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Summary

United States: U.S. Economy Still Resilient, but Headwinds Building

• It was a relatively light week on the U.S. economic data front. A slate of housing data offered additional evidence that high mortgage rates and limited inventory are weighing on housing market activity. Jobless claims remained low, but a still-declining LEI and a further climb in Treasury yields and oil prices suggest economic growth will slow in the months ahead.
• Next week: New Home Sales (Tue.), Durable Goods (Wed.), Personal Income and Spending (Fri.)

International: Central Banks Here, There and Everywhere

• It was a particularly active week for international central banks across the G10 and emerging markets, with several institutions delivering differing decisions and differing messages. Emerging market central banks saw a combination of rate hikes, rate holds and rate cuts. G10 central banks saw some rate hikes and some rate holds, with differing messages also on the likelihood of further monetary tightening in the months ahead.
• Next week: Mexico Policy Rate Decision (Thu.), Eurozone CPI (Fri.), China PMIs (Sat.)

Interest Rate Watch: Higher for Longer

• The Federal Open Market Committee (FOMC) held the target range for the federal funds rate at 5.25%-5.50% this week. While rates were left unchanged, the Committee retained a hawkish bias. The median projection for the midpoint of the target range at the end of 2024 rose to 5.125%, up from 4.625% in June.

Topic of the Week: Oil Prices Complicate the Fed's Efforts to Reduce Inflation

• The climb in oil prices to a 10-month high has created a new challenge to corralling inflation. While having a bigger effect on headline inflation, the increase, if sustained, could also pass through to core prices and slow progress in returning inflation to 2%.

Full report here.

US

It will be a busy week filled with a wide range of economic releases, with the focus falling on the consumer and the Fed’s preferred inflation gauge.  August personal income is expected to rise given the strong labor market while spending cooled given the end of summer vacations.  The bond market will pay extremely close attention to the next round of inflation readings.  Headline PCE will likely heat up given the surge in energy prices, while the core reading should maintain the 0.2% monthly pace.

Wall Street will also pay close attention to the UAW strike and if government shutdown odds grow.  It will also be a busy week filled with central bank speak.  On Monday, the Fed’s Kashkari speaks at Wharton School. Tuesday contains Bowman’s welcoming remarks at a FedCommunities event on rental housing affordability. Thursday contains four events, with Chair Powell hosting a town hall with educators and speeches from Goolsbee, Cook, and Barkin. Williams speaks on monetary policy on Friday.

Eurozone

The ECB signaled after its September meeting that its tightening cycle was likely at an end, barring any nasty surprises on the data front. Next week could be the first test of that, with flash HICP inflation data due on Friday. Substantial progress has already been made and much more is expected over the remainder of the year, while a cooling economy and threat of recession is clearly making policymakers nervous.

As always, a number of individual countries will release their inflation numbers in the days leading up to the eurozone release so we could have a pretty good idea of what we’re in for by the time the Friday release happens. That aside, there are some surveys released over the course of the week among other tier two and three data. Central bank speak will also be monitored, most notably President Christine Lagarde’s comments as she makes an appearance on the same day as the inflation report is released.

UK 

The Bank of England surprised markets this past week in choosing to hold the Bank Rate at 5.25, with those backing it taking the vote by the finest of margins 5-4. That doesn’t necessarily mark the end of the tightening cycle but if the data improves as the MPC expect, it may well be. Any negative data surprises between now and the early November meeting though may tip the balance the other way. There’s going to be even more pressure on the data now, not that there’s really anything of note next week. The final GDP reading for the second quarter is the only one that stands out in any way.

Russia

There’s a selection of data due next week although I’m not sure any will hold much sway when it comes to upcoming monetary policy announcements unless they’re particularly shocking. Industrial output, retail sales, GDP, unemployment, and real wages are among the releases. Russia’s issues with inflation and the currency are much bigger than all of these, although it will be interesting to see how the economy is holding up amid these additional pressures.

South Africa

The SARB held rates steady at its September meeting, as expected, with headline and core inflation sitting comfortably within its 3-6% target. The central bank continued to warn about risks to the inflation outlook and hasn’t declared the end of the tightening cycle just yet. PPI figures next week may be of interest.

Turkey

The Turkish central bank raised interest rates by 5% on Thursday, taking the Key Rate to 30% amid a plunging lira and soaring inflation. The move didn’t help lift the currency which still sits near record lows. Next week doesn’t have much to offer beyond a few tier-three data releases.

Switzerland

The SNB opted against raising interest rates in September as their new forecasts showed inflation below 2% over the forecast horizon, meaning no more tightening is necessary. The decision obviously came with warnings that hikes could be considered in the future if the data warrants it, as the SNB attempted to put itself into hawkish hold territory, which markets didn’t buy. The SNB is done with rate hikes and the focus now will shift to when the first cut will come. Next week has a few things of note, with the KOF indicator and investor sentiment surveys, and the SNB quarterly bulletin being released.

China

The only data to watch will be total industrial profits for August which are forecasted to contract at a slower pace of -10% y/y from -15.5% y/y in July.

India

Q2 current account and external debt data will be released on Friday. The current account deficit is expected to shrink marginally to $1 billion from $-1.3 billion recorded in Q1.

The Indian rupee has been resilient against the strength of the US dollar against other emerging currencies in the past three months. The USD/INR has been trading in a tight range of 175 pips and capped below its October 2022 high of 83.28.

Australia

Two key data releases to be aware of this week. Firstly, the monthly CPI for August will be out on Wednesday, and after a deceleration to 4.9% in the year to July, marking the lowest inflation rate since February 2022, a slight uptick to 5.2% is expected in August.

Secondly, preliminary retail sales for August on Thursday are expected to show a dip to 0.3% m/m from 0.5% in July.

New Zealand

Business confidence data for September is due on Thursday with an improvement to 5 from -3.7 in August expected. That would put an end to 26 consecutive months of negative readings.

Consumer confidence on Friday is expected to slow to 81.5 for September from 85 previously.

Japan

Bank of Japan (BoJ) monetary policy meeting minutes will be out on Wednesday and market participants will scrutinize the BoJ official’s remarks or expressed views on the state of inflation in Japan as well as any debate on bringing forward the end of negative interest rate policy.

A busy Friday with a slew of data releases. The leading Tokyo core inflation reading (excluding fresh food) is expected to dip to 2.6% y/y from 2.8%. That would be the third straight month of deceleration in Tokyo’s core inflation. However, the core-core inflation rate (excluding fresh food and energy) is forecasted to remain the same at 2.6% y/y for September, a 31-year high.

Retail sales for August are expected to dip slightly to 6.6% y/y from 6.8% in July, Consumer confidence in September is expected to improve to 37 from 36.2 in August.

Singapore

Inflation data for August will be out on Monday and the core inflation rate is expected to decelerate further to 3.5% y/y from 3.8% in July. That would be the fourth consecutive month of slowdown. Meanwhile, the headline inflation rate is expected to be almost unchanged at 4% y/y in August versus 4.1% in July.

August’s industrial production figures will be released on Tuesday with another month of contraction expected at a higher magnitude of -3.1% y/y from -0.9% in July. That would mark eleven straight months of contraction suggesting a sticky weak external demand environment.

Economic Calendar

Saturday, Sept. 23

Economic Data/Events

• 78th session of the UN General Assembly (plenary) continues
• German Chancellor Scholz attends SPD campaign events in Nuremberg and Hesse

Sunday, Sept. 24

Economic Data/Events

• Austrian Chancellor Nehammer opens Salzburg Europe Summit

Monday, Sept. 25

Economic Data/Events

• Germany IFO business climate
• Singapore CPI
• IAEA General Conference starts in Vienna
• RBA Assistant Governor Jones speaks on financial technology and climate change
• Fed’s Kashkari participates in Q&A at the University of Pennsylvania’s Wharton School.
• ECB’s Villeroy speaks on monetary policy and macroeconomics at the Paris conference
• EU industry ministers meet in Brussels
• German Chancellor Scholz and Economy Minister Habeck attend the national aerospace conference
• European Budget Commissioner Hahn and Austrian Finance Minister Brunner speak at the Salzburg Europe Summit

Tuesday, Sept. 26

Economic Data/Events

• US new home sales, Conference Board consumer confidence
• Mexico international reserves
• Singapore industrial production
• ECB’s Holzmann speaks at Bloomberg event in Vienna
• ECB’s Lane speaks on monetary policy and macroeconomics at the Paris conference
• Spanish Parliament begins debate on the new prime minister. Vote to occur on Sept. 27th
• German Chancellor Scholz speaks at the annual meeting of the German Society for International Cooperation
• German Economy Minister Habeck speaks at the BDI climate conference

Wednesday, Sept. 27

Economic Data/Events

• US durable goods
• China industrial profits
• Mexico trade
• Russia unemployment, industrial production
• Thailand rate decision: Expected to raise rates 25bps to 2.50%
• Bank of Japan issues minutes of July’s policy meeting
• French government reveals 2024 budget
• Foreign ministers of Austria, Slovenia, Slovakia, Czechia, and Hungary hold a briefing in Vienna

Thursday, Sept. 28

Economic Data/Events

• US initial jobless claims, GDP
• Australia retail sales
• Eurozone economic confidence, consumer confidence
• Germany CPI
• Mexico unemployment, rate decision
• Spain CPI
• Fed Chair Jerome Powell hosts town hall meeting
• Fed’s Barkin dinner speech on monetary policy outlook at Money Marketeers of NYU
• Fed’s Goolsbee speaks at Peterson Institute for International Economics in Washington
• South African Reserve Bank issues quarterly bulletin
• German Chancellor Scholz, Belgian Prime Minister De Croo, Bank of America CEO Brian Moynihan, and BlackRock CEO Larry Fink attend the Berlin Global Dialogue
• Riksbank Deputy Governor Flodén speaks at Svenska Kreditföreningen’s autumn conference
• IEA’s Critical Minerals and Clean Energy Summit in Paris
• Austrian energy regulator’s gas chief Millgramm speaks at the Montel Energy Day conference

Friday, Sept. 29

Economic Data/Events

• US consumer spending, wholesale inventories, University of Michigan consumer sentiment
• China Caixin manufacturing PMI, Caixin services PMI
• Czech Republic GDP
• Eurozone CPI
• France CPI
• Germany unemployment
• Hong Kong retail sales
• Italy CPI
• Japan unemployment, Tokyo CPI, industrial production, retail sales
• Poland CPI
• South Africa trade balance
• Thailand trade
• UK GDP
• China’s ‘Golden Week’ holiday begins from Sept. 29 to Oct. 8
• ECB President Lagarde speaks in Paris at an event on the energy transition
• Fed’s Williams speaks at the Long Island Association
• Helsinki Security Forum begins

Sovereign Rating Updates

• Portugal (Fitch)
• Turkey (S&P)

There was a surprise contraction in Canada’s economy in Q2. Despite estimates for a 1% increase, GDP fell by 0.2% (at an annualized rate) and with most of the decline coming from a 0.2% drop in June. And an early estimate for July suggests GDP was ‘essentially unchanged’ from the month before. Data releases have been broadly consistent with that estimate. Employment edged lower in July (down 6,000 positions) and the unemployment rate ticked higher amid a broader pullback in labour demand. Next week’s Survey of Employment, Payrolls and Hours should continue to show a slowdown in the number of job vacancies in July. Manufacturing sales rose 0.9% (excluding price impacts) in July, but that increase was drawn from existing inventories rather than new production. Wholesale sales volumes were little changed (+0.2%) outside of a surge in the large (and volatile) petroleum component. And retail sales continued to soften, with volumes declining by 0.2% after posting an already-large 3.3% annualized drop in Q2.

Part of the weakness in Q2 output can be attributed to ‘transitory’ factors, including the federal government workers’ strike in April and wildfire-related disruptions to mining sector output. But the softening momentum looks to have been extended into Q3, where a flat reading in July GDP would leave output running at roughly 0.4% (annualized) below the Q2 average. That’s broadly in line with our forecast for output to decline by 0.5% in Q3. Notably, the unemployment rate (which is much less affected by those transitory disruptions) has increased by half a percentage point over the last four months. To be sure, the preliminary estimate for August output (also to be released next week) could read better—given both employment and hours worked bounced back in that month. But housing markets also cooled further as resales declined outright for a second consecutive month in August. And spending on discretionary items also continued to flag, with motor vehicle sales continuing on its downward trend in August.

Meantime, our own tracking of RBC debit and credit spending data flagged less spending on hotels and restaurants, as the busy summer travel season comes to an end. Overall, we believe elevated interest rates are putting a tighter squeeze on households’ buying power. That will drive inflation pressures lower still, despite the upside surprise in August.

Week ahead data watch

U.S. personal consumption expenditure is likely to edge up 0.5% in August, supported by strong retail sales data (+0.6%). Personal income is likely to rise by 0.3%, supported by slower but still elevated wage gain in the same month (+0.2%).

The July job vacancy and employment growth numbers (from SEPH) are out next week. The former will likely confirm a further slowdown in labour demand. The latter will be watched for any divergence in employment accounts from the earlier-reported 6,000 position drop in July in the more timely Labour Force Survey.

Q2 Canadian population estimates will be watched closely after Q1 saw the strongest year-over-year increase since the 1950s. The release could, reportedly, include new details on the composition of non-permanent resident arrivals, that have driven much of the upward surprise in population growth in recent quarters, and potentially also revisions to prior total population counts.

Canadian auto producers may have avoided a strike. But U.S. strikes (currently targeting a small number of motor vehicle production facilities) will still impact Canadian motor vehicle production—particularly if those disruptions escalate. Auto trade is exceptionally integrated across the border. Auto production and retail combined to account for 1.5% of Canadian GDP in 2022.

• PCE inflation to grab attention on Friday as Fed signals higher for longer
• But markets might be more worried about a government shutdown
• Eurozone flash CPIs will also be the in the spotlight on Friday
• Chinese PMIs to be watched for recovery signs

Will core PCE add to second inflation wave worries?

The latest spike in oil prices is causing some headaches for policymakers as energy costs are on the rise again just as they’ve started to see the result of their hard-fought battle to get inflation down. In the United States, higher gasoline prices have already started to push headline inflation back up. But as long as the oil surge turns out to be temporary, the trend in underlying price metrics should remain downwards.

That is what investors are hoping to see on Friday when the latest PCE inflation numbers are published. The core PCE price index is expected to have increased by 0.2% month-on-month in August, taking the annual figure down to 3.8% from 4.2% in July. For the Fed that’s mindful of overtightening, such a print would likely be low enough to give it second thoughts about hiking rates in November or December.

But resurgent energy prices aren’t the Fed’s only concern. Exceptionally strong consumption has been another incentive for policymakers to keep the door open to further hikes. Personal spending is forecast to have increased by 0.5% m/m, moderating slightly from 0.8% previously, while personal income is expected to have risen by 0.4% m/m.

Any upside surprise in either or both personal consumption and core PCE would boost the odds of one final hike, pushing up Treasury yields and the US dollar.

Looming government shutdown could rattle markets

Ahead of Friday’s data, traders will also keep an eye on some housing numbers on Tuesday, which will include new home sales for August, as well as the September consumer confidence index. Durable goods orders are out on Wednesday, while on Thursday, the final estimate of Q2 GDP will be doing the rounds together with pending home sales.

However, a potentially bigger concern for investors is a possible government shutdown as time is running out for Congress before the midnight deadline on September 30 to agree to a stopgap spending bill. Republicans have already torpedoed three attempts by House Speaker Kevin McCarthy to bring to the floor a defence spending bill amid GOP opposition to further aid for Ukraine. But even if McCarthy manages to get a funding bill through the House, it’s unlikely that the Democrat-controlled Senate would pass legislation that contains spending cuts proposed by hardline Republicans.

Falling inflation could be positive for the euro

In the euro area, higher energy prices also pose a problem for the European Central Bank and could determine whether rates stay on hold for the foreseeable future or rise further. Unlike the Fed, the ECB has to factor in a much weaker economy into its decision making, hence, the bar for a further hike is higher.

For the moment at least, Eurozone inflation is falling, removing any urgency for policymakers to respond pre-emptively to any new inflationary threat. The September flash estimates of the harmonised indices of consumer prices (HICP) are due on Friday and should they show a further decline in price pressures as expected, the outlook might brighten a little amid ongoing recession risks.

In this respect, a downside surprise in inflation might not necessarily be bad for the euro, as easing stagflation fears could offset diminishing expectations of further ECB rate hikes.

In other data, some business surveys might also capture the euro’s attention. Germany’s Ifo business climate index is due on Monday, and the Eurozone economic sentiment indicator will follow on Thursday.

Aussie likely to get caught between domestic CPI and Chinese PMIs

Another economy suffering a bit of a wobble lately is China’s. After the post-pandemic recovery unexpectedly faltered earlier this year, Chinese authorities have been busy devising various measures to boost growth. The problem is that a lot of the policy responses have been half measures, leaving investors exasperated by the lack of more substantive stimulus announcements.

However, the drip-feed stimulus has kept on coming and there are encouraging signs that they’ve started to have some effect. The PMI surveys for September will provide fresh clues if the economy is indeed stabilizing. The government will report its manufacturing and non-manufacturing PMI prints on Saturday, and the S&P Global/Caixin equivalent is due next Sunday.

The tepid improvement in the economic picture appears to have helped China-sensitive currencies such as the Australian dollar establish a floor under their recent slide. Whilst the aussie remains one of the worst performing currencies of the year, a Chinese economic revival could yet spur an end of year rally.

One major obstacle, though, for the aussie bulls is an increasingly neutral Reserve Bank of Australia. With inflation in Australia falling to just below 5% in July, RBA tightening has potentially reached the end of the road. However, despite the cautious rhetoric, the RBA did reveal in its meeting minutes that a rate increase was discussed in September. Therefore, Australian CPI figures for August released on Wednesday might pressure the RBA to hike again should the headline figure edge up as forecast.

Tokyo CPIs unlikely to provide much relief to the yen

The Tokyo CPI readings will be watched on Friday for any signs that inflation in Japan isn’t about to drop to 2% in a quick manner. The Tokyo stats are published in advance of the nationwide numbers so they are seen as a forward looking indicator.

The Bank of Japan has yet to be convinced that high inflation is here to stay and that the country isn’t about to fall back into deflation. A sustained rise in wages is a key criterion for policymakers, but even if this isn’t achieved anytime soon, the longer that CPI stays above the 2% target, the more difficult it will be for the Bank of Japan to justify maintaining ultra-loose monetary policy.

Thus, there could be some modest gains for the yen if the data is slightly stronger-than-expected. Also on the agenda in Japan are retail sales and preliminary industrial production figures for August, both on Friday.

This week was all about central banks with monetary policy meetings around the globe. In the US, the Fed maintained the policy rate unchanged at 5.25%-5.50% as widely anticipated, but surprised hawkishly with higher median rate projections (dot plots). The median 'dots' were revised up by 50bp for both 2024 (to 5.1%) and 2025 (to 3.9%) which moved treasury yields higher. The higher projected policy rate was due to a large upward revision of the growth outlook for 2023 to 2.1% (from 1.0%) and 1.5% (from 1.1%) for 2024, while inflation forecasts only received minor adjustments. For more details, see Fed review: Upbeat on growth, 20 September.

Bank of England (BoE) decided to leave the policy rate unchanged at 5.25% and step up QT as five members voted for a pause and four for a hike. The outcome of the meeting was more uncertain than usual as inflation figures released a day before the meeting showed a significantly larger decline in both in headline and core figures than expected. For more details, see BoE review: End to the hiking cycle, but not GBP headwinds, 21 September.

The Bank of Japan kept its QQE with yield control unchanged as expected. The policy rate stayed at -0.1% and the 10-year yield target around 0% with +/- 0.50% tolerance band and a firm cap at 1.0%. The central bank of Turkey increased the policy rate as expected while the Swiss National Bank surprised both analysts and markets by leaving the policy rate unchanged. For details on Sveriges Riksbank and Norges Bank, see Scandi Update section.

The September PMIs showed that the euro area and UK economy ended Q3 in contraction as waning demand lead to a further decline in activity. The service sector surprised positively in the euro area and negatively in the UK but both remain below 50. Price pressures are still large in the service sectors as wages push up input costs.

Focus next week will be on inflation in both the US and euro area on Friday. Inflation drivers continue to paint a mixed picture, as price pressures from food and energy ease while underlying inflation still remains uncomfortably high for the Fed and ECB. In the US core PCE inflation is expected to print around 0.2% m/m as in August while headline is expected to increase to 0.4% m/m from 0.2% m/m. In the euro area, we expect a decline in headline HICP to 4.4% from 5.3% in August driven by negative energy inflation, lower food prices, and a downtick in core inflation from 5.3% to 4.8%.

In China, we receive the September Caxin PMIs for both manufacturing and services on Friday. After a decent rebound in manufacturing PMIs in August from 49.2 to 51.0 we see downside risks to the September print and expect a decline to 50.5. The series is quite erratic and last month's increase seemed a bit too strong relative to the releases on retail sales and housing.

Other relevant data releases next week are US jobless claims, durable goods orders and conference board consumer sentiment. We expect US real private consumption growth volume to land around zero or even slightly negative. In the euro area, we receive money supply (M3) figures and Ifo figures from Germany. Finally, plenty of focus will also be Fed comments after this week's meeting.

Full report in PDF.

Markets

Global PMI’s took center stage today. The eurozone composite measure increased from 46.7 to 47.1 (vs 46.5 expected). The minor increase ended a 4-month decline which took the PMI from a solid 54.1 in April to current contraction levels. The EMU services PMI followed a similar path, gently rebounding from 47.9 to 48.4. The EMU manufacturing PMI stabilized around 43.4, marking the 15^th consecutive <50 print. Details showed a further deterioration in the order situation with companies still reducing the stock of purchased goods. However, the destocking process may bottom out over the next few months in line with the worldwide trend, which is an important precondition for the expected recovery of the manufacturing sector at the beginning of 2024. Details of the services PMI showed shrinking business and orders as well, but companies keep hiring. Input and output prices keep rising and should remain top of mind at the ECB. Especially the risk of a wage-price spiral is high. S&P global, responsible for the PMI survey together with Hamburg Commercial Bank, estimates euro zone growth to have dropped by 0.4% Q/Q in Q3 based on the outcome of July/August/September PMI’s. On a national level, France significantly underperformed linked to a deterioration in the luxury goods business and services industry overall.

Markets were wrongfooted by the disappointing French data, published first. They sent German yields over 5 bps lower at the start of European trading. The move didn’t last though with markets recovering as Germany/EMU PMI’s bucked the French trend and with the huge US Treasury sell-off since Wednesday’s FOMC meeting in mind. At the time of writing, German yields add 0.5 bps (2-yr) to 3.5 bps (30-yr). The German 10-yr yield is again testing the cycle top at 2.77%. The German 30-yr yield exceeds 2.9% for the first time since end 2011. EUR/USD followed this intraday pattern, spiking to 1.0620, before rebounding to 1.0650. So far, key support at 1.0611/34 survives. US Treasuries take a breather after this week’s beating with yields 2 to 3 bps lower ahead of in line with consensus September US PMI’s. EUR/GBP tested 0.87 resistance as September UK PMI’s fell short of expectations. The composite gauge declined from 48.6 to 46.8 (vs 48.7) strengthening BoE Bailey’s dovish hold yesterday. UK Gilts outperform with Gilt yields falling up to 5 bps at the front end (2-yr). European and US stock markets test key support levels (EuroStoxx50: 4175, S&P 500: 4335, Nasdaq: 13162) , but avoid a drop lower for now.

News & Views

Governor Ueda spoke after the Bank of Japan this morning kept the policy rate unchanged at -0.1% and the 10-y yield target at 0%. The reason for doing so despite inflation turning out to be sticky well above the 2% target, is “Because we aren’t in a state where inflation accompanied by wage growth — sustainable and stable inflation — is in sight.” Ueda admitted price growth had been faster than expected but sticks to the view that it would start to slow more clearly in coming months. The ultra-easy monetary policy stance has pressured the Japanese yen against the likes of the euro and the dollar. The BoJ governor did not comment on recent moves but said that he was looking at the FX market closely and is in close communication with the government (which carries out FX interventions if they decide to). USD/JPY inches higher today to north of the 148 barrier. The 150 level at which interventions took place in October last year remains in clear sight.

Hungary’s minister for economic development Nagy said the central bank should avoid keeping interest rates too high as inflation slows. The former central bank deputy governor said that excessive real rates could hurt consumption and thwart Hungary’s recovery process. He forecasts CPI inflation to drop from 16.4% in August to below 10% in November and to 8% in December. This compares to a current shadow policy rate of 14%, which in all likelihood is to be lowered to 13% next week to match the regular base rate again. Nagy expects the economy to exit its now one-year long recession in Q3. The forint together with other CE currencies including the CZK and especially PLN strengthened today but pared gains after Nagy’s comments hit the screen. EUR/HUF is currently changing hands around 387.53, marginally down from an 388 open but higher than the 386 intraday low.

Retail sales rose 0.3% month-on-month (m/m) in July, coming in a tad weaker than 0.4% m/m reported in Statistics Canada's advance estimate. June's print remained unchanged at 0.1% m/m.

Adjusting for inflation, the volume of retail sales was 0.2% lower on the month.

Sales at motor vehicle and parts dealers fell by 1.6% m/m – the first decline in four months. But this weakness comes on the back of a 1.4% gain on average over the past three months.

Sales growth at gasoline stations and fuel vendors were 0.7% lower relative to June. In volumes terms, receipts were down 1.0% m/m in July. We expect to see a reversal in August as gas prices accelerated recently.

Excluding sales at car dealerships and gas stations, core retail sales rebounded strongly in July with a reading of 1.3% m/m that exceeded the consensus estimate of 0.5% m/m. However, the three month average remained at 0.1% in July

Strength in core sales was broad-based and led by food and beverage stores (+1.3% m/m) and general merchandise retailers (+1.8% m/m).

No core category reported losses in July, but Statistics Canada reports that approximately 17% of Canadian retailers were affected by the strike at the ports in British Columbia.

E-commerce sales gained a whopping 2.4% m/m in July on the back of an upwardly revised gain of 3.4% m/m in June (from 1.1% m/m reported earlier).

The advanced estimate for the month of August points to a decline of 0.3% m/m. This is in line with our own estimate of consumer activity based on TD debit/credit card spending.

Key Implications

Retail trade entered the third quarter on a decent footing with solid gains in core categories – revealing a reacceleration in spending momentum from an essentially flat second quarter. But that pick up is modest by historical standards, with real consumer spending tracking 1.4% quarter-on-quarter (annualized) for the third quarter, as outlined in our recent Quarterly Economic Forecast.

Monetary policy's long and variable lags are leaving a permanent mark on the Canadian consumer. By the Bank of Canada's estimates, roughly 50% of mortgages that were initiated before they started raising interest rates last year will face higher rates by the end of this year. Meanwhile, families who rely on a more interest-rate sensitive consumer credit have already fully experienced the bitterness of higher rate medicine, and retail sales in real terms are softening. We think that weaker demand will translate into cooler inflation in the coming months, enabling the BoC to will remain on hold for the rest of the year.

• Canada retail sales climb 2%

The Canadian dollar has posted losses on Friday. In the European session, USD/CAD is trading at 1.3446, down 0.28%.

Canada’s retail sales jump

Canada’s retail sales rebounded in impressive fashion on Friday. Retail sales in July jumped 2% y/y, following a -0.6% reading in June and beating the 0.5% consensus estimate. On a monthly basis, retail sales rose 0.3%, up from 0.1% in June but shy of the consensus estimate of 0.4%. The good news was tempered by the August estimate, which stands at -0.3% m/m and would be the first decline since March. The Canadian dollar showed little reaction to the retail sales release.

The Bank of Canada doesn’t meet again until October 25th and policy makers will have plenty of data to monitor in the meantime. The BoC has been walking a tightrope that will be familiar to most central banks, that of trying to balance the risks of over and under-tightening. The difficulty in finding the right balance was highlighted in the BoC summary of deliberations of the policy meeting earlier this month.

The BoC decided to hold the benchmark rate at 5.0% after concluding that earlier rate hikes were having an effect and slowing economic growth. The summary indicated that policy makers were concerned that a pause might send the wrong message that rate cuts might be on the way. With inflation still above the BOC’s target, the central bank is not looking at rate cuts and stressed at the September meeting that rate hikes were still on the table and that inflation remained too high.

USD/CAD Technical

• USD/CAD is testing resistance at 1.3468. The next resistance line is 1.3553
• 1.3408 and 1.3323 are the next support lines

US PMI Manufacturing rose from 47.9 to 48.9 in September. PMI Services fell from 50.5 to 50.2, an 8-month low. PMI Composite fell from 50.2 to 50.1, a 7-month low.

Siân Jones, Principal Economist at S&P Global Market Intelligence said:

"PMI data for September added to concerns regarding the trajectory of demand conditions in the US economy following interest rate hikes and elevated inflation. Although the overall Output Index remained above the 50.0 mark, it was only fractionally so, with a broad stagnation in total activity signalled for the second month running. The service sector lost further momentum, with the contraction in new orders gaining speed.

"Subdued demand did not translate into overall job losses in September as a greater ability to find and retain employees led to a quicker rise in employment growth. That said, the boost to hiring from rising candidate availability may not be sustained amid evidence of burgeoning spare capacity and dwindling backlogs which have previously supported workloads.

"Inflationary pressures remained marked, as costs rose at a faster pace again. Higher fuel costs following recent increases in oil prices, alongside greater wage bills, pushed operating expenses up. Weak demand nonetheless placed a barrier to firms' ability to pass on greater costs to clients, with prices charged inflation unchanged on the month."

Full US PMI release here.

Daily Pivots: (S1) 0.8991; (P) 0.9035; (R1) 0.9090; More....

USD/CHF's rise from 0.8551 is still in progress. Intraday bias remains on the upside for 0.9146 cluster resistance. On the downside, break of 0.8982 minor support will turn intraday bias neutral first. But further rally will remain in favor as long as 0.8874 resistance turned support holds, in case of retreat.

In the bigger picture, rebound from 0.8551 medium term bottom is currently seen as a correction to the downtrend from 1.0146 (2022 high). Further rally would be seen to 0.9146 cluster resistance (38.2% retracement of 1.0146 to 0.8551 at 0.9160). Strong resistance could be seen there to limit upside, at least on first attempt.