Drivers for the Week Ahead

  • The dollar has benefited from risk-off conditions; the liquidity story should remain positive for risk assets this week, with several major central banks likely to emphasize their dovish stances
  • Markets are still digesting the FOMC decision; with the media embargo over, this will be a very heavy week of Fed speaker
  • May retail sales Tuesday will be the US data highlight for the week; Canada has a busy data week
  • ECB will hold a TLTRO operation Thursday; BOE meets Thursday and is expected to increase its asset purchases by GBP100 bln; UK has a busy data week
  • Norges Bank and SNB also meet Thursday and are expected to keep policy unchanged
  • BOJ meets Tuesday and is expected to keep policy unchanged; Australia has a fairly busy week

The dollar has benefited from risk-off conditions. DXY has risen two straight days as market sentiment worsened but given the underlying Fed dovishness, further gains may be tough. The euro is finding some support just above the $1.12 area, while sterling is getting traction around the $1.25 area. After a brief test of the 110 area, USD/JPY is back trading in its only 106-108 trading range. Its near-term direction is likely to be determined by swings in market sentiment.

The liquidity story should remain positive for risk assets this week, with several major central banks likely to emphasize their dovish stances. On the other hand, the economic data reported this week will likely be awful. Markets will be searching for direction, as the Fed’s message of low rates as far as the eye can see was offset by Powell’s grim outlook for unemployment. This is true for virtually every major economy right now and so we expect heightened volatility until this dilemma has been resolved one way or another.

AMERICAS

Markets are still digesting the FOMC decision. Should they focus on the pledge to keep rates at current levels through 2022 (positive from a liquidity standpoint)? Or should they focus on the reason that rates will stay low through 2022 (negative from a fundamental standpoint due to high unemployment and weak recovery)? Only time will tell, as these two conflicting forces are likely to ebb and flow in the coming months.

With the media embargo over, this will be a very heavy week of Fed speakers. Kaplan and Daly speak Monday. Powell delivers his semi-annual report to the Senate Tuesday, while Clarida speaks later that day. Powell delivers the second part of his semi-annual report to the House Wednesday. Mester also speaks Wednesday. She and Daly speak Thursday. Rosengren, Quarles, Powell, and Mester speak Friday.

May retail sales Tuesday will be the US data highlight for the week. Headline sales are expected to rebound 8.0% m/m vs. -16.4% in April, while ex-autos are expected to rise 5.3% m/m vs. -17.2% in April. The so-called control group used for GDP calculations is expected to rise 5.8% mm vs. -15.3% in April. IP will also be reported Tuesday and is expected to rise 3.0% m/m vs. -11.2% in April. June should show some further improvement as more states reopen, but much will depend on how the virus numbers develop,

The regional Fed manufacturing surveys for June will start to roll out this week. The Empire survey comes out Monday and is expected at -30.0 vs.-48.5 in May. The Philly Fed survey comes next on Thursday and is expected at -25.0 vs. -43.1 in May. These are the first snapshots for June and are likely to show improvement but not yet growth. Yet this is just the production side. To us, the real trick is getting consumers to spend again and that represents the biggest downside risk ahead. China is experiencing this dilemma already.

Weekly jobless claims will be reported Thursday. Initial claims for the survey week containing the 12th of the month are expected at 1.29 mln vs. 1.542 mln last week. Continuing claims are expected at 19.65 bln vs. 20.929 last week. It seems continuing claims are giving a better picture of the labor market than the initial claims. Continuing claims fell -4.1 mln during last month’s survey week, which suggested that markets were being too pessimistic about May jobs data. Because continuing claims are reported with a one-week lag, we will have to wait until next week for the survey week containing the 12th of the month.

It’s early still but Bloomberg consensus sees a gain of 4 mln jobs in June, up from 2.509 mln in May. Unemployment is expected to fall to 12.0% from 13.3% in May, but the data have been rife with errors the past two months. Data will be reported July 2 and we will get more claims data before then to round out the picture. Still, markets would do well to remember Powell’s sobering outlook for the US labor market.

Other minor US data will be reported this week. April TIC data will be reported Monday, followed by business inventories (-1.0% m/m expected) Tuesday. May building permits and housing starts will be reported Wednesday, followed by leading index (2.4% m/m expected) Thursday and Q1 current account data Friday.

Canada has a busy data week. May CPI Wednesday and April retail sales Friday are the most important readings. Headline inflation is expected to rise to 0.1% y/y from -0.2% in April, while common core is expected to remain steady at 1.6% y/y. Headline sales are expected to fall -15.0% m/m vs. -10.0% in March, while ex-autos are expected to fall -10.8% m/m vs. -0.4% in March. Along with those readings, April manufacturing sales (-20.0% m/m expected) and May existing homes sales will be reported Monday and April wholesale trade sales (-11.3% m/m expected) will be reported Thursday. For now, the Bank of Canada is in wait and see mode.

EUROPE/MIDDLE EAST/AFRICA

The ECB will hold a TLTRO operation Thursday. The terms were sweetened in April, and so the take-up should be large for this first operation under the lower rate offered. That helps explain why the take-up for the recent PELTRO was so weak, as many preferred to wait for the TLTRO to get even cheaper funding. In turn, this should help boost demand for a heavy slate of planned eurozone sovereign bond issuance this week. Eurozone data is limited this week. June ZEW expectations will be reported Tuesday. Final May CPI will be reported Wednesday. April current account data will be reported Friday.

UK Prime Minister Johnson and EC President von der Leyen will hold talks Monday in an attempt to break the deadlock. The last round Brexit talks yielded little and so all eyes are on the July 1 deadline for an extension request, which the UK formally ruled out. Instead, the UK and EU agreed to an “intensified timetable” for Brexit negotiations. Five rounds of weekly talks will be held starting the week of June 29. To be quite honest, this acceleration should have happened long ago. Still, we remain skeptical that such a complicated trade deal can be wrapped up by year-end. As such, we believe markets are underestimating the odds of a hard Brexit.

Bank of England meets Thursday and is expected to increase its asset purchases by GBP100 bln. Given how bad the data came in last week, we see risk of a dovish upside surprise. However, even if the BOE sticks to consensus, another top up is likely by the fall as the government will be issuing copious amounts of debt in the coming months. We do not see negative rates this week or for the foreseeable future, while Yield Curve Control may be possible in H2 if yields start to rise. As it is, the market is doing the heavy lifting now and has pushed parts of the UK yield curve into negative territory.

The UK also has a busy data week. Ahead of the BOE decision, the UK reports labor market data Tuesday. Average earnings are expected to slow to 1.3% in April from 2.4% in March, while the unemployment rate is expected to rise almost a full point to 4.7% with employment expected at -110k. May CPI will be reported Wednesday. Headline is expected to fall to 0.5% y/y from 0.8% in March, while CPIH is expected to fall to 0.7% y/y from 0.9% in March. May retail sales will be reported Friday. Headline is expected to rise 6.4% m/m vs. -18.1% in April, while the y/y rate is expected at -16.4% vs. -22.6% in April. May budget data and June CBI industrial trends will also be reported Friday.

Norges Bank meets Thursday and is expected to keep policy unchanged. The bank quickly cut rates to 0%, with the last 25 bp cut unexpectedly coming May 7. As such, we think it is now in wait and see mode. May underlying inflation rose unexpectedly to 3.0% y/y in May but was due largely to base effects. Regardless, it should not impact policymaking as the focus is solely on boosting growth now. The bank has shown no appetite for negative rates. If further stimulus is needed in H2, we think the burden will be on fiscal policy.

Swiss National Bank meets Thursday and is expected to keep policy unchanged. It meets even as deflation is deepening. May CPI fell -1.3% y/y vs. -1.1% in April. This nearly matches the low of -1.5% seen back in September 2015. Q1 GDP came in weaker than expected, contracting -2.6% q/q and -1.3% y/y. New economic forecasts will be issued. Whilst officials say rates could be cut further, we do not think the bank will go more negative. For now, we expect policymakers to continue focusing on the exchange rate with its ongoing intervention program.

ASIA

Bank of Japan meets Tuesday and is expected to keep policy unchanged. We see no changes in rates or Yield Curve Control. It is possible the bank tweaks its lending program, but even that seems too soon since it was just introduced May 22. No, the BOJ is mostly likely in wait and see mode to see how the various fiscal stimulus packages work. After the decision, May trade data will be reported Wednesday. Exports are expected to contract -26.1% y/y vs. -21.9% in April, while imports are expected to contract -20.7% y/y vs. -7.1% in April. May national CPI will be reported Friday. Headline inflation is expected to rise a tick to 0.2% y/y, while ex-fresh food is expected at -0.1% y/y vs. -0.2% in April. These data underscore the difficulties facing Japanese policymakers right now.

Australia has a fairly busy week. RBA minutes will be released Tuesday. With Yield Curve Control in place and working, the bank is clearly in wait and see mode for now. May jobs data will be reported Thursday. Jobs are expected to fall -75k vs. -594.3k in April, while the unemployment rate is seen rising to 7.0% from 6.2% in April. Preliminary May retail sales will be reported Friday. New Zealand reports Q1 current account data Wednesday, followed by Q1 GDP Thursday.