FOREX: EURJPY Pressed Higher Despite Ongoing French Woes
- The initial fade in the JPY on Monday stalled as advisor Honda talked up governmental support for a December BoJ rate hike, however the currency is on the back foot again early Tuesday, helping usher in new weekly highs for USDJPY at 150.83. The move narrows the gap with key resistance and the bull trigger in the pair at 150.92, clearance above which puts prices at the best level since late March. Takaichi's victory in the LDP leadership race remains the primary driver here, with local press focusing on her negotiations with junior coalition partners - who oppose her more conservative political views.
- EURJPY's rally to new alltime highs this week is largely holding, with Tuesday seeing a 176.35 print, however ongoing fiscal and political concerns in France will be containing the strength. Implied EUR vols are steadying and appear to have halted their multi-month downtrend in the front-end. Calls for early Presidential and legislative elections in France to clear the political logjam have been rising - an unlikely occurrence in the very near-term, but a growing possibility given the government's inability to proceed with an acceptable budget.
- NZD is the poorest performing currency on the day, with AUD not far behind. Price action comes ahead of the RBNZ rate decision on Wednesday, at which markets are split between expecting a 25bps rate cut, or something more sizeable. Consumer confidence data in Australia also deteriorated, dragging AUDUSD toward the weekly lows of 0.6582.
- The ongoing US government shutdown keeps data further delayed, meaning today's trade balance data for August is unlikely to be released (and may have spillover impacts on the Canadian trade balance statistics, which are cross-referenced against the US numbers). As such, the speaker schedule is likely to be of more market importance: Fed's Bostic, Bowman, Miran & Kashkari are all set to appear and may shed some insight into the Fed's views on the shutdown ahead of the Minutes release tomorrow. ECB's Nagel & Lagarde are also on the calendar.
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LOOK AHEAD: US Macro: PPI (Wed) and CPI (Thu) Inflation
US PPI inflation is released on Wednesday before CPI inflation on Thursday, an unusual ordering that should see core PCE implications dialled in after the CPI release rather than the usual wide range waiting for specific PPI details. PPI will be watched more closely than usual this month after a far stronger than expected jump in last month’s July report fired a warning short over tariff-based cost pressures starting to feed through. That included a 0.6% M/M increase in our preferred core series of PPI ex food, energy & trade services, which strips out items such as the then booming portfolio management & investment advice category following the strength in equity markets. It's too early to gauge an accurate sense of analyst expectations for August.
CPI inflation on Thursday will then be the last major release ahead of the Sep 17 FOMC decision. Consensus looks for core CPI at 0.3% M/M after the 0.32% M/M in July, another monthly increase comfortably above a pace consistent with 2% inflation. August should in theory start to see the largest tariff impacts along with September and possibly October. Returning to July’s report, core goods inflation was softer than expected, at a still solid (by core goods standards) 0.2% M/M for a second month running but about half that of 0.4% expected by analysts. Instead, non-housing core services surprised higher. The latter was a “dangerous” development in the words of a usually dovish Chicago Fed’s Goolsbee (’25 voter), who speaking after Friday’s payrolls report is still undecided on a September cut whilst looking for August inflation data “to get more information”.
LOOK AHEAD: US Macro: Payrolls Preliminary Benchmark Revisions (Tue)
- The BLS on Tuesday will publish preliminary estimates of benchmark revisions, based off QCEW data for Q1.
- These will give an indication of the actual benchmark revisions on the Mar 2025 level of payrolls due with the Jan 2026 payrolls report released in early February.
- Bear in mind that the final benchmark estimate tends to nearly always be more negative than the preliminary figure – see historical values to the right.
- That doesn’t mean they can’t be large again after last year’s historically negative revision that lowered the level of payrolls by ~600k. Initial estimates we’ve seen look for another large downward revision, with the smallest being worth -550k but with wide ranges higher.
FED: Barclays Adds A Cut To 2025 Fed View
Barclays analysts now expect three Fed cuts in the remainder of the year, adding October to their pre-existing call for 25bp reductions in September and December. "Given the disappointing August employment report, we expect the FOMC to see more elevated downside risks to the employment side of the mandate."
- As for a 50bp September cut, "we think that the FOMC will view [that] as sending too strong a signal that labor market conditions are deteriorating. Indeed, we think that participants such as Powell understand that the slower pace of payroll employment reflects at least, in part, slower labor supply, which does not translate into increased labor market slack."
- For 2026 they continue to expect 25bp cuts in March and June to 3.00-3.25%, but "we do not think the FOMC will be able to cut rates more than twice next year, as we think that activity will show some slight acceleration, with the economy adapting to the new tariff environment and fiscal policy providing some support, and the unemployment rate will revert down amid limited increase in labor supply."
