Drivers for the Week Ahead

  • The dollar is likely to remain under pressure this week
  • Atlanta Fed GDPNow is tracking Q2 growth at 2.0% SAAR, down from 2.1% previously
  • The US yield curve is getting less inverted
  • Germany reports preliminary June CPI Thursday
  • RBNZ meets Tuesday and is expected to keep rates steady at 1.5%
  • In EM, the central banks of Mexico, Hungary, Thailand, and Czech Republic meet

The dollar is likely to remain under pressure this week. The reverberations of last week’s dovish FOMC decision are unlikely to fade that soon. That said, we continue to believe that the bond market is overly pessimistic about the US economy and that subsequent data should be solid. If so, the dollar should regain some traction but we’re not there yet.

We need to see several more days (if not weeks) of price action, but we are left wondering if the dollar will behave like it did after the January 30 FOMC. Recall that Powell and company fist went full-on dovish at that meeting after the disastrous December 19 meeting. The dollar sold off that day and the day after but then recovered to make new highs against most currencies.

It’s too early to say we are seeing a repeat of that situation. However, it’s worth repeating that we remain bullish on the dollar for now due to our underlying optimism regarding the US economy. The bond market remains way too pessimistic on the US economy and is likely to recalibrate its rate cut expectations in the coming weeks. However, we must acknowledge that the dollar remains vulnerable until the US outlook becomes clearer.

Atlanta Fed GDPNow is tracking Q2 growth at 2.0% SAAR, down from 2.1% previously. Elsewhere, NY Fed Nowcast has Q2 growth at 1.4% SAAR, steady from last week. However, it cut its Q3 reading to 1.3% SAAR from 1.7% 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 Chicago Fed National Index (CFNAI) for May will be reported Monday and is expected to come in at -0.05 vs. -0.45 in April. If so, the 3-month average for CFNAI would fall to -0.15 from -0.32 in April. That was the low for the cycle but still well above the recessionary threshold of -0.7. For those on recession alert, we believe this is the single more important economic indicator (see Some Thoughts on the US Economy and Fed Policy).

The US yield curve is getting less inverted. At -3 bp for the 3-month to 10-year curve, this is the lowest inversion since May 27. The curve should move back to positive slope if our view on the US economy pans out. However, we expect the curve to move back and forth into positive and negative territory until the US outlook becomes more certain.

The regional Fed manufacturing surveys for June continue with Dallas on Monday (-2.0 expected). Richmond reports Tuesday (4 expected) and Kansas City reports Thursday (0 expected). Last week, the Empire survey came in at -8.6 and the Philly Fed at 0.3, both weaker than expected.

There is a lot of other minor US data out this week. These readings include May new home sales and Conference Board consumer confidence Tuesday, followed by May wholesale and retail inventories, durable goods orders, and advance goods trade Wednesday. Thursday brings another revision to Q1 GDP, weekly jobless claims, and May pending home sales. The week ends with May personal income and spending, core PCE, and Chicago PMI reported Friday.

With the FOMC media embargo over, Fed officials are starting to fan out. Williams, Bostic, Powell, Barkin, and Bullard all speak Tuesday. Daly speaks both Wednesday and Friday. the FOMC decision all but cemented a July cut. However, it will be up to Fed officials to better manage market expectations. Three cuts this year followed by up to two cuts next year is simply too aggressive.

Germany reports preliminary June CPI Thursday. Headline inflation is expected to remain steady at 1.4% y/y. France reports June CPI Friday ahead of eurozone CPI out later that day, which is expected to remain steady at 1.2% y/y too. 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 37% chance of a cut then, with odds rising sharply as we move into Q4.

RBNZ meets Tuesday and is expected to keep rates steady at 1.5%. WIRP suggests 20% odds of a cut then. Market sees one more cut this year, but the timing is likely in H2 since the last cut was just seen in May.

In EM, the central banks of Mexico, Hungary, Thailand, and Czech Republic meet. None are expected to change policy except for Hungary. We see a small chance of a hawkish surprise since inflation is running near the top of the 2-4% target range.