Opinions

With the August employment report in the rear-view mirror, this week’s CPI (Friday) and PPI (Thursday) may very well determine whether the Fed hikes at the September 16 FOMC meeting. Amongst US macro data this week, we have CPI, PPI, existing home sales, Univ of Michigan & initial jobless claims. On CPI itself, we estimate headline CPI to be at 0.36% MoM & core CPI to be at 0.22% MoM. Our forecast for CPI and PPI data points to 0.20% m-o-m core PCE inflation in August. We believe another 0.2% monthly core PCE inflation is consistent with our Fed call of no rate hike at the September FOMC meeting. If our forecast materializes, we think that a majority of FOMC participants will see three months of benign core PCE inflation (0.1-0.2% m-o-m) from June through August as progress toward the Fed’s 2% inflation goal, leading to no rate hikes at the upcoming September FOMC meeting. In dated UST supply this week, we have $58 BN of 3 year UST auction on Tuesday, $39 BN of 10yr UST auction on Wednesday & $22 BN of 30 year US bonds on Thursday. Fed speak last week was mostly dovish with both Waller & Williams advocating for a hold in Sep FOMC meeting. The low intensity conflict in middle east continues with increase in shipping attacks seen on the weekend. We are now expecting Brent to break out from the narrow range of 85-95 levels to move towards 110 levels if current hostilities continue. Iran seems to be taking a position of ensuring higher crude prices so that US elections get affected for Trump but Trump does not seem to care about the elections anymore. The larger issue at hand is that post US elections on 3rd Nov, Iran won’t have any leverage on Trump & then Trump can choose to take any action he deems fit. That should worry IRGC bosses. Time is running out for Iran to make a deal with US. In RoW events, we have ECB meeting on Thursday where we expect a neutral hike of 25 bps. We also have German state election results on Sunday, German industrial production, Euro Area Sentix survey & UK GDP data this week.

We expect core CPI inflation remained essentially unchanged at 0.22% m-o-m in August after 0.215% in July. Super core inflation likely accelerated moderately in August to 0.28% m-o-m from 0.19% in July. Core goods inflation appears to have moderated slightly as apparel prices and prescription drug prices declined in the month, which was partly offset by higher appliance and vehicle prices. Our forecast for CPI and PPI data points to 0.20% m-o-m core PCE inflation in August. Also along with the August reading, the BEA will introduce new methodologies for estimating three key components of the PCE price index: portfolio management and investment advice, legal services, and computer software and accessories. These adjustments will likely reduce y-o-y core PCE inflation by 0.2-0.3pp. If our forecasts are correct, we think that a majority of FOMC participants will see three months of benign core PCE inflation (0.1-0.2% m-o-m) from June through August as progress toward the Fed’s 2% inflation goal, leading to no rate hikes at the upcoming September FOMC meeting. Although Chair Warsh’s reaction function is unclear, recent Fed speak such as comments from New York Fed President Williams and Governor Waller suggest another 0.2% monthly core PCE inflation would be sufficient for the Fed to remain in wait-and-see mode. From a market perspective, we like to receive 2yr US SOFR around 4.30 levels with stop at 4.45 and TP at 4.05. CMP is 4.23. For the last few weeks, 1yr-1yr US SOFR remains our high conviction idea based on above view. We are currently received half risk at 4.15 and another half at 4.25 with stop at 4.4 and TP at 3.90. Last week it made a high of 4.35 before cooling down to current levels of 4.33. In FX, we remain bullish on JPY as we approach 16th Sep FOMC. In our opinion piece “JPY’s path ahead has changed post joint intervention” published on 8th Aug, we had given a target of 155 on JPY which was almost achieved last week. https://macro-spectrum.com/opinion/jpys-path-ahead-has-changed-post-joint-intervention We continue to see JPY ending CY26 around 152 levels.

Following on the heels of Fed Chair Warsh’s forceful speech at Jackson Hole last Friday, the data docket picks up this week with the main event being Friday’s August employment report. Chair Warsh’s Jackson Hole speech was uber hawkish. He emphasized the importance of the inflation target (reiterating that the Fed’s target is PCE inflation) and implied that the Fed may need to act if disinflation is not occurring “with speed.” Interestingly, Warsh downplayed dovish signals from recent inflation and labor data. But we had expected this from him as there was no other way long end US bond yields could have been tamed. For Aug NFP we estimate 65k and UR at 4.0% with AHE at .4% MoM. In other US macro data this week, we have JOLTS, ISM manufacturing & ISM services. On Fed's policy itself, we believe Fed is likely on hold for REMCY26 as inflation momentum is waning & Fed typically does not do a hawkish pivot in an election year since 1990. There is no dated UST supply this week. In RoW events we have the critical Eurozone HICP inflation figures for Aug where we expect an uptick in headline to 3.4% YoY and core to 2.7% YoY. We also have the Bank of Canada's rate decision on Wedneday where we expect a hold. China also has it's official PMI data release on Monday where we expect some recovery due to recently announced government stimulus measures in line of slowing growth momentum.

We expect nonfarm payroll growth rebounded to 65k in August. Some of the July weakness appearS temporary – especially the decline in public-sector employment. We expect the unemployment rate continued to decline in August, dropping to 4.0%. Fundamentals for unemployment improved through the month, with layoff measures remaining near historic lows and signs of stabilization in labor demand. Wage growth likely rebounded after surprising weakness in July. We expect monthly average hourly earnings (AHE) growth to round up to 0.4%. Underlying wage growth appears to be cooling gradually, but a technical rebound in AHE is likely in August. Policy implication is that a healthy labor market should keep Fed officials focused on inflation risks. But the labor market does not appear to be a source of inflationary pressure. NFP growth remains uncomfortably low, with additional near-term headwinds for labor supply. And despite a technical rebound in August, we expect gradual wage disinflation to continue. Hence, we believe Fed is likely on hold as inflation momentum is waning & Fed typically does not do a hawkish pivot in an election year since 1990. From trading perspective, we are currently received in 1yr-1yr SOFR half risk at 4.15 and half risk at 4.25. Friday’s close was 4.27. Our stop loss is at 4.40 and profit target is 3.90. We like to receive 2 yr US SOFR around 4.32 levels (CMP 4.21) and 2yr UST around 4.45 levels (CMP 4.34), preferably after Aug NFP. Stop to both trades is 10 bps higher from entry and take profit is 20 bps lower from entry. We also like to put steepeners in 2*10 US SOFR around .05-.07 levels (CMP .13) for an eventual profit target of 0.20 with SL at -0.02. DXY is likely to see an upswing to around 100.40 levels from CMP of 99.70 which is also the 50 DMA. But 100.40-100.50 is a tough resistance beyond which we do not see DXY sustaining.

This week is headlined by Chair Warsh’s keynote at the Kansas City Fed’s Jackson Hole Symposium on Friday morning at 10am ET. If Warsh sticks to big picture topics, we see the task forces and AI as most likely focal points for his comments. If, instead, he decides to delve into more policy-relevant topics – less likely in our view, we see him focussing more on 2% inflation target & tools (policy rate vs balance sheet) likely to achieve it. In US macro data this week, we have July core PCE (expected around .23% MoM), consumer confidence, Q2GDP 2nd estimate & initial jobless claims. We continue to believe Fed is likely to remain on hold for REMCY26 as inflation moderates & employment/housing moderates further from current levels. In UST dated supply, we have $69 Bn of 2 year UST auction on Tuesday, $70 BN of 5 year UST auction on Wednesday & $44 BN of 7 year UST auction on Thursday. We also have Nvidia quarterly results on Wednesday which shall provide direction to Mag-7 names. In RoW events, we have Australian CPI on Wednesday & Tokyo CPI on Friday. We expect Tokyo CPI to remain elevated giving credence to our view of two 25 bps hikes by BOJ in both Sep & Dec this year. In tariff news, US & Canada tariff talks have broken down leading to US imposing 50% tariffs on Canadian products from Saturday which is likely to see retaliation from Canada too. In middle east conflict, situation remains of no war no peace. Treasury Secretary Bessent is likely to announce new economic sanctions on Iran on Monday 10 am EST. Same day Pakistan army Chief Asif Munir is travelling to Iran. Traffic through SoH remains currently around 5-10 ships on a daily basis implying movement of 5-7 mbpd of crude. We expect Brent is likely range bound between 85-95 levels in near term.

This week's focus in US macro data will be Wednesday’s minutes from the July 29 FOMC meeting. While the minutes are slightly stale considering last week’s CPI inflation report, we will be looking closely into details of the “good family fight” that Chair Warsh described in his post-meeting press conference. Regarding last week’s inflation data, July CPI and PPI data broadly came in line with our expectations. On net, we have revised up our July core PCE forecast to 0.23% m-o-m from our pre-CPI estimate of 0.21% m-o-m. On a y-o-y basis, our forecast suggests core PCE inflation remained essentially unchanged at 3.28%. Last week saw a very weak retail sales data which was likely due to negative payback after Prime Day sales boosted this component in June. Overall, we think that temporary factors that boosted spending in Q2 waned and weighed on spending in July. In US macro data next week we have housing starts, industrial production, pending home sales & initial jobless claims. On July FOMC minutes itself, we expect the minutes to clarify that a majority of policymakers remain comfortable with a wait-and-see approach to potential rate hikes. We expect Fed to remain on hold for REMCY26 as we expect a non-escalating middle east conflict along with subdued core PCE around 0.2% MoM. We expect payrolls to worsen from Sep’26 onwards and as we approach 3rd Nov US elections, we expect more weakness in US macro data as economic decision-making stalls in anticipation of election results. Based on prevailing conditions, our view is that post elections, democrats might be in majority in both Senate & House of representatives. We will be coming out soon with a detailed report on the same. In UST dated supply, we have $16 BN of 20 year UST auctions on Wednesday & $8 BN of 30 year TIPS on Thursday. In rest of the world data, we have European PMIs, UK CPI, UK retail sales & Canadian CPI. On middle east conflict, we have a "no war no peace" situation. President Trump wants to impose more sanctions on Iran so as to cripple it’s economy but markets are not so optimistic about the pain threshold of Iran. Iran current stance implies it wants US to feel the pinch of higher gasoline prices as US house elections approach in early November. Between this tussle of which party has a higher pain threshold, the rest of the world including middle east oil exporting countries & oil importing countries are suffering economic consequences. In the current state of SoH, crude is likely range bound between 85-95 levels for Brent in near term.