Jackson Hole Symposium, preliminary PMI data from the Eurozone and the UK as well as potential for more rate cuts from China will highlight the week ahead of us.
USD
July retail sales report showed that US consumer is not backing down. Headline number came in at 0.7% m/m vs 0.4% m/m as expected. Control group, which excludes volatile components and is used for GDP calculation, rose 1% m/m vs 0.5% m/m as expected. Ex autos category also rose 1% m/m vs 0.4% m/m as expected as car sales were down. One thing that surely impacted the reading was Amazon’s Prime Day as sales at nonstore retailers rose 1.9% m/m. Sales were down at furniture stores and for electronics and appliances.
FOMC minutes were more hawkish as they showed that “most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy”. Some participants do not see recession in 2023 and now see “real GDP growth in 2024 and 2025 would run below their estimate of potential output growth, leading to a small increase in the unemployment rate relative to its current level”. September looks to be a pause while Fed remains in data dependent mode but probability of a November or December hike is increasing.
The yield on a 10y Treasury started the week and year at around 4.14%, rose to 4.33% and finished the week at around the 4.22%. The yield on 2y Treasury reached the high of above 5%. Spread between 2y and 10y Treasuries started the week at -73bp then widened to -75bp only to come back down and finish the week at around -68bp. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at September meeting at around 14% while probability of no change is at around 86%.
This week we will have Jackson Hole Symposium with Powell set to speak on Friday.
Important news for USD:
Thursday – Saturday:
Jackson Hole Symposium
EUR
Second estimate of Q2 GDP was unchanged from preliminary reading at 0.3% q/q and 0.6% y/y. Industrial production for June came in at 0.5% m/m, up from being flat in May and thus finished the second quarter on a strong note and could give some boost to start of Q3. Final inflation print for the month of July was unchanged with headline at 5.3% y/y and core at 5.5% y/y. Core inflation peaked at 5.7% y/y in March and has not made any significant progress to the downside since then. ECB remains data dependent and this reading does not provide much information about their September move.
This week we will have preliminary PMI data for the month of August.
Important news for EUR:
Tuesday:
S&P Global Manufacturing PMI (Eurozone, Germany, France)
S&P Global Services PMI (Eurozone, Germany, France)
S&P Global Composite PMI (Eurozone, Germany, France)
GBP
The employment report was a a very mixed one. On the one hand, BOE got what it was looking for, the ILO unemployment rate for June rose to 4.2% from 4 in May and employment change saw a drop of 66k jobs. On the other hand, wages have continued their march up. Average weekly earnings for June came in at 8.2% 3m/y vs 7.3% 3m/y while May’s reading was revised up to 7.2% 3m/y. Average weekly earnings ex bonus rose 7.8% 3m/y vs 7.4% 3m/y as expected and up from upwardly revised May reading of 7.5% 3m/y. BOE has emphasized importance of wage data and this report may nudge markets towards pricing a higher terminal rate.
Headline inflation number in July fell to 6.8% y/y as expected, down from 7.9% y/y in June on the back of declines of almost 20% in household electricity bills. Food prices have also declined, but they still show double digit inflation (14.9% vs 17.4% in June). The biggest contributor were hotels and airfares. Core inflation ticked up to 6.9% y/y from 6.8% y/y the previous month as services inflation rose to 7.4% y/y from 7.2% y/y in June. Peak core reading was 7.1% y/y in May and July reading is moving towards it instead of away from it. Markets are fully pricing in a 25bp rate hike in September and are moving closer to pricing 6% terminal rate.
This week we will have preliminary PMI data for the month of August.
Important news for GBP:
Tuesday:
S&P Global Manufacturing PMI
S&P Global Services PMI
S&P Global Composite PMI
AUD
July employment report was abysmal. The employment change showed a loss of 14.6k jobs vs 15k jobs added as expected. The unemployment rate rose to 3.7% from 3.5% in June while participation rate ticked down to 66.7%. Adding to the disappointment, all of the jobs lost were full-time jobs (-24.2k) while part-time jobs added 9.6k. This is a single report but it indicates that RBA has managed to loosen up previously tight labor market. Wages data for Q2 grew slower than expected and printed 0.8% q/q and 3.6% y/y vs 1% q/q and 3.7% y/y as expected. Subdued wage growth and weak employment data will lower fears around wage-price spiral in the economy and will keep RBA in the pause mode for September.
July industrial production came in at 3.7% y/y vs 4.5% y/y as expected and down from 4.4% y/y in June. Retail sales, also missed expectations by coming in at 2.5% y/y vs 4.8% y/y as expected and down from 3.1% y/y the previous month. In a response to weak data and in a surprising move PBOC has cut 1-year MLF rate to 2.5% from 2.65%. MLF is used as a benchmark rate for commercial banks in China to borrow funds from PBOC on a 6-month to 1-year horizon. PBOC has also lowered a 7-day reverse repo rate to 1.8% from 1.9% previously. Further cuts were made to overnight, 7-day and 1-month SLF rates which were all cut by 10bps to 2.65%, 2.8% and 3.15% respectively. All of the moves are aimed at increasing liquidity and thus providing stimulus to the economy. Some major banks are slashing GDP forecasts for 2023 to 4.5%. Next week we will have LPR setting from PBOC and talks about 15bp rate cuts are growing louder.
NZD
RBNZ has decided to leave the Official Cash Rate (OCR) unchanged at 5.50% as was widely expected. New projections see OCR higher than previously and shown that rate in December of 2023 is seen at 5.54% vs 5.5% as seen in May and in December of 2024 will be at 5.50%. Headline inflation and inflation expectations have declined from their peaks but they are still too high. The statement shows that “In the near term, there is a risk that activity and inflation measures do not slow as much as expected.” Additionally, Committee is confident that keeping rates at restrictive levels will bring inflation down to the targeted range of 1-3%. Governor Orr stated that they are happy where rates are and that economy is still on the path of soft landing. He added that there are too many uncertainties to provide forward guidance and that projected cash rate will not deviate far from 5.5% in the next 2 years. GDT auction saw prices falling 7.4%, a disastrous reading for New Zealand’s term of trade.
This week we will have Q2 consumption data.
Important news for NZD:
Tuesday:
Retail Sales
CAD
CPI report for the month of July surprised the markets and showed that inflation reaccalerated faster than expected. Headline number came in at 3.3% y/y vs 3% y/y as expected and up from 2.8% y/y in June. Core measures have all continued to decline with median printing 3.7% y/y, trim 3.6% y/y and common 4.8% y/y. Digging into the details of report we can see that increase in inflation owes to base effects in gasoline prices which fell 12.9% y/y vs a drop of 21.6% y/y the previous month. Additional factor that added to rise in prices were mortgage costs. Index for mortgage costs rose 2.4% in July. Due to the weakness in recent incoming data BOC was seen as pausing, but after today’s report markets will increase their pricing of another hike which should give CAD a short-term boost. We also need to be mindful that core measures continued to decline which is in line with what BOC is hoping for.
JPY
Q2 GDP data showed stunning rebound in the economy as it grew by 1.5% q/q vs 0.8% q/q as expected. Annualized growth was at 6% vs 3.1% as expected and 3.7% in the previous quarter. Digging into the details we see that private consumption fell 0.5% after it has risen steadily for the past quarters. Business spending was flat while government spending rose 0.1%. The biggest contribution came in from net trade, with exports growing the most in two years (3.2%) while imports fell for the third consecutive quarter (-4.3%). Weak JPY was very supportive of growing exports.
Headline inflation in July for the whole country stayed unchanged at 3.3% y/y with ex fresh food component dropping to 3.1% y/y from 3.3% y/y in June while “core-core” ex fresh food, energy inflation ticked up to 4.3% y/y from 4.2% y/y the previous month. BOJ remains adamant that inflation will start coming down from September/October and that there is no need for changes in their monetary policy. JGB had a disastrous 2y auction where the tail was highest since 1997. Rising yields on JGBs will have impact on rising yields around the world. Yield on 10y JGB 0.66 and there was no intervention by the BOJ.
CHF
SNB total sight deposits for the week ending August 11 came in at CHF484.8bn vs CHF492.9bn the previous week. Sight deposits are continuing their decline as SNB sells EUR and USD in order to prop Swissy strength and subdue inflation pressures.
