RBNZ and BOC meetings, inflation from the US and China as well as employment from the UK and trade data from China will highlight the week ahead of us.
USD
June ISM manufacturing slipped to 46 from 46.9 in May while expectations were for it to tick up to 47. Digging into subcomponents of the report we see a fascinating thing, all of indexes were in contraction territory, below the 50 level. This is the first time that happened since Covid outbreak. Production and employment were above the 50 level in May and now they are contracting. Demand remains weak with new orders and new export orders continuing to decline with backlog of orders at a very low level.
Minutes from the latest FOMC meeting saw almost all participants opting to keep rates unchanged. There were some members who wanted to continue with 25bp rate hikes stating: 1. Strong labour market; 2. Strong economy; 3. Not enough evidence of inflation going back to 2% target. Desk survey showed that majority of members expect recession to occur in the short-term but good economic data keeps pushing the date further into the future. Members agree overall that recession will not be deep or prolonged.
ISM Services PMI came in at 53.7 vs 51 as expected and up from 50.3 the previous month. Highlights of report include improvement in new orders and new export orders, employment index returning into expansion after being in contraction the previous month. Backlog of orders is improving while inventories are declining. Additionally, prices paid component continued to decline indicating that inflation pressures are easing.
NFP in June has broken a streak of 14 reports in a row in which it beat expectations. Headline number came in at 209k vs 225k as expected. The unemployment rate ticked down to 3.6% as expected while participation rate remained unchanged at 62.6%. Wages continued to run hot as they rose 0.4% m/m vs 0.3% m/m in May and 4.4% y/y vs 4.3% y/y the previous month. Government added 60k jobs, health care added 41k jobs while leisure and hospitality added 21k jobs. Construction added 21k jobs solidifying the case for a strong construction sector.
The yield on a 10y Treasury started the week and year at around 3.84%, rose to 4.10% and finished the week at around the 4.02% level. The yield on 2y Treasury spiked to highest level since 2007 of around 5.12%. Spread between 2y and 10y Treasuries started the week at -109bp then tightened to -90bp as the curve flattened. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at 95% while probability of no change in July is at 5%.
This week we will get inflation numbers for the month of June. Headline number is expected to be around 3.6% due to base effects while core number should print around 5%.
Important news for USD:
Wednesday:
CPI
EUR
Final manufacturing PMI for the month of June for Eurozone was revised down to 43.4 from 43.6 on the back of revision lower for German reading which printed measly 40.6. New orders and output declined at a faster rate owning to the slowing demand for industrial goods. There was a first decline in employment since January of 2021. The report also shows that supply delivery times are improving but companies are reporting shortage of materials. French reading was revised up and now makes it second consecutive month of improvements. The number is still well in contraction territory though and with ongoing protests across the France we may see it declining in the coming months. Final services was revised down to 52 from 52.4 on the back of lower than expected readings from Italy and Spain while German and French reading remained unchanged. This has caused composite to slip into contraction with 49.9. The report shows that “all major euro countries have again lost considerable momentum. The slowdown in business activity growth was accompanied by a weaker rise in new business, lower price increases and a decline in business expectations.” Employment continuing to improve and price pressures easing are the positives.
ECB policymaker and head of German Bundesbank Nagel, a well-known hawk, stated that rates must continue to rise but it is too early to say how far. On the other hand, ECB policymaker and head of Bank of Italy Visco, a well-known dove, stated that more rate hikes is not the only way to bring inflation down. Rates can also be held steady at high levels for sufficient period of time. He added that he is not going along with idea that tightening too much is better than tightening too little.
GBP
UK final June manufacturing reading was revised slightly up to 46.5 from 46.2 as preliminary reported, but still down from 47.1 in May. New orders, output and employment indexes showed further declines as weaker demand conditions are dominating. On the positive side, there was a further reduction in supply chains and price pressures. Services and composite were unchanged at 53.7 and 52.8 respectively as services sector starts loosing momentum with business activity increasing at a weak pace. On the other hand, price pressures are seen easing which is a very welcomed sign considering how high inflation in the UK is. BOE MPC member Silvana Tenreyro, a most dovish member of MPC, finished her mandate on July 4 and according to reports her replacement will lean much more hawkish.
This week we will have employment data.
Important news for GBP:
Tuesday:
Claimant Count Change
Unemployment Rate
AUD
RBA has opted to keep the cash rate unchanged at 4.1%. They see rate hikes slowly working its way into the economy and combined with uncertainty surrounding the economic outlook they decided that pause is the best decision. They claim that inflation has peaked, that economy has slowed and that labour market has eased somewhat although it remains very tight. Wages have picked up and are in line with inflation target. Household consumption is a cause of concern as costs of living increase. The statement shows that “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.” This decision may be viewed as a skip now and hike in August. Data still plays the central role in board’s decisions.
Caixin manufacturing PMI for the month of June came in at 50.5 vs 50.9 the previous month. It weakened but still managed to stay in expansion territory and beat the expectations of 50.2. The report pointed to slow in demand for goods but improvement in supply chains. Employment in manufacturing sector continued to decline and it was well below 50. Both output and input prices also continued to decline and are deep under the 50 level. Caixin services printed 53.9, down from 57.1 in May but still well in expansion territory. Composite was at 52.5 and report shows that production, exports, employment and demand all continued to improve albeit at a slower pace.
This week we will have inflation and trade data from China.
Important news for AUD:
Monday:
CPI (China)
Thursday:
Trade Balance (China)
NZD
Q2 business confidence has improved to -63 from -66 the previous quarter. First dairy auction of July saw GDT price index decline -3.3% with butter and butter milk prices plunging more than 10%.
This week we will have RBNZ meeting. At their last meeting it was stated that peak rate level is at current level of 5.5% and that there will be no rate changes until September of 2024.
Important news for NZD:
Wednesday:
RBNZ Interest Rate Decision
CAD
June employment report was a scorching hot. Employment change came in at 59.9k vs 20k as expected and up from -17.3k in May, The unemployment rate ticked up to 5.4% but it was due to participation rate jumping to 65.7%. The real star of the report was the fact that full-time jobs added printed astonishing 109.6k! Part-time jobs declined by 49.8k. Wage data showed and increase of 4.2% y/y, slowly coming down which will make BOC happy.
This week we will have BOC meeting. With inflation coming down but labour market running hot markets are leaning toward no change in the policy rate with some pricing in a 25bp rate hike.
Important news for CAD:
Wednesday:
BOC Interest Rate Decision
JPY
BOJ Tankan survey for Q2 saw improvements for both companies in manufacturing and services sector. Additionally, survey showed improved outlook for companies from both sectors indicating that they see strong Q3. Final manufacturing PMI was unchanged at 49.8. The report notes that both new orders and output regresses into contraction. Weak demand for goods dominated while on the positive side supply chain issues and inflation pressures eased. Final services reading was revised down to 54 from 54.2 as preliminary reported which dragged composite down to 52.1 from 52.3 as preliminary reported. The report accentuates divergence between sectors as demand for services remained positive.
Wages data saw nominal wages in May rising 2.5% y/y vs 0.8% y/y in April. Due to the high inflation this still puts real inflation into negative territory with a -1.2% y/y reading. Household consumption was affected by weak wage growth as it fell 4% y/y in May after a decline of 4.4% y/y the previous month. BOJ Deputy Governor Uchida stated “We will continue YCC”. This indicates that July meeting will again lead to no changes in monetary policy. Additionally, this prompted some thinking that BOJ will not intervene before USDJPY reaches the 150 level.
CHF
SNB total sight deposits for the week ending June 30 came in at CHF491.9bn vs CHF508bn the previous week. SNB is not letting go of selling USD and EUR to conduct its monetary policy. June inflation figures showed headline inflation dropping below 2% and printing 1.7% y/y vs 1.8% y/y as expected and down from 2.2% y/y in May. Core also declined and printed 1.8% y/y, down from 1.9% y/y the previous month. Inflation has dropped below the target and the rhetoric coming from SNB is still that they are prepared to further tighten monetary policy if need arises.
