Drivers for the Week Ahead

  • US has a heavy slate of first tier economic data this week; this could be a key week for the dollar
  • With the media embargo in effect ahead of the June 19 FOMC, there are no Fed speakers this week
  • UK has a heavy data week; Australia reports May jobs data Thursday
  • China data dump for May is this week
  • In EM, the central banks of Russia, Turkey, and Peru meet

US has a heavy slate of first tier economic data this week. The most important reading will be May retail sales Friday. Consensus sees headline up 0.6% m/m and would be a good bounce from the -0.2% reported in April. Both sales ex-autos and the so-called control group are seen rising 0.4% m/m. This report may have become more important than the jobs report now. May IP, April business inventories, and June Michigan sentiment will also be reported Friday.

This could be a key week for the dollar. The greenback has suffered as Fed easing expectations have gain strength. Recent US data have been unhelpful, and further weakness will likely lead to further dollar losses. Yet the canceled Mexico tariffs remove some recession risk for both nations.

Ahead of retail sales, the US reports April JOLTS job openings Monday. A higher reading of 7496 is expected, which would signal further tightness in the labor market. May PPI will be reported Tuesday, with headline expected at 2.0% y/y and core at 2.3% y/y. May CPI will be reported Wednesday, with headline expected a tick lower at 1.9% y/y and core steady at 2.1% y/y. The May budget statement will also be reported Wednesday.

Rather than the lagging jobs data markets are better off looking for a reliable leading or coincident indicator. The Chicago Fed National Activity Index fits the bill. The 3-month average was -0.32 in April, the low for the cycle but still above the recessionary threshold of -0.7. The May reading will be reported June 24. For a deep dive into this underrated indicator, please see our recent MarketView piece “Some Thoughts on the US Economy and Fed Policy.”

With the media embargo in effect ahead of the June 19 FOMC, there are no Fed speakers this week. It’s clear that markets are more dovish than the Fed right now. The Fed Funds futures market is pricing in up to three cuts this year, followed by more easing next year. WIRP suggests 17% odds of a cut this month, which we think overstates the case. July and September meetings are live but will be data-dependent.

The Atlanta Fed’s GDPNow model is now tracking 1.4% SAAR for Q2, down from 1.5% previously. Elsewhere, the New York Fed’s Nowcast model is tracking 1.0% SAAR for Q2 vs. 1.5% the previous week. More importantly, we got its initial estimate for Q3 growth of 1.3% SAAR. Q2 data have clearly been on the soft side, but we note that Q1 also started off on a soft note before rebounding to 3.2% SAAR growth in the advance report (3.1% SAAR in the first revision). While a slowdown from Q1 was to be expected, markets will be particularly sensitive for signs of a larger than expected drop-off.

US tariffs on Mexico have been called off. The two countries have reached an agreement, though there is some confusion as to what was actually agreed. President Trump claims that Mexico agreed to large-scale purchases of US agricultural goods, but Mexico would not confirm. Press reports suggest that many aspects of the deal had already been agreed upon. Either way, the peso is seeing a relief rally.

UK has a heavy data week. April GDP, IP, trade, and construction output will be reported Monday. Labor market data will be reported Tuesday. Last week’s PMI readings for May confirm our suspicions that the UK economy will continue to weaken into the October 1 Brexit deadline. Despite ongoing hawkish comments from Governor Carney, the market does not believe the BOE will hike anytime soon.

Japan reported April current account and final Q1 GDP Monday. May machine tool orders will be reported Tuesday, followed by May PPI and April core machine orders Wednesday. Bank of Japan meets June 20, and no change is expected then. However, we expect further stimulus after the October consumption tax hike.

Australia reports May jobs data Thursday. Downside risks to the economy remain strong and so we see further easing ahead after the RBA just cut rates 25 bp. Next policy meeting is July 2, and it may be too soon for another hike. We favor a cut at either the August 6 or September 3 meetings.

China will report money and new loan data for May this week. Both new loans and aggregate financing are expected to increase from April. It reported May trade data, with exports rising 1.1% y/y vs. -3.9% expected but exports contracting -8.5% y/y vs. -3.5% y/y expected. China reports May CPI and PPI Wednesday and are expected to rise 2.7% y/y and 0.6% y/y, respectively. May retail sales and IP will be reported Friday and are expected to rise 8.0% y/y and 5.4% y/y, respectively.

Elsewhere in EM, the central banks of Russia, Turkey, and Peru meet. Of the three, Russia is the only one that is expected to move, as a 25 bp cut is priced in. Turkey will be under pressure to cut but it is too risky to move now. Late Friday, Chile shocked markets with a 50 bp cut to 2.5%. This reverses the entire tightening cycle so far and takes the policy rate back to the recent lows.