets are still left wondering under what conditions the Fed will begin tightening. Powell downplayed any sort of rote reaction function (a la the Taylor rule), instead stressing “Our decisions about appropriate monetary policy will continue to reflect a broad array of considerations and will not be dictated by any formula.” That said, it will probably be five years or so before we have to start worrying about imminent Fed tightening.

Weekly jobless claims will be reported Thursday. Initial claims are expected at 950k vs. 1.006 mln the previous week, while continuing claims are expected at 14.0 mln vs. 14.535 mln the previous week. Recent data suggest the labor market is still healing, albeit slowly, as initial claims at 1 mln or more nearly every week suggests.

Quite a bit of other US data round out the week. August Dallas Fed manufacturing activity index will be reported Monday, which is expected at 0.0 vs. -3.0 in July. This will be followed by final Markit manufacturing PMI Tuesday and final Markit services and composite PMIs Thursday. July construction spending will be reported Tuesday, along with August auto sales that are expected to show a 14.8 mln annual pace. July factory orders will be reported Wednesday and are expected to rise 6.0% m/m, while July trade will be reported Thursday (-$57.0 bln expected).

Canada highlight will also be August jobs data Friday. Consensus sees 250k vs. 418.5k in July. Ahead of that, August Markit manufacturing PMI will be reported Tuesday. July trade will be reported Thursday. Ivey PMI will also be reported Friday. With the government teeing up more fiscal stimulus to be announced next month, the Bank of Canada is on hold. Next policy meeting is September 9 and no change is expected then.

EUROPE/MIDDLE EAST/AFRICA

Messy EU politics couldn’t have come at a worse time. EU Trade Commissioner Hogan was forced to resign after an unseemly golf outing for a select crowd. Hogan was a former Environment Minister in Ireland, and it appears that domestic politics colored the decision as the three-party coalition running the country was under pressure to deliver some sort of political consequences to the high-profile guests at the dinner.

Germany has a heavy data week. August CPI will be reported Monday and is expected to rise 0.1% y/y vs. -0.1% in July. August unemployment data will be reported Tuesday, which is expected to be flat vs. -18k in July. July retail sales will be reported Wednesday, which are expected to rise 0.5% m/m vs. -2.0% in June. Factory orders will be reported Friday, which are expected to rise 5.0% m/m vs. 27.9% in June.

Eurozone final August manufacturing PMIs will be reported Tuesday. Spain is expected to fall half a point to 53.0, while Italy is expected to rise a tick to 52.0. Final August services and composite PMIs and July retail sales will be reported Thursday. With regards to the composite, Spain is expected to drop to 49.5 from 52.8 July, while Italy is expected to drop to 50.0 from 52.5 in July. Overall, the eurozone outlook is solid but the latest COVID outbreaks will be a headwind. Next ECB meeting is September 10 and it will have to acknowledge the weakening outlook.

ASIA

The political landscape in Japan just took a big jolt. While the departure of Shinzo Abe is unlikely to have any near-term economic policy implications, trans-Pacific and regional relations will remain in flux. Meanwhile, Japan has a heavy data week. July IP, retail sales, housing starts, and construction orders were reported Monday. IP rose 8.0% m/m, while sales fell -3.3% m/m. July labor market data and final August manufacturing PMI will be reported Tuesday.

Reserve Bank of Australia meets Tuesday. No change is expected. At its last meeting, the bank resumed its bond purchases after 3-year yields traded consistently above its 0.25% target. Since then, the economic outlook has worsened due to the lockdown, which the RBA will have to acknowledge. Q2 GDP will be reported Wednesday and is expected to contract -6.0% q/q vs. -0.3% in Q1. July trade data will be reported Thursday (AUD5.35 bln expected), while retail sales will be reported Friday (3.3% m/m expected).

Full story here
About Win Thin
Win Thin
Win Thin is a senior currency strategist with over fifteen years of investment experience. He has a broad international background with a special interest in developing markets. Prior to joining BBH in June 2007, he founded Mandalay Advisors, an independent research firm that provided sovereign emerging market analysis to institutional investors. He received an MA from Georgetown University in 1985 and a B.A. from Brandeis University 1983. Feel free to contact the Zurich office of BBH
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