- The dollar has finally gotten some traction
- The US data highlight this week will be June retail sales today
- The 3-month to 10-year US curve is finally back to positive territory
- The UK reported mixed labor market data
- RBA minutes were released; New Zealand Q2 CPI came in at 1.7% y/y, as expected
- Pakistan is expected to hike rates 100 bp to 13.25%; Argentina June CPI is expected to rise 2.6% m/m
The dollar is broadly firmer against the majors on a potential Turnaround Tuesday. Kiwi and yen are outperforming, while the euro and sterling are underperforming. EM currencies are mostly softer. ZAR and PHP are outperforming, while the CEE currencies are underperforming. MSCI Asia Pacific was flat, with the Nikkei falling 0.7% after Japan returned from holiday. MSCI EM is up 0.2% so far today, with the Shanghai Composite falling 0.2%. Euro Stoxx 600 is flat near midday, while DJIA futures are pointing to a lower open. 10-year UST yields are flat at 2.09%, while the 3-month to 10-year spread is up 5 bp to stand at +2 bp. Commodity prices are mixed, with Brent oil up 0.2%, copper flat, and gold flat.
The dollar has finally gotten some traction. DXY is trading at its highest level since July 11 and has retraced nearly half of its post-Powell swoon. Break above the 97.256 area is needed to set up a test of the pre-Powell high near 97.588 from July 9. An improved US economic outlook should provide some fuel for further dollar gains.
The US data highlight this week will be June retail sales today. Headline and ex-autos are expected to rise 0.2% and 0.1% m/m, respectively, while the control group is seen rising 0.3% m/m. All represent some slowing from the May gains. Note that auto sales were stronger than expected last month. June IP will also be reported and is expected to rise 0.1% m/m. May business inventories and TIC data will also be reported today.
Atlanta Fed GDPNow is tracking Q2 growth at 1.4% SAAR, up from 1.3% previously. Elsewhere, NY Fed Nowcast has Q2 growth at 1.5% SAAR, steady from last week. Its Q3 reading rose to 1.75% SAAR from 1.74% previously. While a slowdown from Q1 (3.1% SAAR) was to be expected, markets will be particularly sensitive for signs of a larger than expected drop-off. For now, a recession seems far off.
The 3-month to 10-year US curve is finally back to positive territory. At +2 bp today, the slope is positive for the first time since May 22 and suggests recession risks have receded somewhat. While the slope is likely to oscillate between negative and positive near-term, an improved US outlook should keep it largely out of inverted territory over the longer-term.
Ahead of the media embargo for the July 31 FOMC meeting, there is a full slate of Fed speakers this week. Bostic, Bowman, Kaplan, Powell, and Evans all speak today. We expect them to tow the party line set forth by Powell last week. While the Fed seems to have cemented a 25 bp cut on July 31, we continue to believe that markets are overestimating Fed dovishness for the rest of the year. The implied yield on the January 2020 Fed Funds futures contract is currently around 1.71%, which still nearly prices in three cuts in total for H2.
The UK reported mixed labor market data today. Jobless claims rose 38k in June and employment rose a lower than expected 28k in May. However, average weekly earnings rose a stronger than expected 3.4% (3.6% ex-bonus) in May while the unemployment rate was steady at 3.8%. We expect the data to remain soft ahead of the October 31 Brexit deadline, reinforcing the markets’ increasingly dovish take on the BOE.
We got an outside down day for cable yesterday. With a close below Friday’s low near $1.2520, charts point to further losses for sterling. It has not disappointed as sterling is trading near $1.2455 and is approaching the cycle low near $1.2440 from last week. Likewise, EUR/GBP is making new cycle highs near .90247 today and is on track to test the January high near .91084.
RBA minutes were released overnight. At that meeting, it cut rates 25 bp for the second straight time. The bank said that it is watching the jobs market closely and will adjust rates if needed. Australia reports June jobs data Thursday, with employment expected to rise 9k vs. 42.3k in May. Next RBA meeting is August 6, with WIRP showing 17% odds of a cut then. After that, the next meetings in 2019 are September 3, October 1, November 5, and December 3, with odds steadily rising to 61% for December 3.
New Zealand Q2 CPI came in at 1.7% y/y, as expected. Inflation remains in the lower half of the 1-3% target range, which is where the RBNZ expects it to remain until mid-2021. Next RBNZ meeting is August 7, with WIRP showing 85% odds of a cut then. After that, the next meetings in 2019 are September 25 and November 13, with odds rising steadily to 94% for November 13.
Pakistan central bank is expected to hike rates 100 bp to 13.25%. Expectations are all over the place, with some looking for no move and others looking for either 50 bp, 75 bp, 100 bp, 125 bp, and 150 bp of tightening. It has already hiked three times this year and continues the tightening cycle that it started last January. The pace of tightening has picked up as the May devaluation will likely feed into higher inflation. CPI rose 8.9% y/y in June and is likely to move further above the 6% target in H2.
Argentina June CPI is expected to rise 2.6% m/m vs. 3.1% in May. If so, the y/y rate would slow to 54.8% y/y. This would be the lowest since March and the first y/y deceleration since December. However, the bank should not risk any sort of premature easing. The IMF has reportedly approved increased FX intervention. Argentina may now sell as much as $3.6 bln in dollar futures by end-September, up from $1 bln previously allowed under its $56 bln IMF program. Lower inflation and a stable peso should be helpful for Marci’s reelection chances this fall.