After a very eventful week this week will be more calm but will still have RBA meeting, employment data from New Zealand and Canada as well as ISM services PMI and trade balance and inflation data from China.
USD
US Treasury plans to issue $740bn bonds in the Q3 provided that TGA has a quarter end balance of $850bn. It was estimated that they will borrow $856bn. Q2 Employment Cost Index saw increase of 0.9% vs 1% as expected. Lower wages and overall employment costs will help ease Fed’s worries about wage-price induced inflation spiralling out of control.
Fed has left interest rates unchanged in a 5.25 – 5.50% range as was widely expected. The statement showed that economic activity continues to expand at a solid pace, job are moderating and the unemployment rate has moved up but it remains low. Inflation has eased over the past year but remains somewhat elevated. The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance. They have added that they are attentive to their employment goals. They repeated that they do not expect to cut until they have gained greater confidence that inflation is moving closer to 2%. The Committee is prepared to adjust monetary policy so it is in line with its goals and the statement concludes with “The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
Powell clarified during the press conference that there was no decision made on September meeting and emphasized that Fed is data-dependent and not data point-dependent, meaning that they are looking at a broader picture. He hinted that if economy moves in line with their projections September will see a rate cut. Powell clarified that they are seeing declines in broader inflation, not just in goods but in both housing and non-housing services which is a very encouraging sign. He emphasized several times that they want to sere more confirmation in data before cutting rates. Additionally, he stated that there are plausible scenarios ranging from “zero to several cuts this year”.
ISM Manufacturing PMI for July 46.8, down from 48.5 in June while markets expected an increase to 48.8. This makes it 20 out of last 21 reports in contraction. Details of the report are ugly. Production, new orders and employment all fell further deeper into contraction. Prices paid index increased and moved further into expansion indicating that inflation pressures are not slowing down yet. Weak domestic demand and uncertainty regarding outlook of the economy are main concerns manufacturers state in report.
July NFP report was weak. Headline number printed 114k vs 175k as expected with a 27k negative revision to June reading. The unemployment rate jumped to 4.3% from 4.1% the previous month but when it is not rounded it printed 4.252%. The increase in the unemployment rate has triggered Sahm rule, which states that recession occurs when three-month moving average of the national unemployment rate rises by 0.50% or more relative to its low during the previous 12 months. Participation rate managed to tick up to 62.7% and thus to give some comfort regarding the increase in the unemployment rate. U6 unemployment rate jumped to 7.8% from 7.4% in June. Weakness was seen in wages that rose 0.2% m/m and 3.6% y/y vs 0.3% m/m and 3.7% y/y as expected and down from 0.3% m/m and 3.9% y/y the previous month. Additionally, hours worked ticked down to 34.2 hours. Healthcare continued to add the biggest number of jobs while government added 17k jobs. This reading gives boost to the chances of a September rate cut.
The yield on a 10y Treasury started the week at 4.20%, rose to 4.20%, then dropped below 4% after the FOMC meeting and finished the week at around 3.80%. The yield on 2y Treasury started the week at 4.39% and reached the high of 4.42% only to decline post FOMC meeting and drop below 4% after the NFP. Spread between 2y and 10y Treasuries started the week at -19bp then tightened to -9bp as curve proceeded to steepen. The 2y10y is inverted for over two years. FedWatchTool sees the probability of a 25bp rate cut at September meeting at around 41% while probability of a 50bp rate cut is around 59%. Markets are fully pricing in November and December rate cuts making it a total of three rate cuts in 2024.
This week we will have ISM Services PMI.
Important news for USD:
Monday:
ISM Services PMI
EUR
Preliminary Q2 GDP printed 0.3% q/q unchanged from the first quarter while a 0.2% q/q reading was expected. French Q2 GDP printed 0.3% q/q vs 0.2% q/q as expected while Q1 GDP was revised up to show a growth of 0.3% q/q. Household consumption was flat while government consumption rose by 0.3%. Fixed investment also rose by 0.1% and net trade also positively contributed to the reading. Spain Q2 GDP printed 0.8% q/q vs 0.5% q/q as expected, Italian Q2 GDP came in at 0.2% q/q as expected while Germany disappointed with a contraction of -0.1% q/q vs 0.1% q/q as expected and down from 0.2% q/q in the first quarter.
Preliminary July CPI came in at 2.6% y/y vs 2.5% y/y as expected and in June while core CPI stayed unchanged for the third straight month at 2.9% y/y. Expectations were for it to slip to 2.8% y/y. Both German and French July CPI readings ticked up to 2.3% y/y from 2.2% y/y in June.
GBP
BoE has cut interest rate by 25bp to 5%. It was a very close call with a 5-4 vote (Pill, Mann, Haskel and Greene dissented) and the decision has been described as “finely balanced”. The statement contains hawkish tones as “It is now appropriate to reduce slightly the degree of policy restrictiveness”. Inflation is expected to increase towards 2.75% in the H2 of 2024 due to base effects connected with energy prices. Inflation and inflation expectations are expected to continue decline caused by lower wage pressures but they warn that “inflationary persistence has not yet conclusively dissipated, and there remained some upside risks to the outlook”. The statement shows that bank continues to monitor the risks of inflationary persistence and remains in meeting-by-meeting stance. GDP for 2024 was revised up to 1.25% from 0.5% previously.
BoE Governor Bailey reiterated as the press conference that this was a “finely balanced” decision adding that there may be one step up in services inflation in August but after that it will come down during the remainder of the year. Services inflation remains closely watched data point. He also reiterated that decisions regarding monetary policy will be made meeting-by-meeting and he would not give any comments regrading the future path of rates. He cautioned everyone against a view of successive rate cuts at next meetings which was echoed by the Chief Economist Huw Pill.
AUD
Q2 inflation data showed headline number unchanged at 1% q/q with 3.8% y/y vs 3.6% y/y in Q1. Core number showed some easing of inflation as it printed 0.8% q/q vs 1% q/q as expected and in previous quarter as well as 3.9% y/y vs 4% y/y as expected and in Q1. Headline moving in the wrong direction while core slipping towards the target will create uncertainty regarding next week’s RBA meeting.
Official PMI data from China for the month of July saw manufacturing tick down to 49.4 from 49.5 in June as production, new orders and new export orders indexes continued to decline. Services barely managed to stay in expansion with a 50.2 print, down from 50.5 the previous month with new orders and new export orders still in contraction for fifteen and seven months respectively. Composite also printed 50.2, down from 50.5 in June. Official PMI data have been declining for the fourth consecutive month. Caixin manufacturing PMI surprised to the downside and slipped into contraction for the first time in nine months with a 49.8 reading. Expectations were for a 51.5 reading and June figure was 51.8. The report showed a marginal increase in output followed by decline in new orders while input costs increased but export prices decreased.
This week we will have RBA meeting as well as trade balance and inflation data from China. After Q2 inflation slipped down no change to rate is expected.
Important news for AUD:
Tuesday:
RBA Interest Rate Decision
Wednesday:
Trade Balance (China)
Friday:
CPI (China)
NZD
Business confidence made a big jump in July as it printed 27.1 vs 6.1 in June. This is the first monthly increase after five consecutive monthly decreases. There were big improvements in export intentions and residential construction and decent improvements in wage expectations, capacity utilization and profit expectations. There was also a drop in inflation expectations. On the other hand, drops in activity and employment compared to a year ago are of concern.
This week we will have employment data.
Important news for NZD:
Wednesday:
Employment Change
Unemployment Rate
CAD
May GDP came in at 0.2% m/m vs 0.1% m/m as expected. June reading is seen at 0.1% m/m which will make for a positive GDP reading in all three months of Q2. Manufacturing sector lead the gains with 1% followed by public sector. Drops were seen in retail and wholesale trade.
This week we will have employment data.
Important news for CAD:
Friday:
Employment Change
Unemployment Rate
JPY
BoJ has delivered a 15bp rate cut thus raising the rate to 0.25%. There were plenty of leaks through Japanese media so the move was not unexpected. The decision to increase rate was not unanimous as two members dissented. On the other hand, the decision to reduce scheduled monthly buying of bonds was a unanimous one. The plan is for bond purchases to be tapered by JPY3tn by Q1 of 2026 which would mean reduced bond buying of around JPY400bn per quarter. Members expect underlying inflation pressures to increase gradually. The statements shows that: “Real interest rates are expected to remain significantly negative after the change in the policy interest rate, and accommodative financial conditions will continue to firmly support economic activity”. Provided that economic activity and prices continue to develop as projected BoJ is prepared to further hike rates.
New projections see lower growth in Fiscal Year (FY) 2024 0.6% vs 0.8% as seem in April while CPI ex fresh food was lowered to 2.5% for FY 2024 from 2.8% as previously seen but raised to 2.1% for FY 2025 from 1.9% as projected in April. There were no changes for FY 2026 for either GDP or core CPI.
BoJ Governor Ueda sounded more hawkish at the press conference stating that upside risks to inflation require attention and added that he does not see 0.50% policy rate as a ceiling. Economic indicators to be watched include wages, inflation, service prices and GDP output gap. Ueda added that 0.25% policy rate is still extremely low as with high inflation real rates are deeply negative. Wage increases are becoming more widespread and are supporting private consumption.
According to information published by Ministry of Finance they have spent $36.8bn on BoJ intervention during the month of July. BoJ Quarterly Outlook saw comments that inflation is expected to increase gradually and that wages could rise more than expected which would put upward pressures on inflation and make it deviate fro their baseline scenario. JPY has strengthened massively on the back of carry unwinding trade where investors were selling their high carry investments and buying back JPY.
CHF
SNB total sight deposits for the week ending July 26 came in at CHF458.2bn vs CHF461.3bn the previous week. Deposits are still within a well-established range, though at the bottom of it. Inflation data for the month of July saw headline at 1.3% y/y and core at 1.1% y/y, same as in June. Overall risk off mood in the markets has given CHF a huge boost.
