Drivers for the Week Ahead

  • The June jobs data support our view that the US economy remains in solid shape
  • FOMC minutes will be released Wednesday; Fed Chair Powell gives his semiannual Humphrey-Hawkins testimony
  • US data highlights are June CPI Thursday and PPI Friday
  • UK reports May GDP, IP, construction output, and trade Wednesday
  • Bank of Canada meets Wednesday and is expected to keep rates steady at 1.75%
  • EM FX remains vulnerable; the shock firing of central bank Governor Murat Cetinkaya over the weekend may weigh on wider EM

The June jobs data support our view that the US economy remains in solid shape. The headline 224k gain brings the 3-month average up to 171k, while the 6-month average was steady at 172k and the 12-month average fell slightly to 192k. This is just about where one would expect the labor market to be in such a late cycle phase. Average hourly earnings disappointed, remaining steady at 3.1% y/y.

Taken in conjunction with May retail sales data, the data paint a picture of the US economy where hiring continues apace, and consumption remains firm. Yes, recent manufacturing data are worrisome, but this sector accounts for a small share of the economy compared to services and consumption.

What does this mean for Fed policy? Unfortunately, the Fed has painted itself into a metaphorical corner and seems to have committed to cut rates at the July 31 FOMC meeting. WIRP shows a 100% certainty of a 25 bp cut, though the odds of a 50 bp cut then have moved close to zero. Looking further out, the Fed Funds futures strip is starting to pare back its easing expectations. The implied yield on the January 2020 contract is around 1.78%, the highest since June 11 up from the 1.58% trough on June 24.

FOMC minutes will be released Wednesday. The Fed delivered a dovish pivot then with its statement and Dot Plots. However, we think markets took the message too dovishly and so Fed officials have been pushing back against this perception. We remain bullish on the dollar, as we think market repricing of Fed policy is still in early days.

Fed Chair Powell will also give his semiannual Humphrey-Hawkins testimony before the House Wednesday and the Senate Thursday. We believe he will continue to this pushback. Besides Powell, there is a full slate of other Fed speakers this week. Bullard and Bostic speak Tuesday, while Bullard speaks again Wednesday. Williams, Bostic, Barkin, and Kashkari all speak Thursday, followed by Evans Friday.

Atlanta Fed GDPNow is tracking Q2 growth at 1.3% SAAR, down from 1.5% previously. Conversely, NY Fed Nowcast has Q2 growth at 1.5% SAAR, up from 1.3% last week. It also raised its Q3 reading to 1.7% SAAR from 1.2% 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.

US data highlights are June CPI Thursday and PPI Friday. Headline CPI is expected to rise 1.6% y/y vs. 1.8% in May, while core CPI is expected to remain steady at 2.0% y/y. Headline PPI is expected to rise 1.6% y/y vs. 1.8% in May, while core PPI is expected to rise 2.1% y/y vs. 2.3% in May. And therein lies the rub. Despite full employment and robust growth, price pressures remain low. While we do not believe that this in and of itself is a reason to cut rates, it’s clear that a growing number of Fed officials and economists do.

There will be other minor data of note this week. May consumer credit will be reported Monday, where a gain of $17 bln is expected. May JOLTS job openings will be reported Tuesday, where a rise to 7465 is expected. Wholesale trade sales and inventories will be reported Wednesday, which are expected to rise 0.3% m/m and 0.4% m/m, respectively. Weekly jobless claims and June budget data will be reported Thursday.

UK reports May GDP, IP, construction output, and trade on Wednesday. GDP growth is expected to rebound to 0.3% m/m from -0.4% in April, while IP is expected to rebound to 1.5% m/m from 02.7% in April. Construction spending is expected to rebound to 0.2% mm from -0.4% in April. Yet the weaker than expected June PMI readings warn that further downside risks remain as the October 31 Brexit deadline looms.

Next Bank of England meeting is August 1. Given Carney’s most recent dovish pivot, markets are starting to price in rising odds of easing. WIRP suggests only a 6% chance of a cut next month, but the odds rise sharply as we move into Q4 and Q1 2020. Sterling remains heavy after trading at a new cycle low near $1.2480 Friday. The January low near $1.2440 lies near. After that is the April 2017 low near $1.2350 and then the March 2017 low near $1.2110.

Japan reports May current account and core machine orders data Monday. May cash earnings, machine tool orders will be reported Tuesday, followed by June PPI Wednesday. The next Bank of Japan meeting is July 30. While the economy is showing signs of softness, we think the bank will stay on hold until later in the year. USD/JPY has bounced back nicely after bottoming out near 106.80 on June 25. Break above 108.75 is needed to set up a test of the May 30 high near 109.95. After that is the May 21 high near 110.

Bank of Canada meets Wednesday and is expected to keep rates steady at 1.75%. Bloomberg’s WIRP shows virtually no chance of a move either way. However, the odds of a cut rise as we move into Q4. Ahead of the BOC decision, Canada reports June housing starts and May building permits.

China reports June money and loan data sometime this week. It reports June CPI and PPI Wednesday, which are expected to rise 2.7% y/y and 0.3% y/y, respectively. June trade will be reported Friday, with exports expected to contract -0.6% y/y and imports by -4.6% y/y. Further stimulus measures are likely if the slowdown carries over into Q3, as we expect.

EM FX remains vulnerable to ongoing global trade tensions. It may also suffer from the recalibration of market expectations regarding Fed policy. We remain negative on EM near-term until the outlook for both of these major drivers becomes clearer. The central banks of Israel, Malaysia, and Peru meet this week, and none are expected to change policy.

Turkish data are secondary after the shock firing of central bank Governor Murat Cetinkaya over the weekend. His crime? Not cutting rates. According to President Erdogan’s worldview, high interest rates cause high inflation. Deputy Governor Murat Uysal was named as the replacement, though we all know who really controls monetary policy now. The weak lira may weigh on overall EM sentiment.