Drivers for the Week Ahead

  • The G20 delivered as much good news for risk sentiment as one could want
  • There will be several major US data releases this week; Fed speaking engagements are surprisingly few this week
  • Eurozone final June manufacturing PMI will be reported Monday; BOJ released its Q2 Tankan report
  • RBA meets Tuesday and is expected to cut rates 25 bp to 1.0%; Swedish Riksbank meets Wednesday and is expected to keep rates at -0.25%
  • China reported weak PMI readings for June; Poland is the only EM central bank to meet and is expected to keep rates steady

The G20 delivered as much good news for risk sentiment as one could want. Trump delayed additional tariffs on Chinese goods while talks resume. Existing tariffs will remain in place, but the US made some concessions on Huawei by allowing the blacklisted company to buy some US products. In return, China will reportedly buy “tremendous” amounts of US agricultural goods.

Trump also took a step to defuse tensions on the Korean peninsula. He made a surprise visit to the Demilitarized Zone (DMZ) that separates the two Koreas and became the first US President while in office to set foot in North Korea. Teams from each side will resume talks over the next few weeks. Sanctions will remain in place, but Trump hinted of potential lifting if negotiations go well.

All in all, the G20 headlines haven’t really resolved any of the difficult matters at hand. It’s more of a can-kicking exercise. However, the compromises have allowed time for difficult talks to progress. This may be enough to boost risk sentiment near-term, but the longer-term outlook remains cloudy. Within this uncertainty, we are retaining our bullish dollar outlook.

There will be several major US data releases this week. June ISM manufacturing PMI will be reported Monday July 1. It is expected at 51.0 vs. 52.1 in May, but there are clear downside risks given weak regional Fed surveys and Chicago PMI. ADP private sector jobs will be reported Wednesday July 3 ahead of the June jobs report Friday July 5. Each of these data points have taken on more significance given the Fed’s shift to more data-dependence, in our view.

There will be a lot of minor data too. May construction spending (flat m/m expected) will be reported Monday. June Challenger job cuts, May trade (-$53.5 bln expected), weekly jobless claims (221k expected), May factory orders (-0.5% m/m expected), and ISM non-manufacturing PMI (56.0 expected) will all be reported Wednesday.

So far, we have two pieces of the NFP puzzle for June. Employment component for Chicago PMI and weekly jobless claims for the survey week both point to a solid number Friday. ISM on Monday and ADP on Wednesday will round out the picture. Consensus is currently 160k vs. 75k in May. Average hourly earnings are expected to tick up to 3.2% y/y, while unemployment is seen steady at 3.6%.

Atlanta Fed GDPNow is tracking Q2 growth at 1.5% SAAR, down from 1.9% previously. Elsewhere, NY Fed Nowcast has Q2 growth at 1.3% SAAR, down from 1.4% last week. It also it cut its Q3 reading to 1.2% SAAR from 1.3% 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.

Fed speaking engagements are surprisingly few this week. Clarida speaks Monday, followed by Williams and Mester Tuesday. Expectations for three cuts this year followed by up to two cuts next year is simply too aggressive to us. And apparently to the Fed as well, as comments last week represented a pushback of sorts.

Eurozone final June manufacturing PMI will be reported Monday. Final services and composite PMIs will be reported Wednesday. Elsewhere, Germany reports June unemployment Monday and May retail sales Tuesday. German May factory orders will be reported Friday. Given continued softness in the data, consensus seems to be building for the ECB to give a dovish sign July 25 that sets up a rate cut September 12.

Bank of Japan released its Q2 Tankan report. Large manufacturers came in at 7 vs. 9 expected while small manufacturing came in at 1 vs. 2 expected. Capex is expected to rise 7.4% y/y vs. 8.1% expected. Overall, a sense of gloom hangs over Japan due to regional tensions and ahead of the October consumption tax hike. These were the weakest Tankan readings in nearly three years, but the survey was conducted before this weekend’s G20 summit. We expect the BOJ to add stimulus in H2.

Reserve Bank of Australia meets Tuesday and is expected to cut rates 25 bp to 1.0%. WIRP suggests 77% odds of a cut then. Indeed, many observers are now looking for three cuts total this year. This may be too aggressive, but much will depend on how the US-China tensions play out.

Swedish Riksbank meets Wednesday and is expected to keep rates at -0.25%. At its last meeting April 25, the Riksbank delivered a dovish hold by pushing the next hike out to end-2019 or early 2020 instead of sometime in H2 previously. The Riksbank added that “rate rises thereafter are expected to occur at a somewhat slower pace.”   May headline CPI unexpectedly accelerated to 2.2% y/y vs. 2.0% expected, while underlying CPIF rose 2.1% y/y vs. 1.9% expected. We do not think this is enough to shift the bank’s forward guidance.

China reported weak PMI readings for June. Official PMI was weaker than expected at 49.4. Caixin also reported weaker than expected PMI falling to 49.4 vs. 50.1 expected. Indeed, most of the regional PMI readings worsened. Of not, Taiwan fell to 45.5, Malaysia fell to 47.8, Korea fell to 47.5, and Indonesia fell to 50.6. Philippines bucked the trend and rose a tick to 51.3. Otherwise, the countries in China’s supply chain continue to feel the heat from the US-China trade war.

Poland is the only EM central bank to meet and is expected to keep rates steady. There will be numerous CPI reports that imply little need for tightening, with growing need for easing. Korea, Indonesia, Philippines, Thailand and Turkey are mostly expected to show decelerating inflation.