- Markets continue to search for direction ahead of this weekend’s G20 meeting in Osaka
- Trump has already given markets plenty to digest
- US reports revised Q1 GDP, weekly jobless claims, May pending home sales, and June KC Fed manufacturing index
- Germany reports preliminary June CPI; Japan reported May retail sales
- Brazil central bank releases its quarterly inflation report; Banco de Mexico is expected to keep rates steady at 8.25%
The dollar is narrowly mixed against the majors ahead of this weekend’s G20 summit. Sterling and the Antipodeans are outperforming, while the Scandies are underperforming. EM currencies are also mixed. ZAR and PHP are outperforming, while KRW and TRY are underperforming. MSCI Asia Pacific was up 0.9%, with the Nikkei rising 1.2%. MSCI EM is up 0.7% so far today, with the Shanghai Composite rising 0.7%. Euro Stoxx 600 is down 0.3% near midday, while DJIA futures are pointing to a lower open. 10-year UST yields are down 1 bp at 2.04%, while the 3-month to 10-year spread is steady and stands at -9 bp. Commodity prices are mostly lower, with Brent oil down 1.2%, copper down 0.2%, and gold down 0.3%.
Markets continue to search for direction ahead of this weekend’s G20 meeting in Osaka. The dollar is narrowly mixed against most currencies, with DXY trying to rally for the third straight day. The US 10-year yield is having trouble staying below 2%, and a further move above this threshold would help the dollar get some more traction.
The G20 highlight is when Presidents Trump and Xi meet Saturday morning at 1130 AM local time. However, Trump will hold a series of key meetings ahead of the weekend and so be prepared for some headlines. On Friday, he meets with Japan Prime Minister Abe, Indian Prime Minister Modi German Chancellor Merkel, Russian President Putin, and Brazilian President Bolsonaro.
Trump has already given markets plenty to digest. He said his Plan B for China in the event of no progress in trade talks is to raise tariffs on China. Trump also called India’s recent decision to raise tariffs on US goods “unacceptable” and said they must be withdrawn. Vietnam also got a shout-out from Trump, calling it “almost the single worst abuser of everybody.” Trade advisor Navarro is also attending the G20 summit and so markets should prepare for the risk of more confrontation.
Indeed, it’s clear that even if the US can close a deal with China this fall, other conflagrations lie ahead. That is, mercantilist trade policies are a permanent fixture for the Trump administration. Japan and Europe are on the back burner now, but the auto tariff deadline comes up in mid-November.
During the North American session, the US reports another revision to Q1 GDP, weekly jobless claims, May pending home sales, and June Kansas City Fed manufacturing index. Growth is expected to tick back up to 3.2% SAAR, claims are expected at 220k, pending home sales are expected to rise 1.0% m/m, and KC manufacturing index is expected at 1. There are no Fed speakers scheduled today.
Germany reports preliminary June CPI. Headline inflation is expected to remain steady at 1.4% y/y. State CPI data is trickling out today and most have accelerated from May. As such, we see upside risks to the national reading. France reports June CPI tomorrow, followed later in the day by headline eurozone CPI.
The ECB is struggling with sluggish growth and low inflation, raising the odds that Draghi eases further before stepping down October 31. Next ECB policy meeting is July 25. WIRP suggests a nearly 30% chance of a cut then, with odds rising sharply as we move into Q4. We suspect the ECB will modify its outlook next month as preparation for a move at the September 12 meeting, when new staff forecasts will be released.
Japan reported May retail sales. Sales rose 1.2% y/y, as expected. However, department store and supermarket sales contracted -0.5% y/y vs. an expected gain of 0.2%. The planned consumption tax hike in October makes it difficult to get a clean read on consumption, as many households are likely to frontload purchases to avoid the tax, only to clam up afterwards. That said, most indicators are pointing to a softer economy ahead and so the BOJ is likely preparing to add stimulus this fall.
Brazil central bank releases its quarterly inflation report. The most recent COPOM statement seemed to set the table for an eventual rate cut, provided pension reforms get passed. Mid-June IPCA inflation came in at 3.84% y/y vs. 4.93% in mid-May. This was the lowest reading since January and moves inflation back into the bottom of the 2.75-5.75% target range. CDI market is pricing in two rate cuts by year-end, while analyst poll shows three cuts. Next COPOM meeting is July 31, this may be too soon for a cut.
Banco de Mexico is expected to keep rates steady at 8.25%. Mid-June CPI rose 4.0% y/y, the lowest since March and back to the 2-4% target range. Markets are looking for an easing cycle to start in early 2020, but much will depend on the peso and external conditions. Ahead of the rate decision, Mexico reports May trade data. A deficit of -$1.03 bln is expected.