Ok, so the overarching narrative for this week shouldn’t be materially different from last week – people will be concerned about the same things, namely the looming debt ceiling debate, the odds of a government shutdown which ebb and flow with whatever shows up on Trump’s Twitter feed, and the fallout from North Korea’s latest ballistic missile provocation.
The dollar will be in focus as Yellen’s perceived lack of hawkishness at Jackson Hole weighs on sentiment. Remember, it’s not so much that anyone was expecting something from Yellen that would give renewed hope to dollar bulls, rather it’s that in the absence of a reason to change their mind, the bears are in control. Yellen gave them no such reason.
Although it’s still far too early to divine anything concrete, the dollar did start out on the back foot right out of the gate, opening lower against most of the G-10 amid thin liquidity.
And make no mistake, there’s no relief in sight for the greenback in terms of data risk. We’ll get PCE and jobs this week, both of which are potential land mines for the dollar and yields. 10Y yields are sitting near their lowest level since Sintra and as noted earlier on Sunday, spec positioning in TY is extreme.
Also on the docket: Euro area inflation.
“Although the data are expected to show weak inflation in both economies, the United States leads the eurozone in its cyclical recovery [and] as we approach the September ECB and Fed meetings, risks are skewed towards a change in narrative that favours the USD, particularly at the expense of the EUR,” Barclays wrote Sunday, before cautioning that “until that shift in narrative occurs, however, markets’ focus on inflation as the primary driver of policy represents a risk to our short EURUSD view.”
Notably, EURUSD is starting to run well ahead of the rate differentials pillar again:
“We expect nonfarm payrolls to increase by 165k in August from 209k in July, implying a slowdown from the 3-month moving average of 190k, albeit with a higher probability of seasonal bias. Markets will look to wage growth to gauge the Fed’s next steps – we expect a steady 0.2% m/m (2.6% y/y) – though this week also brings core PCE data which we see edging down to 1.4% y/y, moving further away from the Fed’s 2% target,” BofAML writes, weighing in on the outlook in their own week ahead piece. As for Europe, the bank sees CPI printing at 1.5% y/y.
Here’s a look at the most notable upcoming events along with Goldman’s estimates and consensus:
- Wednesday, August 30: United States, GDP (Q2 second). GS +2.8%, consensus +2.7%, last +2.6%. We expect a two-tenths upward revision in the second vintage of Q2 GDP report, driven by a faster pace of consumption growth, partially offset by a negative revision to government spending. We look for real personal consumption to be revised up 0.4pp to +3.2%.
- Thursday, August 31: Japan, Production (July). GS -0.5%, consensus -0.3%, last +2.2%. June production was revised upward to a final reading of +2.2% mom, from a preliminary figure of +1.6%. We estimate a slight decline of 0.5% mom in July production amid moderate deceleration in export volume growth for the month.
- Thursday, August 31: Euro area inflation. GS +1.4%, consensus +1.4%, last +1.3%. German inflation will be published on Wednesday, with Italy and the Euro area following on Thursday. We expect Euro area annual headline inflation to rise by 0.2pp to +1.5%yoy in August, and core inflation to be unchanged at 1.2%yoy. In Germany, we expect a rise in the headline rate of inflation to +1.8%yoy. We expect +0.9%yoy in France, and +1.3%yoy in Italy.
- Friday, September 1: Japan, MOF corporate statistics (Q2). GS +8.0%, consensus +8.5%, last +5.2%. Corporate statistics should reconfirm solid sales and profit growth for the quarter. We expect capex to accelerate to +8.0% yoy from +5.2% in Q1.
- Friday, September 1: United States, ISM manufacturing (August). GS 56.8, consensus 56.5, last 56.3. We expect the ISM manufacturing index increase 0.5pt to 56.8 in the August report. Regional manufacturing surveys strengthened on balance in August: our manufacturing survey tracker—which is scaled to the ISM index—bounced back 1.4pt to 58.0 in August.
- Friday, September 1: United States, Nonfarm payroll employment (August). GS +160k, consensus +180k, last +209k. We estimate nonfarm payroll growth decelerated to 160k in August, as our service-sector employment tracker pulled back and we expect residual seasonality in August to weigh on job growth. We expect the unemployment rate to remain unchanged at 4.3% and estimate average hourly earnings increased 0.1% month-over-month, reflecting negative calendar effects.
It probably goes without saying that just about the last thing the dollar needs at this point is a barrage of lackluster data.
And with the euro sitting at its highest since January of 2015, any signs that the prospects for Europe are improving further just as the U.S. economy falters ahead of a potentially disastrous game of fiscal chicken could push the single currency higher still.
Here’s a look at positioning (euro left pane, agg. dollar – black line- right pane):
Oh, and we’ll also get the Bank of Korea – that’s notable for obvious reasons.
Here’s the full calendar from BofAML: