• MON: Japanese GDP Prelim (Q2), Chinese Activity data (Jul), Canadian Inflation (Jul)
• TUE: UK Jobs report (Jun/Jul), German ZEW Survey (Aug)
• WED: UK Inflation (Jul), EZ Final CPI (Jul), FOMC Minutes
• THU: Riksbank Announcement, PBoC LPR, Japanese Trade Balance (Jul), Australian Jobs Report (Jul)
• FRI: Japanese CPI (Jul), UK Retail Sales (Jul), EZ/UK/US Flash PMIs (Aug), Canadian Retail Sales (Jul)

WEEK AHEAD

JAPANESE GDP (MON): Japanese preliminary Q2 GDP growth is expected at 0.5% Q/Q (prev. 0.5%) and 2.0% annualised (prev. 1.8%), broadly maintaining the pace seen in Q1. Domestic demand is expected to remain the key driver, with private consumption seen rising 0.5%, while business investment is expected to moderate and external demand provide little support. Attention will be on whether resilient domestic activity strengthens the case for further BoJ normalisation, with a solid print likely to reinforce expectations for another rate hike later this year. Recent sources suggested the BoJ is reportedly set to raise interest rates as soon as September and is also considering accelerating subsequent hikes.

CHINESE ACTIVITY DATA (MON): Industrial Production is expected at 4.8% Y/Y (prev. 5.3%), Retail Sales at 1.6% (prev. 1.0%) and Fixed Asset Investment at -6.0% Y/Y (prev. -5.7%). Focus will remain on the divergence between relatively resilient industrial activity and continued weakness in domestic demand and investment. A softer-than-expected release would reinforce concerns about the Chinese growth outlook and calls for further policy support from Beijing.

CANADIAN INFLATION (MON): The Canadian inflation report will be closely watched for its implications for the BoC’s next move on interest rates. The central bank is currently on hold as it assesses competing risks from elevated inflation and softer growth. Higher energy prices and continued uncertainty in the Middle East are keeping upside inflation risks alive, while ongoing trade uncertainty with the US continues to pose downside risks to the growth outlook. The previous inflation report was encouraging, with headline CPI easing to 2.8% Y/Y and core CPI cooling to 2.1%, both lower than their prior readings. Meanwhile, the average of the BoC’s preferred Common, Median and Trimmed measures eased to 2.1% from 2.27%, pointing to some moderation in underlying price pressures. The BoC targets 2% headline inflation within a 1-3% control range, meaning headline inflation remains within the target range but towards its upper end, while underlying inflation measures are sitting much closer to 2%. The upcoming report will therefore be important in determining whether recent progress on inflation is continuing. Another soft report would strengthen the case for the BoC to remain patient, particularly given lingering downside risks to growth from trade uncertainty. Conversely, renewed strength in headline or underlying inflation, especially against the backdrop of higher energy prices, could bolster the case for further tightening. Regarding the policy outlook, Rabobank expects the BoC to remain on hold through year-end, while money markets currently price around 13bps of tightening by year-end, equivalent to roughly a 52% probability of a 25bp hike. Note, the policy rate is currently around the lower end of the BoC’s estimated neutral range, meaning any further rate cuts would likely move policy into accommodative territory.

UK JOBS (TUE): The last series sparked modest GBP strength, as while the main components were broadly in-line, the overall series spoke to a relatively steady market, and while there are still some points of softening, they are nothing new. For the BoE, the wage data remains potentially the main point to watch, as it could provide a somewhat timely indicator of any early second round effects from the Middle East shock. But, aside from public sector awards skewing the associated print, the components continue to show a moderation in the rate of wage growth. For the April-June series, the labour market will likely continue to show the stabilisation that has roughly been seen in recent outturns.

UK INFLATION (WED): June’s print was hotter-than-expected for the core, but a touch cooler on the headline Y/Y. Sparking a very modest hawkish reaction, as the ‘sticky’ inflation narrative, alongside the Middle East escalation at the time dominated the discourse. For July, the PMI series spoke to a cooling in price pressures, given the lower energy prices seen in the first half of the period; albeit, the outlet cautioned that inflationary pressures clearly remain elevated. Despite this, the headline rate will likely see an increase in July, as a function of the latest Ofgem utility price cap adjustment. For the BoE, focus remains on the balancing act among the hawks and doves at Threadneedle St., and while the July series will inform, it will not decide the debate which may well continue over the next few months, until it either becomes clear that second round effects are/aren’t present, or, the underlying economic picture changes.

FOMC MINUTES (WED): The FOMC left rates unchanged at 3.50-3.75% in July, as expected, although the decision drew three dissents, with regional Fed Presidents Logan, Hammack and Kashkari all voting for a 25bps hike. The statement was little changed from June and offered no explicit forward guidance, consistent with Chair Warsh’s aversion to signalling the future policy path. The Fed reiterated its commitment to price stability while describing economic activity as expanding at a solid pace, supported by strong productivity and capital investment, alongside steady job gains. With Warsh having moved away from forward guidance, analysts increasingly view each meeting as effectively live. Markets initially interpreted the decision as dovish, unwinding hawkish positioning built ahead of the meeting, while expectations for a September hold have since risen to around 67% at the time of writing, from roughly 50/50 in recent weeks following inflation and labour market data. The meeting also triggered a pronounced steepening of the Treasury curve, with the front end richening and the long end cheapening. The move was partly attributed to increased term premium amid uncertainty over the future policy path given the lack of forward guidance. Warsh also appeared relatively comfortable with the recent tightening in financial conditions, suggesting it was doing some of the Fed’s work, potentially reducing the need for the policy rate itself to deliver all of the required tightening. Some have also questioned whether the Fed could increasingly lean on balance-sheet policy alongside the FFR to influence financial conditions. The minutes will therefore be closely watched for how far the hawkish sentiment extended beyond the three dissenters and whether other officials saw a case for tighter policy despite ultimately voting to hold. Attention will also be on the arguments put forward by the dissenters, particularly concerns that supply shocks and the AI investment boom could entrench inflation pressures, alongside their view that a sufficiently stable labour market gives the Fed room to prioritise restoring price stability. Any indication that the three dissenters had broader sympathy within the Committee could keep the prospect of a September hike alive. However, data released since the meeting have strengthened the case for patience. July CPI showed both headline and core Y/Y inflation easing, while subsequent PPI data were also softer than expected. July core PCE is currently tracking around 0.2-0.3% M/M, ahead of its August 26th release. Meanwhile, the July payrolls report was notably weak and included sizeable downward revisions to previous months. The combination of easing inflation and softer labour market data has underpinned expectations among some analysts for the Fed to remain on hold, even as inflation remains above target. There is a risk that markets ultimately look through the minutes given their backward-looking nature, particularly following the significant amount of inflation and labour market data released since the July meeting. Attention may instead remain on the Jackson Hole Economic Symposium later this month, where Chair Warsh is expected to speak. Furthermore, the Fed will receive another round of inflation and employment data before the September FOMC, leaving the near-term policy outlook highly dependent on incoming data.

RIKSBANK ANNOUNCEMENT (THU) The Riksbank is expected to keep its policy rate unchanged at 1.75% at its August meeting, a view shared by all economists surveyed by Bloomberg. Despite July inflation coming in above both the Riksbank’s forecast and analyst consensus, a hold is justified as inflation does not deviate significantly from the Riksbank’s target. However, the board will likely flag that inflation has been higher than expected and reiterate that the Riksbank is ready to act if inflation shows signs of becoming persistently higher, noting that risks have shifted to the upside – as stated at its last meeting, when it kept rates unchanged. SEB views the probability for a rate hike in August as very low, Nordea says the recent inflation data is modest enough to keep the Riksbank on hold though to year-end, while Nomura also expects a hold through to year-end. All banks caution hawkish risks to the outlook, given the uncertain geopolitical environment. Note, there will be no new macro forecasts presented this meeting.

PBOC LPR (THU): The PBoC is expected to maintain its 1yr LPR at 3.00% and 5yr LPR at 3.50%. Despite continued weakness in domestic demand and investment, policymakers are expected to favour targeted liquidity and fiscal support over further broad-based monetary easing, while pressure on banks’ net interest margins is also expected to limit the scope for LPR cuts.

JAPANESE TRADE BALANCE (THU): Export growth is expected to remain supported by autos, semiconductors and resilient global technology demand, while elevated energy costs continue to inflate Japan’s import bill.

AUSTRALIAN JOBS REPORT (THU): Employment is expected to rise by 20-25k in July (prev. +76.3k), with the Unemployment Rate seen at 4.4-4.5% (prev. 4.4%) and Participation Rate around 66.9-67.0% (prev. 67.0%). Westpac forecasts a 15k employment gain and notes that underlying jobs growth has slowed, with the three-month average running at an annualised 1.1%, below both its long-run average and working-age population growth. Westpac expects unemployment to remain at 4.4%, although the recent sharp rise in underemployment could signal further slack ahead, while recommending focus on the employment-to-population ratio given volatility around population estimates.

JAPANESE CPI (FRI): Japanese Core CPI is expected to rise to 1.8% Y/Y in July (prev. 1.6%), with the recent acceleration in Tokyo CPI and elevated energy costs pointing to renewed inflationary pressures. Focus will be on whether price pressures continue to move towards the BoJ’s 2% target, particularly amid signs that higher input costs are feeding through to consumers. A firmer-than-expected print would strengthen the case for further BoJ normalisation and reinforce expectations for another rate hike later this year. Recent sources suggested the BoJ is reportedly set to raise interest rates as soon as September and is also considering accelerating subsequent hikes.

UK RETAIL SALES (FRI): July’s BRC monitor moderated from the prior by more than expected, with the outlet reporting “modest” sales growth as while the concluding period of the World Cup helped, the heatwave seemingly hindered some activity and broader levels of consumer demand. As such, the much stronger-than-expected June reading is unlikely to be repeated, as the consumer seemingly takes a pause amid the summer heat; a dynamic that, as things stand, could well be repeated in August. While unwelcome from an economic perspective, the moderation in consumer activity will do nothing for second round effects. Points that both work in favour of a hold at this stage and then factor on the dovish side of things as/when the Middle East inflation risk passes. BoE aside, activity will be a point of focus when it comes to framing the Burnham government’s first budget in the next few months.

UK FLASH PMI (FRI): July’s series was better-than-expected, with the economy supported by an improvement in market conditions, while this remained at sluggish levels, expectations of business activity picked up for a consecutive month. Across August, the UK heatwave has continued and may well weigh on consumer activity in the period, and may temper the already modest growth expectations for Q3 following the July print. For policymakers, the cooling price pressure in July would have been welcome by the BoE, though the underlying levels of such pressure in the economy likely remained at a level (and evidenced by the three BoE hawkish dissenters) that some view as incompatible with attaining the 2% inflation target. Therefore, any further easing in such pressure, or an unwinding of July’s action, will factor on the dovish and hawkish side respectively; but, overall, the extended hold narrative remains in play until a better call can be made on second round effects, absent a significant change to underlying economic activity, or a fresh/renewed external shock.

EZ FLASH PMI (FRI): Eurozone Flash Manufacturing PMI is expected to edge higher to 52.0 in August (prev. 51.9), while Services and Composite PMIs previously stood at 51.6 and 51.9, respectively. Traders will be looking for whether the recent improvement in manufacturing momentum can offset softer services activity, alongside regional divergences between Germany and France. Particular attention will also fall on the PMI price gauges and anecdotal commentary for signs of underlying inflationary pressures against a backdrop of fluid geopolitics.

WEEK IN REVIEW

BOJ SUMMARY OF OPINIONS (MON): BoJ Summary of Opinions from the July meeting provided a hawkish tone, as a member said Middle East developments, expanding AI-related demand and a weak yen all work towards pushing up inflation, while another member said consumer goods inflation is expected to pick up again towards autumn. The Summary of Opinions also noted that a member said policymakers should remain alert to upside inflation risks from a weak yen and strong AI-related demand, while another opinion was that inflation risks are skewed sharply to the upside as higher oil costs feed into consumer prices and global AI demand and Japan’s expansionary fiscal policy support demand. Furthermore, there were opinions that the pace of BoJ rate hikes could exceed market expectations depending on economic, price and financial conditions, while a member said the BoJ should speed up the withdrawal of monetary support as the cost of delaying a rate hike is not insignificant. The opinions clearly showed a hawkish debate among board members and have contributed to increased bets on a September rate hike, with money markets now pricing in around a 62% chance that the BoJ will raise rates at its next meeting in September.

RBA ANNOUNCEMENT (TUE): RBA kept the Cash Rate unchanged at 4.35%, as expected, in a unanimous decision, while maintaining its hawkish tone as it said inflation remains elevated and risks are skewed to the upside. The central bank remained focused on preventing high inflation from becoming entrenched and said it would continue to do what it considers necessary to return inflation sustainably to target, including raising the Cash Rate further if upside risks materialise. It also said inflation remains too high and is not expected to return to around the midpoint of the target range until late 2027, with upside risks to that projection. The overall tone of the initial release was seen as slightly less hawkish than previously, as the central bank noted that financial conditions appear somewhat restrictive and trimmed some of its CPI forecasts in the quarterly SoMP. It also acknowledged that, following three increases since the start of the year, financial conditions are now tighter than previously and the economy appears to be slowing as expected. It said financial conditions in Australia appear somewhat restrictive and the economy is expected to return to balance in 2027, a little earlier than previously forecast. However, RBA Governor Bullock stuck to the hawkish script during the post-meeting press conference, saying the Board hopes to slow the economy, sees upside risks to inflation and will raise rates again if needed. She also revealed that the Board did not discuss a rate cut at the meeting, only whether to raise or maintain rates, and said it was thinking hard about when it might be appropriate to raise rates and that it was possible another hike would be needed.

US CPI (WED): Headline CPI rose 0.1% M/M in July, in line with expectations, following the 0.4% decline in June, which had been driven by a notable 5.7% drop in energy prices. The Y/Y rate eased to 3.4% from 3.5%, also matching forecasts. Core CPI rose 0.2% M/M, in line with consensus and accelerating from June’s unchanged reading, while the Y/Y rate cooled to 2.5% from 2.6%, as expected. Overall, the report was encouraging, with both annual inflation measures ticking lower and no upside surprise in the monthly core reading. Money markets subsequently increased the probability of an unchanged rate decision in September to around 60% from 50% beforehand, with the weak July jobs report also supporting the case for patience. Looking at the drivers, shelter rose 0.1% M/M and accounted for around two-thirds of the overall monthly increase in the all-items index. Food prices also rose 0.1%, including a 0.3% increase in food away from home, while energy prices declined 1.5%. Within the core components, prices increased for medical care, airline fares, communication, education and recreation, while motor vehicle insurance was among the major indexes to decline in July. However, there is still plenty of data due before the September 16th FOMC, including another CPI and NFP report, which will further shape rate expectations given the Fed’s continued lack of explicit forward guidance. Policymakers will receive the July Core PCE report before the meeting, with Pantheon Macroeconomics now expecting a 0.16% M/M increase following today’s CPI data, while Oxford Economics looks for 0.2% and Goldman Sachs 0.23%. The August PCE report, however, will not be available before the September decision. Regional Fed inflation measures were somewhat mixed. The Atlanta Fed’s Sticky-Price CPI accelerated to a 3.5% annualised M/M rate from 0.8%, with the core measure also rising to 3.5% from 0.7%. However, the less volatile Y/Y measures were more encouraging, with headline sticky CPI unchanged at 2.8% and core easing to 2.7% from 2.8%. Meanwhile, the Cleveland Fed Median CPI rose 0.3% M/M from 0.2%, while the Y/Y rate was unchanged at 2.7%. The sharp swings in the annualised monthly Atlanta Fed measures warrant some caution, while the more stable Y/Y readings suggest underlying inflation remains relatively sticky but is broadly moving in the right direction.

NORGES BANK ANNOUNCEMENT (THU): Norges Bank left rates unchanged at 4.25%, as expected. Commentary accompanying the announcement stated that “slower inflation is welcome news, but inflation is still too high”. As a reminder, core inflation in June and July came in at 2.7% Y/Y, below the Bank’s 3.3% forecast. However, the Board caveated this by stating that “it is too early to conclude that the inflation outlook has changed materially”. As a result, guidance was essentially unchanged, stating that it “may still become necessary to raise the policy rate”. SEB interpreted this as the Committee keeping the door open for a September hike while awaiting further inflation data and new projections. All-in-all, it was an uneventful meeting, with the focus now on upcoming data ahead of the September meeting. SEB’s view is unchanged, calling for a final rate hike to 4.50% in September.

UK GDP (THU): Q2 GDP was strong against consensus, aside from the in-line Q2 Q/Q, with services continuing to support and benefitting from the period of warm weather, while Pharmaceuticals also drove some manufacturing strength, though the input is often volatile and could be subject to revision. However, while firmer-than-expected, the series is caveated by a weaker-than-expected breakdown for June and downward revisions to the May GDP series. Overall, the series does not change the extended hold narrative for the BoE. However, it does work in favour of those who raised dovish points at the last gathering.

US RETAIL SALES (FRI) US retail sales fell 0.6% M/M in July (exp. +0.1%, prev. +0.2%), significantly below expectations, while sales excluding autos declined 0.3% (exp. +0.2%, prev. -0.2%). The details were also soft, with sales excluding autos and gasoline falling 0.2% M/M (prev. +0.4%), while the closely watched Control Group declined 0.4% (exp. +0.3%, prev. +0.4%), pointing to weakness in the component most closely linked to consumer spending in GDP. Looking at the sector breakdown, weakness was led by nonstore retailers (-2.2%), motor vehicle & parts dealers (-1.8%), gasoline stations (-0.9%), and electronics & appliance stores (-0.5%). Conversely, clothing & clothing accessories stores (+1.9%) saw the strongest increase, followed by health & personal care stores (+0.7%), miscellaneous retailers (+0.5%), and food services & drinking places (+0.5%). On an annual basis, retail sales growth slowed to 5.0% Y/Y from 6.7%. Overall, the report points to a notable loss of momentum in consumer spending at the start of Q3, particularly given the downside surprise in the Control Group. Some of the July weakness may reflect a reversal of World Cup-related spending and consumption brought forward into June, although the broad-based softness, including the decline in Control Group sales, suggests this was unlikely to be the sole driver.

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