After a very eventful week the week ahead of us will be a quiet summer week with not much economic data. Inflation data from the US and preliminary Q2 GDP from the UK will be its highlights.

USD 

ISM manufacturing PMI for July came in at 59.9, down from 60.6 print in June. Expectations were for it to rise to 60.8. New orders and new export orders reported small declines but are still at very high levels (64 and 55 respectively). Combined with rising backlog of orders and a drop in customer inventories it seems that supply chain disruptions are the main culprit to the sector. Employment index returned to expansion with 52.9 print while prices paid component dropped significantly to 85.7 from 92.1 the previous month. It is still at highly elevated levels. 

ISM services PMI in July smashed expectations and posted a new record high by coming in at 64.1 vs 60.5 as expected. Previous month was 60.1. Business activity index at 67 indicates a booming in services related to reopening. Employment index returned to expansion with 53.8. New orders category continued to rise and is now at a very strong level of 63.7 with exports orders rising to 65.8 from 50.7 in June indicating strong external demand for US services. Prices paid component continued to rise, now moving over the 80 level indicating mounting price pressures. 

Employment report for July showed stellar improvement across the data. Headline number came in at 943k vs 870k as expected with June reading being revised up to 938k. The unemployment rate dropped to 5.4% from 5.9% the previous month and expectations were for a drop to 5.7%. Participation rate rose to 61.7% thus giving more credibility to the drop in the unemployment rate. Underemployment fell to 9.2% from 9.8% in June indicating that more and more people are finding work that suits their desires. Finally, wages rose 0.4% m/m and 4% y/y thus adding more potential to the wage-induced inflation. With almost 1 million newly employed, with the unemployment plunging closer to 5% and wages rising Fed should be spurred into intensifying their taper talk. In turn this will add to USD strength. 

This week we will have inflation data and expectations are for it to slow down. 

Important news for USD: 

Wednesday:

CPI 

EUR 

Finale manufacturing PMI in July was revised up to 62.8 from 62.6 as preliminary reported. German reading was revised to 65.9 from 65.6 as preliminary reported and 65.1 in June. German reading is moving closer to the high of 66.2 seen in April of this year. Final services printed 59.8 vs 60.4 as preliminary reported. Both German and French readings were revised down which contributed to the downgrade of services reading. Still, the reading is at a very high level indicating ongoing optimism after reopening. 

GBP 

BOE has left the rate unchanged at 0.10% with a unanimous vote. Total asset purchases remained unchanged at £895bn. The vote was 7:1. New projections show GDP expected to have risen by 5% in Q2 and around 3% in Q3. Projections show that GDP will reach pre-pandemic levels in Q4 of 2021. Bank members expect inflation to fall back close to 2% in the coming months. There was a change in forward guidance, stating that once bank rate rises to 0.50%, and if appropriate given economic circumstances, BOE intends to reduce stock of purchased assets. Previously the plan was to reduce purchases once the rate reaches 1.50%. The meeting did not provide sufficient information for a change in direction, it was a rather small step by BOE toward the tightening, so GBP continued on it is path, almost unchanged after the publication. 

Final manufacturing PMI reading for July was unchanged at 60.4 while services reading showed an improvement to 59.6 from 57.8 as preliminary reported. Services reading helped lift composite reading to 59.2 from 57.7 as preliminary reported. “Pingdemic” is already causing shortages of labour as more and more people are called to self-isolate and it should bring down services reading for August. 

This week we will have preliminary Q2 GDP data. 

Important news for GBP: 

Thursday:

GDP 

AUD 

RBA has left cash rate unchanged at 0.10% as expected but did not make any changes to their QE program. Their stance on tapering has not been changed which surprised the markets and propelled AUD higher with AUDUSD crossing the 0.74 level. They will purchase bonds at AUD5bn/week until early September and then lower them to AUD4bn/week until at least mid-November. Bond buying program will continue to be reviewed in light of economic and health situation. They reiterated that rate is not expected to rise until 2024 at least. Recent virus outbreak are interrupting recovery and expectations are for GDP decline in Q3. Members have noted that past experience shows that the ‘economy bounces back quickly’ after virus outbreaks are contained. They also added that:”the Bank’s central scenario is for the economy to grow by a little over 4 per cent over 2022 and by around 2½ per cent over 2023. This scenario is based on a significant share of the population being vaccinated by the end of this year and a gradual opening up of the international border from the middle of 2022.” 

RBA Governor Lowe stated that economy bounced back faster than it was expected adding that the recovery in labour market has been the most impressive. Overall he was optimistic on the economy for the year, although he sees GDP dropping in Q3, with expectations for even stronger growth in the following year. He sees a gradual pick up in wages which will leave inflation pressures subdued adding that RBA is not targeting lower AUD, but that AUD is lower due to the necessary policies the bank is implementing. RBA sees unemployment at 5% by the of end 2021, 4.25% at the end of 2022 and 4% at the end of 2023. Core inflation is expected to be at 1.75% for 2021 and 2022 before rising to 2.25% in 2023 which will put it in bank’s target range of 2-3%. 

Official manufacturing PMI from China dropped more than expected, to 50.4 from 50.9 the previous month. This is the fourth consecutive month of drops and lowest since February of 2020. Both new orders and new export orders indexes pencilled in declines with former coming in at 50.9 and latter at measly 47.7 indicating that demand for manufacturing products from China is waning, both domestically and internally. Non-manufacturing came in at 53.3 as expected, down from 53.5 in June due to a drop in construction but with a much brighter activity outlook than its manufacturing counterpart. Composite was dragged to 52.4 from 52.9 the previous month. Caixin manufacturing PMI, the one measuring activity of smaller, non-government owned companies, dropped to 50.3 from 51.3 in June. Caixin services smashed the expectations and came in at 54.9, a huge jump from 50.3 the previous month. Output, total new orders, new export orders and employment were all in expansionary territory. Markit notes that due to the recent virus outbreak we could see August readings come down. 

This week we will have employment data from Australia and inflation data from China. 

Important news for AUD: 

Monday:

CPI (China)

Friday:

Employment Change

Unemployment Rate 

NZD 

Employment data for Q2 did not disappoint. Employment change came in at 1% q/q vs 0.6% q/q in Q1 and 1.7% y/y vs 0.3% y/y the previous quarter. The unemployment rate dropped to 4% from 4.7% in Q1 while participation rate ticked higher to 70.5% from 70.4% in the previous quarter. Additionally, the underutilisation rate dropped to 10.6% from 12.1% in Q1. A very strong report with the unemployment rate returning to level of Q2 2020 and wages rising will be the final piece in the interest rate puzzle needed for a rate hike. Markets are penciling first rate hike to come at RBNZ’s August 18 meeting. 

CAD 

Employment report for July started with a disappointment. Headline number came in at 94k vs 177k as expected. However, as we dig deeper into details we find more encouraging data. The unemployment rate dropped to 7.5% from 7.8% in June while participation rate remained at 65.2%. Wages rose 0.6% vs 0.1% the previous month. Majority of newly created jobs were full-time with full-time employment coming in at 83k and part-time employment coming in at 11k. Labor market conditions continue to improve which should help keep CAD underpinned, but currently CAD’s fortunes are more closely tied with oil prices. 

JPY 

Tokyo inflation data continues to hover around zero. Headline number came in at -0.1% y/y while ex-fresh food category printed a 0.1% y/y reading. This is the first time that ex-fresh food inflation posted a positive reading since July of 2020 and it was achieved on the back of rising energy prices. BOJ target of 2% is miles away and will not be reached any time soon. Final manufacturing PMI was improved to 53 while services was revised up to 47.4 pushing composite with it to 48.8. Markit noted that “lower demand led Japanese service providers to decrease staffing levels for the first time since December 2020.” 

CHF 

SNB total sight deposits for the week ending July 30 came in at CHF712.0bn vs CHF712.1bn the previous week. Inflation data for July show headline number coming in at 0.7% y/y as expected, up from 0.6% y/y in June but core reading slipped to 0.2% y/y from 0.3% y/y the previous month. Price pressures remain subdued compared to the Eurozone and especially when compared to the US.

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