After two action packed weeks we will take a breather in the coming week with the US inflation data taking centre stage followed by inflation from China and preliminary Q2 GDP from the UK.
USD
ISM manufacturing PMI for July printed 46.4 vs 46.8 as expected, but still up from 46 in June. New orders and production showed improvements but are still deep in the contraction territory. Prices paid turned higher, but it rose less than expected. Employment index was most concerning as it showed a huge drop further into contraction, much larger than expected. It printed 44.4 vs 48 as expected and down from 48.1 in June.
Fitch downgraded US government to AA+ from AAA which is the first time they downgraded in almost 30 years. USD weakened on the news but it has recovered its strength in the next few hours. Oil inventories saw a biggest drawdown in the 40 year history of the series. EIA reported that inventories fell 17409k barrels while a drop of 1367k was expected.
ISM Services PMI for July came in at 52.7 vs 53 as expected and down from 53.9 in June. The report shows small declines in new orders and new export orders, but they are still in very healthy territory with latter printing over 60. There was a big jump in backlog of orders, indicating unfinished orders and big drop in inventories. Worrying signs are appearing in the employment index which fell and barely managed to stay in expansion with 50.7 while there was a small increase in prices paid index.
Headline number NFP for the month of July printed 187k vs 200k as expected. June reading was revised down to 185k from 209k as previously reported. The unemployment rate slid to 3.5% with participation rate staying the same at 62.6%. Wages rose 0.4% m/m and 4.4% y/y, unchanged from previous month but higher than expected at 0.3% m/m and 4.2% y/y respectively. Underemployment rate fell to 6.7% from 6.9%. Although headline number missed expectations and there was a downward revision to June, exactly what Fed wants to see, other details of this report indicate still strong labour market, particularly stronger than expected wage growth.
The yield on a 10y Treasury started the week and year at around 3.95%, rose to 4.2% and finished the week at around the 4.05% level. The yield on 2y Treasury reached the high of around 4.93%. Spread between 2y and 10y Treasuries started the week at -91bp then tightened to -70bp due to bear steepening of the curve. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at September meeting at around 17% while probability of no change is at around 83%.
This week we will have inflation data. Headline reading is expected to drop below 3% while core reading is expected to tick down to 4.6%.
Important news for USD:
Thursday:
CPI
EUR
Preliminary June inflation data saw headline continue its downward trajectory as it printed 5.3% y/y as expected vs 5.5% y/y in May. Goods inflation is continuing to trend down, while services inflation is trending up. Core is proving to be much more stubborn as it printed 5.5% y/y, same as previous month while a slip to 5.4% y/y was expected. Headline data suggests that ECB can relax a bit and pause in September while core screams stickiness, dropping just slightly from the high of 5.7% in March. Looking solely at the core ECB should deliver another rate hike in September.
Preliminary Q2 GDP came in at 0.3% q/q vs 0.2% q/q as expected and helped Eurozone escape technical recession after GDPs of Q1 and Q4 came in negative. Irish GDP gave the boost to the overall reading while italian GDP came in negative 0.3% q/q vs 0% q/q as expected indicating that parts of the Eurozone are going though a ton of struggle. French and Spanish GDP readings were encouraging. Overall, this reading does not suggest that ECB will pause in September.
GBP
BOE has decided to raise interest rate by 25bp as majority of markets expected and thus bring bank rate to 5.25%. The voting was split 6-3 with Dhingra voting for no change. MPC members Haskel and Mann voted for a 50bp rate hike! Inflation is still too high and is seen falling toward 5% by the end of the year. Energy will be the main cause of bringing inflation down, followed by food and core goods while services is expected to stay close to current high levels. CPI inflation is seen returning to 2% by Q2 of 2025. Current monetary policy is seen as being restrictive. This is the first time since the start of tightening cycle that BOE described monetary policy as restrictive. BOE stands ready to tighten further if necessary and they conclude the statement with “The MPC will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with its remit.” They continue to be data dependent and statement has some clearly hawkish tones as more rate hikes are possible. Markets are pricing in two more rate hikes before the year ends. BOE Governor Bailey stated “I don’t think it is time to declare it’s all over,” indicating their readiness to tighten further and deliver on market expectations. Major banks are slashing their forecast for peak rates to 5.50% from 6%, not believing that BOE can deliver more than one rate hike.
This week we will have preliminary Q2 GDP reading.
Important news for GBP:
Friday:
GDP
AUD
RBA has decided to keep rates unchanged at 4.10%. This is the second consecutive meeting where there was no change in the cash rate. This decision was made so that further impact of previous rate hikes can be assessed better. Inflation is seen as declining, with goods inflation easing, but it is still deemed to be too high at 6%. Central forecast sees CPI at around 3.75% by the end of 2024 and then falling further into the targeted range of 2-3% by the end of 2025. Economy is growing below trend with weak household consumption growth. Central forecast for GDP is around 1.75% for 2024 and little above 2% for 2025. Labour market remains very tight, although it has eased a bit. The unemployment rate is seen gradually rising to 4.5% by the late 2024. “The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon and with output and employment continuing to grow.” The bank continues to be data dependent and some further tightening will also depend on “the evolving assessment of risks.” As long as RBA stays on the sidelines AUD will suffer. Potential stimulus from China could prop AUD up.
RBA released Statement on Monetary Policy (SoMP) on Friday in which it stated that the board has considered a rate hike in August, but instead decided that there was a stronger case to keep them unchanged. They acknowledged that policy has been significantly tightened but that the full effects of monetary tightening have not been fully felt yet. They have cut GDP and CPI projections slightly from the previous SoMP as they now see GDP at 0.9% by the end of 2023, 1.6% by the end of 2024 and 2.3% by the end of 2025. CPI is seen at 4.1% by the end of 2023, 3.3% by the end of 2024 and 2.8% (within 2-3% target) by the end of 2025.
Official PMI data for the month of June showed manufacturing improve to 49.3 from 49 in May while expectations were for it to decline to 48.9. Non-Manufacturing has declined to 51.5 from 53 the previous month, which was bigger decline than expected, and brought composite with it to 51.1, down from 52.5 in May. Since China is seen as world’s factory the jump in manufacturing was celebrated in the markets with AUD getting a push up. Caixin manufacturing PMI slipped back into contraction with 49.2 reading after spending previous two months above the 50 level. Expectations were for it to decline modestly to 50.3. The report shows a big drop in new export orders as international demand falters. Combine that with declines in supply and deterioration of jobs market and with June reading barely holding above 50, below 50 reading was inevitable. Caixin services came in at 54.1 vs 52.5 and up from 53.9 the previous month. Composite was dragged down to 51.9 due to weak manufacturing but it still shows that economy comprised of small and medium-sized companies is in expansion.
This week we will have trade balance and inflation data from China.
Important news for AUD:
Tuesday:
Trade Balance (China)
Wednesday:
CPI (China)
NZD
Business confidence in July improved to -13.1 from -18 in June. Both cost and wages expectations went up while pricing intentions and inflation expectations declined. The biggest improvement was seen in residential construction which showed highest jump since February of 2022. Employment report for the Q2 saw employment change rise by 1% q/q, doubling the expectations of a 0.5% q/q increase and coming higher from 0.8% q/q in the previous quarter. The unemployment rate has gone up to 3.6% but it was due to large jump in participation rate 72.4% (from 72% in Q1). Labor Cost Index has declined to 4.3% y/y from 4.5% y/y in the previous quarter. Labor market seems to be getting even tighter with great number of jobs added and participation rate jumping. On the other hand, loosening of wage price pressures may give some comfort to RBNZ in their fight against inflation.
CAD
July employment report missed expectation and showed 6.4k job losses. Projection was for a 21.1k increase. The unemployment rate ticked higher to 5.5% which is the third consecutive month of increases in the unemployment rate. Participation rate ticked down to 65.6% from 65.7% in June. One positive is that economy added 1.7k full-time jobs while part-time jobs declined by 8.1k. Wage increases jumped to 5% y/y from 4.2% y/y the previous month. BOC will be happy that its tightening is having effects as seen by employment change and the unemployment rate, however surge in wages will cause them to reevaluate their stance.
JPY
Retail sales in June declined 0.4% m/m but rose 5.9% y/y vs 5.8% y/y in May. Sales in the automotive sector led the way with biggest gains followed by pharmaceuticals & cosmetics and food & beverages. Preliminary industrial production for June showed 2% m/m increase due to positive contributions from motor vehicles and electronic parts and devices.
The yield on 10y JGB traded above 0.60% for the first time since 2014 and then BOJ announced unscheduled bond-buying program of JPY300bn in the 5-10y JGBs. This injection led to broad JPY weakness. BOJ Deputy Governor stated that BOJ needs to continue with easy policy. He added that they their move on making YCC flexible is not a step toward exit from the ultra loose policy. Additionally, he clarified that they may step in and buy more JGBs before the yield on 10y reaches 1%. It will all depend on the speed of the move, according to him, meaning that there is a heightened uncertainty about BOJ intervention through bond market. On Wednesday 10y JGB reached a new high in yields since 2014 of almost 0.65%.
CHF
SNB total sight deposits for the week ending July 28 came in at CHF490.1bn vs CHF489.3bn the previous week. July CPI report saw further declines as both headline and core numbers slipped lower to 1.6% y/y and 1.7% y/y respectively. Inflation coming down is a very welcoming sign for the SNB that may lean towards pausing in September.
