Drivers for the Week Ahead

  • The dollar came under pressure after Powell’s testimony last week
  • The US data highlight this week will be June retail sales Tuesday
  • The UK has a heavy data week
  • Canada reports June CPI Wednesday; RBA minutes will be released Tuesday; New Zealand reports Q2 CPI Tuesday
  • In EM, the central banks of Korea, Chile, Indonesia, and South Africa meet

The dollar came under pressure after Powell’s testimony last week. While he seems to have cemented a 25 bp cut on July 31, we continue to believe that markets are overestimating Fed dovishness for the rest of the year. The implied yield on the January 2020 Fed Funds futures contract is currently around 1.71%, which nearly prices in three cuts in total for H2.

The US data highlight this week will be June retail sales Tuesday. Headline and ex-autos are expected to rise 0.1% m/m, while the control group is seen rising 0.3% m/m. All represent some slowing from the May gains. Note that auto sales were stronger than expected last month. June IP will also be reported Tuesday and is expected to rise 0.1% m/m. May business inventories and TIC data will also be reported Tuesday.

Atlanta Fed GDPNow is tracking Q2 growth at 1.4% SAAR, up from 1.3% previously. Conversely, NY Fed Nowcast has Q2 growth at 1.5% SAAR, steady from last week. Its Q3 reading rose to 1.75% SAAR from 1.74% 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 other highlight from the US will be the Fed’s Beige Book report Wednesday. This has been prepared for the July 31 FOMC meeting and will be scoured for clues on Fed policy. June housing starts and building permits will also be reported Wednesday and are expected at -0.7% m/m and 0.1% m/m, respectively.

Ahead of the media embargo for the FOMC meeting, there is a full slate of Fed speakers this week. Williams speaks Monday, followed Bostic and Evans Tuesday. Bostic and Williams speak Thursday, followed by Bullard and Rosengren Friday. We expect them all to tow the party line set forth by Powell last week.

The first of the regional Fed manufacturing surveys for July will be reported Monday. The Empire survey is seen rebounding to 2.0 from -8.6 in June. Philly Fed reports Thursday and is expected to rebound to 5.0 from 0.3 in June. Weekly jobless claims will also be reported Thursday for the July survey week containing the 12th of the month. June leading index will also be reported Thursday and is expected to rise 0.1% m/m. Lastly, preliminary July Michigan consumer sentiment will be reported Friday.

Eurozone final June CPI readings will be reported Wednesday. Headline and core are expected to be unchanged from the preliminary readings of 1.2% y/y and 1.1% y/y, respectively. The account for the June ECB meeting shows broad agreement amongst policymakers that it needs to prepare to ease policy again. Most believe that the next ECB meeting July 25 will set the table for easing at the September 12 meeting, when new staff forecasts will be released. The October 24 meeting will be the last under outgoing President Draghi.

The UK has a heavy data week. It reports labor market data Tuesday. June CPI will be reported Wednesday, with headline and CPIH expected to remain steady at 2.0% y/y and 1.9% y/y, respectively. June retail sales will be reported Thursday, with headline expected to contract -0.3% mm vs. -0.5% in May. We expect the data to remain soft ahead of the October 31 Brexit deadline.

Next BOE meeting is August 1 and markets are expecting a dovish pivot after recent Carney comments. WIRP shows 4% odds of cut then. After that, the next meetings in 2019 are September 19, November 7, and December 19, with odds rising as the year progresses.

Japan reports June trade Thursday, where an adjusted -JPY141 bln deficit is expected. Exports are expected to contract -5.4% y/y and imports by -0.2% y/y. June national CPI will be reported Friday, with headline expected to remain steady at 0.7% y/y. Ex-fresh food is seen slowing a couple of ticks to 0.6% y/y. Next BOJ meeting is July 30. After that, the next meetings in 2019 are September 19, October 31, and December 19.

Canada reports June CPI Wednesday. Headline inflation is seen easing to 2.0% y/y from 2.4% in May, while common core is expected to remain steady at 1.8% y/y. May retail sales will be reported Friday, with headline expected to rise 0.3% m/m and ex-auto sales by 0.4% m/m. Next BOC meeting is September 4, with WIRP showing 8% odds of a cut then. After that, the next meetings in 2019 are October 30, and December 4, with odds steadily rising as the year progresses.

RBA minutes will be released Tuesday. Australia then reports June jobs data Thursday, with employment expected to rise 9k vs. 42.3k in May. Next RBA meeting is August 6, with WIPR showing 16% odds of a cut then. After that, the next meetings in 2019 are September 3, October 1, November 5, and December 3, with odds steadily rising as the year progresses.

New Zealand reports Q2 CPI Tuesday, which is expected to rise 1.7% y/y vs. 1.5% in Q1. Next RBNZ meeting is August 7, with WIRP showing 86% odds of a cut then. After that, the next meetings in 2019 are September 25 and November 13.

EM FX was mixed last week despite the dovish signals from the Fed’s Powell. Weak data last week from emerging Asia support the notion that the ongoing US-China trade war will continue to weigh on global growth and trade, which is negative for EM. We remain cautious on EM as more weak data is expected this week and especially given our less dovish take on the Fed.

In EM, the central banks of Korea, Chile, Indonesia, and South Africa meet. Chile is expected to keep rates steady, while markets are evenly split over whether Korea keeps rates steady or cuts 25 bp. The latter two are expected to start easing cycles with 25 bp rate cuts. This is another reason why we remain cautious on EM FX. As dovish as the Fed is expected to get, EM central banks will take every opportunity to cut rates as well.