RBNZ meeting and inflation data from the US and China will highlight the week ahead of us that will also see Fed Chairman Powell testify on Tuesday.
USD
June ISM manufacturing PMI printed 48.5 vs 49.1 as expected and down from 48.7 in May. With the exception of March reading (50.3) manufacturing PMI has been in contraction every month since October of 2022. Production, new export orders and employment orders slipped back into contraction while new orders surged compared to May, but still in contraction. One positive is that prices paid component dropped to 52.1 from 57 the previous month indicating easing of inflationary pressures.
ISM services PMI plunged back into contraction in June with a 48.8 reading, down from 53.8 in May making it the lowest reading since May of 2020, the heart of pandemic. Business activity fell to 49.6 from 61.2 the previous month with new orders also dropping into contraction with a 47.3 print, down from 54.1 in May. Backlog of orders also plunged down into contraction while new export orders managed to barely stay in expansion, but still reported a huge drop compared to May reading. Employment continued to slip deeper into contraction. Prices paid declined as inflation pressures continue to subside.
Minutes from the June FOMC meeting showed that the economic forecast for the June meeting was similar to the projection at the previous meeting. “Participants noted that after a significant decline in inflation during the second half of 2023, the early part of this year had seen a lack of further progress toward the Committee’s 2 percent objective.” Participants stated a few factors that will likely contribute to lower inflation ahead, such as. continued easing of demand–supply pressures in product and labour markets, lagged effects on wages and prices of past monetary policy tightening, lags in shelter prices to rental market developments and the prospect of additional supply-side improvements. Some participants highlighted reasons why inflation could remain above 2% for longer than expected, such as worsening geopolitical developments, heightened trade tensions, more persistent shelter price inflation, financial conditions that might be or could become insufficiently restrictive, or U.S. fiscal policy becoming more expansionary than expected. Most participants saw growth gradually slowing and concluded that policy stance is restrictive.
June employment report showed NFP increase by 206k vs 190k as expected but with a big revision to May reading (218k vs 272k as preliminary reported). The unemployment rate ticked higher to 4.1% as did the participation rate 62.6% from 62.5% the previous month. Wages came in line with expectations 0.3% m/m and 3.9% y/y, down from 0.4% m/m and 4.1% y/y in May. Government added 70k jobs while health care added 49k jobs.
The yield on a 10y Treasury started the week at 4.40%, rose to 4.49% and finished the week at around 4.28%. The yield on 2y Treasury started the week at 4.77% and reached the high of 4.8%. Spread between 2y and 10y Treasuries started the week at -36bp then tightened to -32bp as curve proceeded to steepen. The 2y10y is inverted for two years. FedWatchTool sees the probability of no change at July meeting at around 95% while probability of a rate cut is around 5%. Probability of a September rate cut sits at around 75% while November is at around 86%.
This week we will get June inflation data. Headline number is expected to decline further while core is seen remaining unchanged.
Important news for USD:
Thursday:
CPI
EUR
Final manufacturing PMI for the month of June was revised slightly up to 45.8 from 45.6 as preliminary reported on the back of improvements in German, French and Italian readings. Once concern is that new orders continue to decline. Final services PMI were was revised up to 52.8 from 52.6 on the back of positive revision to French reading (49.6 vs 48.8) and another strong reading from Spain. The report shows that services recovery is broad-based among four major economies (Germany, France, Italy and Spain). Employment was higher in all four major economies while input prices and prices charged to consumers increased at slowest pace in three years. Tourism is seen as the biggest driver of services sector. Composite was revised slightly higher to 50.9 from 50.8 as preliminary reported.
Preliminary June inflation data showed headline number tick down to 2.5% y/y as expected from 2.6% y/y in May, but core reading remained unchanged at 2.9% y/y while a slide down to 2.8% y/y was expected. German reading saw inflation coming to 2.2% y/y from 2.4% y/y in May.
ECB Chief Economist Lane stated that June inflation data is along the lines of their projections and that services inflation remains essential. Later on he added that firms are reporting wage pressures coming down which should in turn help with disinflationary process. Minutes from the June meeting showed that some members were not for a rate cut. Additionally, they show that June cut was not a start of a rate cutting cycle. The cut seems to be made because ECB’s pre-commitment to it in previous months.
GBP
Final June manufacturing PMI was revised down to 50.9 from 51.4 as preliminary reported and it is now down from 51.2 in May. New orders and output continue to increase and are in expansion while new export orders declined further indicating weak foreign demand for UK manufacturing products. Input prices have jumped and are rising at the quickest pace since 2023 which is a cause for great concern regarding persistent underlying inflation pressures. Final services were revised up to 52.1 from 51.2 and now represent smaller decline from 52.9 in May. Similar picture is seen with composite as it was revised up to 52.3 from 51.7 and down from 53 the previous month. The report shows easing of input costs which in turn should bring services inflation down and BoE is looking for that in order to deliver its first rate cut. The Labour party has won majority, north of 400 seats in the Parliament, as expected and Keir Stammer will be the new Prime Minister.
AUD
Minutes from RBA June meeting showed that there was a stronger case for holding rates than for raising them but there is a need to be vigilant about upside risks to inflation as was suggested by the latest incoming data. They clarified that recent incoming data is not changing their projection for inflation coming back down to target by 2026. Material rise in inflation could require significantly higher rates. All in all, July 31 is the most important data as we will get Q2 CPI data then which will dictate RBA’s decision at the August meeting.
Official June PMI data from China showed manufacturing at 49.5, same as in May, for the second consecutive month of contraction. Services PMI declined to 50.5 from 51.1 the previous month and dragged with it composite to 50.5 from 51 in May. Caixin Manufacturing fared much better than official number as it printed 51.8, tick up from 51.7 the previous month. The reading is highest in three years, it has been increasing every month since the start of the year and it is indicating that SMEs are doing much better than large state-owned companies. Caixin services PMI dropped to 51.2 from 54 as new orders and new export orders slow down, but the latter faring much better. This drop in services led to a drop in composite to 52.8 from 54 in May.
This week we will have inflation and trade data from China.
Important news for AUD:
Wednesday:
CPI (China)
Friday:
Trade Balance (China)
NZD
Business confidence has plunged in Q2 to -44%, down from -25% in the previous quarter. The survey shows increasing pessimism among companies as high interest rates continue to push demand down. First dairy auction of July saw prices plummet by 6.9%. Anhydrous Milk Fat and Butter saw double digit price declines.
This week we will have RBNZ meeting. With inflation running high there will be no changes in rate or monetary policy. Recent data is not allowing RBNZ to take more dovish stance.
Important news for NZD:
Wednesday:
RBNZ Interest Rate Decision
CAD
Employment report for the month of June heavily missed expectations by showing a loss of 1.4k jobs vs 22.5 added jobs expected. The unemployment rate jumped to 6.4% from 6.2% in May while increase to 6.3% was expected. In additional to that, the participation rate ticked down to 65.3% from 65.4% the previous month. Wages have gone up to 5.6% y/y from 5.2% y/y in May.
JPY
Due to revision to construction data Q1 GDP has been revised down to -2.9% from -1.8% as previously reported. This is an awful GDP reading and it will be a big blow to rate hike chances. Final June manufacturing PMI was revised down to 50 with report showing increases in output and business confidence but higher cost pressures due to weak JPY which led manufacturers to increase their prices and thus contribute to inflation pressures amidst weaker demand for manufacturing products. Final services have been revised down to 49.4 making it first month in contraction since August of 2022. This has pushed composite into contraction at 49.7. Household spending in May provided us with another weak data print as it showed a decline of 1.8% y/y vs increase of 0.1% y/y as expected and down from 0.5% y/y in April.
CHF
SNB total sight deposits for the week ending June 28 came in at CHF452bn vs CHF451.8bn the previous week. It is a negligible move higher from the lows of a well-established channel. June inflation saw a headline print of 1.3% y/y vs 1.4% y/y as expected and in May. Core CPI printed 1.1% y/y, down from 1.2% y/y the previous month. SNB published projections at their June meeting showing they are expecting lower inflation in 2024.
