NFP, preliminary CPI from Europe and official PMI data from China will highlight the week as we enter in the last month of Q3.
USD
New home sales for July continued to plunge. They came in at 511k from downwardly revised 585k in June. The number was at 642k in May. The fall in July is -12.6% m/m. Rising mortgage rates are keeping new home buyers at bay. President Biden announced a plan to forgive a $10 000 in student loans for all borrowers earning less than $125 000. The announcement was made in a tweet stating “In keeping with my campaign promise, my Administration is announcing a plan to give working and middle class families breathing room as they prepare to resume federal student loan payments in January 2023.” First estimates see that this plan will raise US debt by $400-600bn and will be without a doubt inflationary.
Second estimate of Q2 GDP came in at -0.6% vs -0.9% annualized in preliminary reading. Personal consumption improved to 1.5% from 1.1% in preliminary reading and it was the biggest contributor to the reading. PCE data for July saw a drop in headline inflation to 6.3% y/y from 6.8% y/y in June with index falling -0.1% m/m. Core inflation also came in weaker than expected at 4.6% y/y vs 4.7% y/y and down from 4.8% y/y the previous month. Personal consumption rose 0.1% compared to a drop of 1% increase as seen in June. A drop in CPI will lower the chances of a 75bp rate hike in September, but Powell’s speech could turn that around.
Prior to the Powell speech in Jackson Hole several Fed members expressed their hawkish stances. Kansas City Fed President Ester George stated that the Fed funds rate could go well over 4% but that will depend on the incoming data. Chairman Powell stated that drop in July inflation is a welcoming sign but that it is not enough for Fed to be confident that inflation is going down and that September hike will depend on totality of data. Basically, Powell is saying to the markets that Fed will not stop until they see inflation coming down.
The yield on a 10y Treasury started the week at almost 3%, crossed it on Monday and went as high as 3.12%. Spread between 2y and 10y Treasuries started to flatten but deepened near the end of the week toward -31bp. FedWatchTool saw the probability of a 50bp rate hike in September at 29.5% and probability of a 75bp rate hike at 70.5%.
This week we will have ISM Manufacturing PMI and NFP data. Headline NFP number is expected to come at around 300k while the unemployment rate should remain at 3.5%. If headline number comes north of 300k it will increase chances of a 75bp rate hike in September.
Important news for USD:
Thursday:
ISM Manufacturing PMI
Friday:
NFP
Unemployment Rate
EUR
Preliminary PMI data for August painted a bleak picture of the EU’s economic conditions. Manufacturing managed to beat expectations but still ticked down on the month (49.7 vs 49.8 in July) which is the lowest reading since June of 2020. It was helped by surprising increase in German reading which also remained in contraction territory, below the 50 level. Services managed to stay ain expansion territory but barely with 50.2. Again, this is the lowest reading since March of 2021. Composite plunged deeper into contraction, coming at 49.2 vs 49.9 in July. All of the data point to contraction in Q3 GDP. S&P Global notes slower demand, slower output, slower new export orders and increase in inventories which should keep new orders low for the foreseeable future. One positive is that input prices continue to decline indicating that inflation pressures will ease as we get closer to the year-end.
Russia will close down NordStream pipeline for three days (August 31 – September 2) for maintenance. After maintenance is carried out the flow of gas will be returned to the current 20% of capacity. This is putting additional concerns regarding energy supply over the winter as natural gas prices spiked over 14% on the day and helped push EURUSD below parity. AGSI data shows that the European Union storage are 77.74% full as of August 22. European benchmark Dutch TTF gas futures has reached €315/MWh while French and German year-ahead power prices rose to new record highs of €9000/MWh and €725/MWh respectively.
German Ifo survey showed a second consecutive month of declines across the readings. Declines were small and readings beat the expectations, however trend to the downside remains unchanged. Ifo economist Klaus Wohlrabe stated that Q3 GDP in Germany will see a contraction of -0.5% q/q. He added that sentiment is still really poor due to high inflation and that recession cannot be ruled out. Ifo report shows that almost 50% of companies plan to raise prices in the next three months. GfK consumer sentiment in Germany fell to the lowest level since 2005 (-36.5, down from -31.8 the previous month). Increases in cost-of-living due to surging energy prices are crushing consumer’s spirits.
This week we will have preliminary August CPI which is expected to continue increasing.
Important news for EUR:
Wednesday:
CPI
GBP
Flash PMI data from UK for the month of August was a mixed bag. Starting with the manufacturing which completely collapsed and came in at 46 vs 52.1 in July, lowest since May of 2020. Services held much better beating expectations and slightly ticking down from the previous month’s reading (52.5 vs 52.6). Composite was affected by the manufacturing reading but still held above the 50 level (50.9 vs 52.1 the previous month). S&P Global notes waning demand, weaker growth outlook, shortages of stuff and inputs as harsh headwinds for the economy. There was a relief in input prices but the report states “However, the tightening of financial conditions via interest rate hikes, the cost of living crisis, labor shortages and strained supply chains are all likely to dampen economic performance further and keep costs elevated in the months ahead.”
AUD
Chinese banks have decided to go with additional rate cuts to their prime rates. LPR (Loan Prime Rate) for 1-year has been cut to 3.65% from 3.7% previously while 5-year rate was lowered to 4.3% from 4.45% previously. Generally, 1-year is used as basis for all new and outstanding loans while 5-year is used for mortgage rates. Last Friday Chinese government announced a stimulus package for property developers of unfinished homes. It should amount to $29bn or CNY200bn. Analysts at ING see the total value of unfinished homes at CNY675bn so the package should only be a start as it barely covers 1/3 of liabilities. China Premier Li Keqiang announced stimulus totaling 1 trillion CNY ($146bn) to bolster the economy. The stimulus will be focused on infrastructure projects.
This week we will have official PMI data from China as well as Caixin Manufacturing PMI.
Important news for AUD:
Wednesday:
Manufacturing PMI (China)
Non-Manufacturing PMI (China)
Composite PMI (China)
Thursday:
Caixin Manufacturing PMI (China)
NZD
RBNZ Deputy Governor Hawkesby stated that OCR will go to around 4.25% before bank changes its view to a more balanced one. He added that monetary conditions need to be comfortably above neutral. RBNZ member Richardson stated in an interview that they will focus on bringing the core inflation down and added that “domestic inflation is a lot more persistent than the imported inflation.” Consumption struggled in Q2 as retail sales dropped -2.3% q/q and -3.7% y/y. This reading will be acknowledged by the RBNZ but they are more focused on inflation so this will not dissuade them from continuing with rate hikes. In an interview with Bloomberg television RBNZ Governor Orr stated that there will be at least two more rate hikes and that he does not see technical recession.
CAD
Oil was leading CAD this week and USDCAD followed. The pair went up at the start of the week only to turn lower once oil started to gain. EURCAD and GBPCAD had only one way: down. Both pairs fell around 150 pips. Canada has large supplies of Natural Gas but due to a lack of pipelines they are not able to fully profit from the surging prices.
This week we will have a Q2 GDP reading.
Important news for CAD:
Wednesday:
GDP
JPY
Preliminary August PMI data showed deterioration across the readings. Manufacturing dropped to 51 from 52.1 in July thus making it the lowest reading since January of 2021. Services reading fell into contraction as it printed 49.2 vs 50.3 the previous month. Composite reading was dragged down into contraction as well by services and it came in at 48.9, down from 50.2 in July. Tokyo area inflation data for the month of August printed a new, almost 8-year high, at 2.9% y/y, up from 2.5% y/y in July. Ex fresh food came in at 2.6% y/y vs 2.3% y/y in July while ex fresh food, energy component rose to 1.4% y/y from 1.2% y/y the previous month. BOJ reiterated that easing policy is necessary to support the economy of Japan. Additionally, they are characterizing inflation as transitory so this reading, although it may be a welcomed one, will not change their policy stance.
CHF
SNB total sight deposits for the week ending August 19 came in at CHF752.8bn vs CHF751.3bn the previous week. A continuation of sight deposit increases stretching into the seventh consecutive week. Increases are small but when calculated together it may indicate that SNB is willing to restrict Swissy’s strength.
Important news for CHF:
Thursday:
CPI
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