BOE and RBA meetings coupled with NFP as well as inflation and growth data from the Eurozone, inflation data from Switzerland and PMI data from China will highlight another action packed week ahead of us.
USD
IMF has raised its projection for 2023 GDP to 3% from 2.8% and left 2024 projection unchanged at 3%. Projection for 2023 was revised up due to better than expected GDP readings for the US and the UK. US GDP is seen at 1.8% vs 1.6% in April while UK GDP is seen rising 0.4% vs falling 0.3% in April. German GDP was downgraded and IMF now sees it falling by 0.3% vs falling by 0.1% in previous projections. Consumer confidence measured by Confidence Board jumped in July to 117 from upwardly revised 110.1 in June. This represents the highest reading in two years and it is additional proof that economy is handling high rates pretty good.
Fed has delivered another 25bp rate hike, as was widely expected and brought Fed funds target rate into the 5.25-5.50% range. The statement did not reveal much saying that “economic activity has been expanding at a moderate pace” that “Job gains have been robust in recent months” and that “Inflation remains elevated.” The committee will take into account the cumulative effects of monetary policy and the lags along with economic and financial developments. We got more information from Powell’s opening statement during the press conference and Q&A session.
Chairman Powell declared that full extent of rate hikes is yet to be felt. He acknowledged a strong pace of job growth and added that process of bringing inflation back to 2% inflation “still has a long ways to go”. During Q&A session he stated that inflation will not return to 2% level before 2025. He also strongly emphasized that they are in a data-dependent mode stating that there are two more jobs (NFP) and inflation reports until September meeting. He admitted that June CPI was welcomed but it is just one reading and more is needed as they want to see core inflation down. He also stated that staff projections no longer see recession in 2023. Ultimately, he dismissed rate cuts for the rest of the year. Overall it can be said that his comments were neutral as he was looking to keep September meeting open for another rate hike, although he clarified that future rate hikes were not discussed.
Q2 GDP has come in strong at 2.4% annualised vs 1.8% annualised as expected and up from 2% in the first quarter. There was a big drop in personal consumption, which added just 1.12pp to the GDP reading, down from 2.79% in Q1. On the other hand, fixed investment showed a big jump and contributed 0.83pp to the GDP, up from -0.08pp in the previous quarter. Durable goods printed 4.7% m/m vs 1% m/m as expected. This is the highest monthly rise in three years.
PCE in June printed headline at 3% y/y as expected, down from 3.8% y/y in May. Core reading has dropped more than expected and is now at 4.1% y/y, down from 4.6% y/y the previous month. Headline PCE and CPI are both at 3% but core PCE is lower as core CPI is at 4.8% y/y. Personal income rose by 0.3% m/m while 0.5% m/m was expected. Personal spending jumped 0.5% m/m compared to increase of 0.1% m/m the previous month. Fed may be very satisfied with this reading as inflation is falling at desired pace and personal income seems to be slowing down while spending remains unchanged.
The yield on a 10y Treasury started the week and year at around 3.85%, rose to a little over 4% and finished the week at around the 3.95% level. The yield on 2y Treasury reached the high of around 5%. Spread between 2y and 10y Treasuries started the week at -101bp then tightened to -92bp. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at September meeting at around 20% while probability of no change is at around 80%.
This week we will have ISM PMI data for July and NFP numbers on Friday. Headline NFP is seen at around 190k with the unemployment rate staying unchanged at 3.6%.
Important news for USD:
Tuesday:
ISM Manufacturing PMI
Thursday:
ISM Services PMI
Friday:
NFP
Unemployment Rate
EUR
Preliminary PMI numbers for July for Eurozone as a whole came in slightly worse than expected. Manufacturing has slipped to 42.7 from 43.4 in June while services declined to 51.1 from 51.5 the previous month making composite drop to 48.9 from 49.7, a second consecutive month below 50. Digging into the details we find abysmal data. German manufacturing has fallen to 38.8. This low level has last been seen in May of 2020, at the peak of pandemic and lockdowns. French services reading has declined to 47.4 from 48 in June thus making it second consecutive month in contraction. German composite has also fallen into contraction with 48.8 reading. Q3 and H2 of 2023 will be very challenging for Eurozone as PMIs suggest even weaker readings in the coming months. The report also shows that new orders fell for services sector for the first time in seven months and that price pressures are still holding especially in the service sector.
Euro area bank lending survey for July of 2023 presented a dire situation. Credit standards have continued to tighten for all loan categories which led to sharp drop in demand for loans from businesses and households. The net demand for loans has fallen to the lowest level since the start of the survey 20 years ago. Banks are reporting that they are more concerned about non-performing loans and that they are set to further tighten lending conditions. The report states “For the third quarter of 2023, euro area banks expect a further, albeit more moderate, net tightening of credit standards on loans to firms, and unchanged credit standards on loans to households for house purchase.”
ECB has delivered their announced 25bp rate hike and brought deposit rate to 3.75%. Inflation continues to decline but it is still at too high level and will stay there for too long. ECB will remain data-dependent when deciding future rate hikes.
ECB President Lagarde acknowledged at the press conference that near-term economic outlook has deteriorated due to weaker domestic demand. Price pressures from wages and profit margins are becoming an increasing source of inflation. She reiterated during the Q&A session as well as during the opening statement that ECB is data-dependent. She particularly brought attention to the change in the statement from “The Governing Council’s future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary.” to “The Governing Council’s future decisions will ensure that the key ECB interest rates will be set to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary.”
Preliminary Q2 GDP readings showed French at 0.5% q/q vs 0.1% q/q as expected due to big contribution from net exports. German Q2 GDP was flat, showing weak economic rebound. As a reminder, preliminary Q1 GDP from Germany was also flat but it was revised lower in final reading to -0.3% q/q pushing the country into technical recession of two consecutive quarters of falling growth. So we cannot be sure yet that Germany managed to break the cycle and not post third consecutive quarterly decline in growth. Preliminary inflation data for July saw French reading at 4.3% y/y, down from 4.5% in June.
This week we will have preliminary Q2 GDP and July CPI data for the Eurozone.
Important news for EUR:
Monday:
CPI
GDP
GBP
PMI data from the UK for the month of June saw continued declines in economic activity. Manufacturing fell to 45, services to 51.5 while composite managed to stay in expansion territory with a 50.7 print. New orders are almost unchanged while price pressures seem to be easing as the economy pushes to avoid a negative GDP print in Q3.
This week we will have BOE meeting. Markets are positioning themselves for a 25bp rate hike.
Important news for GBP:
Thursday:
BOE Interest Rate Decision
AUD
Q2 inflation data came in at 0.8% q/q and 6% y/y vs 1% q/q and 6.2% y/y as expected and down from 1.4% q/q and 7% y/y in Q1. Inflation has come down and if we look at H1 of 2023 it has printed 2.6% annualised which is right within RBAs 2-3% target range. This report should lead to RBA not changing the cash rate next week. The report still holds some concerning data as it shows that services inflation is at 6.3% which is a 22-year high.
Pan Gongsheng has been appointed as the new Governor of PBOC. China’s Politburo has stated they will provide “counter-cyclical” measures in order to prop the economy.
This week we will have RBA meeting as well as official and Caixin PMI data from China. The economists are split almost 50/50 whether there will be a 25bp rate hike. We are leaning more toward no change in rate hike.
Important news for AUD:
Monday:
Manufacturing PMI (China)
Non-Manufacturing PMI (China)
Composite PMI (China)
Tuesday:
RBA Interest Rate Decision
Caixin Manufacturing PMI (China)
Thursday:
Caixin Services PMI (China)
Caixin Composite PMI (China)
NZD
June trade balance saw surplus of just NZD9m, down from May figure as both exports and imports declined. Kiwi had an up and down week, as did the majority of currencies, enjoying risk on in the first half of the week and then plunging on the risk off mood post ECB.
This week we will have Q2 employment data.
Important news for NZD:
Wednesday:
Employment Change
Unemployment Rate
CAD
Manufacturing sales in June fell 2.1% m/m after they rose 1.2% m/m in May with biggest declines seen in petroleum and coal products followed by chemical and food producing industries. May GDP data came in at 0.3% m/m as expected with preliminary June reading seen dropping 0.2% m/m.
This week we will have employment data.
Important news for CAD:
Friday:
Employment Change
Unemployment Rate
JPY
Preliminary July PMI numbers saw small declines across the board. Manufacturing dropped to 49.4 from 49.8 while services slipped to 53.9 from 54 which resulted in composite remaining unchanged from June at 52.1, The report shows weaker decline in output, new export orders as well as stronger decline for new orders in the manufacturing sector. Services sector saw weaker growth in all three of those categories. Stronger inflation is seen in both input and output prices while future output showed weaker positive outlook which is concerning sign going further into Q3 and H2 of 2023. Government spokesperson stated that they expect CPI to come down and print 1.5% in Fiscal Year of 2024. As a reminder, Fiscal Year in Japan starts in April. So the government sees inflation as transitory and expects it to come down below 2% target in about a year from now.
During the week speculations appeared that BOJ will tweak its Yield Curve Control (YCC) and that gave a huge boost to the JPY. Finally, after the meeting was concluded, it was announced that there will be no changes to the monetary policy or YCC, however BOJ will keep offering fixed-rate operations for 10y JGBs at yield of 1%. The vote on YCC was not unanimous, it was an 8-1. 10y This caused JGBs to trade at highest levels since 2014. Markets whipsawed on these comments with USDJPY going up and down 300 pips in a short time span. This is a tweak to YCC but not exactly as markets hoped for and they are still trying to grasp the meaning of the move.
Tokyo CPI data showed continued decline in ex fresh food category in July as it came in at 3% y/y vs 3.2% y/y in June. On the other hand, headline and the so-called “core core” measure which excludes food and energy reaccelerated to 3.2% y/y and 4% y/y from 3.1% y/y and 3.8% y/y the previous month. This is the highest reading for “core core” since April of 1982. BOJ quarterly report showed that risks for inflation are skewed to the upside for fiscal years of 2023 and 2024. There was an upward revision to core core inflation for 2023. It is now seen at 3.2% vs 2.5% in April.
CHF
SNB total sight deposits for the week ending July 21 came in at CHF489.3bn vs CHF494.7bn the previous week. It is a continuation of a trend down as SNB sells EUR and USD in order to strengthen Swissy and fight off inflation.
This week we will have inflation data.
Important news for CHF:
Thursday:
CPI
