Drivers for the Week Ahead

  • The dollar is coming off a volatile week
  • The most important US data release this week is the June Chicago Fed National Activity Index Monday
  • Preliminary July eurozone PMI readings will be reported Wednesday; ECB meets Thursday
  • Japan has a busy data week; Prime Minister Abe’s ruling coalition won weekend elections for the Upper House
  • In EM, the central banks of Hungary (Tuesday), Turkey, (Thursday), Russia, and Colombia (both Friday) meet

The dollar is coming off a volatile week. Markets continue to struggle with the Fed policy outlook, but we remain steadfast in our call for a 25 bp cut on July 31 followed by a wait-and-see period. Simply put, the Fed pivoted dovish just as the US data was turning for the better. While we do not think a rate cut is warranted this month, the Fed has painted itself into a corner. That said, it’s clearly pushing back against the market’s uber-dovish take on monetary policy.

The implied yield on the January 2020 Fed Funds futures contract sank as low as 1.61% last week before rising to 1.70% currently. That still prices in nearly three cuts this year but this seems way too dovish in light of firm retail sales and jobs data. Manufacturing sector remains a concern, but even that seems to be recovering in July. The 3-month to 10-year US curve continues to flirt with a positive slope as the data improves.

We think that the most important US data release this week is the June Chicago Fed National Activity Index Monday. It is expected to come in at 0.10 vs. -0.05 in May. If so, the 3-month average for CFNAI would improve to -0.14 from -0.17 in May. This would be the best reading since January and further 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 regional Fed manufacturing surveys for July will continue to trickle out this week. So far, the Empire survey rebounded to 4.3 from -8.6 in June and the Philly Fed rebounded to 21.8 from 0.3 in June. Both were much stronger than expected. Richmond Fed reports Tuesday (5 expected), followed by Kansas City Thursday (3 expected). Markit reports its preliminary July US PMI readings Thursday.

The first official estimate for Q2 GDP will be reported Friday and Bloomberg consensus is currently at 1.8% SAAR. Atlanta Fed’s GDPNow model is tracking Q2 growth at 1.6% SAAR, while NY Fed’s Nowcast model is tracking Q2 growth at 1.4% SAAR and Q3 growth at 1.9% SAAR. While a slowdown from Q1 (3.1% SAAR) was to be expected, this would be close to trend growth (~2%). Markets will remain particularly sensitive for signs of a larger than expected drop-off but for now, a US recession seems particularly far off.

There are other minor data out. US reports June existing home sales Tuesday (-0.2% m/m expected), followed by new home sales Wednesday (5.4% m/m expected). June wholesale and retail inventories as well as durable goods orders and advance goods trade will be reported Thursday.

Preliminary July eurozone PMI readings will be reported Wednesday. Headline composite PMI is seen steady at 52.2, with manufacturing expected to remain steady at 47.6 and services expected to fall to 53.3. Looking at the country breakdown, Germany composite is seen falling to 52.4, with an expected improvement in manufacturing offset by an expected drop in services. In France, the composite is seen falling to 52.5 as both manufacturing and services are expected to fall.

The ECB meets Thursday amidst weaker data. Further stimulus seems to be a done deal, but the open question is one of timing. WIRP suggests nearly 50% odds of a cut this week. We favor a move at the September 12 meeting, when new staff forecasts will be released. Either way, the euro is likely to remain heavy. Support near $1.12 is holding for now but we expect a test of the May lows near $1.1105 in the coming days.

CBI releases its UK surveys for July. Trends and business optimism will be reported Tuesday, while sales will be reported Thursday. Most UK data have been coming in soft in the lead-up to the October 31 Brexit. Next BOE meeting is August 1 and no change is expected then. However, markets are pricing in greater odds of a rate cut as we move into Q4 and then Q1.

Japan has a busy data week. It reports June supermarket and department store sales Tuesday. Preliminary July PMI readings will be reported Wednesday. Tokyo July CPI will be reported Friday, with headline inflation and ex-fresh food both seen slowing a tick to 1.0% y/y and 0.8% y/y, respectively. BOJ next meets July 30 and WIRP suggests 14% chance of a cut then. Most favor a move after the October consumption tax hike.

Prime Minister Abe’s ruling coalition won weekend elections for the Upper House. However, I fell short of winning the supermajority needed to revise the constitution. Early tallies show his LDP and its partner Komeito likely won at least 69 seats up for election. Given the 70 seats already held, this give the coalition simple majority in the 245-seat Upper House.

In EM, the central banks of Hungary (Tuesday), Turkey, (Thursday), Russia, and Colombia (both Friday) meet. Hungary and Colombia are expected to stand pat, while Turkey and Russia are expected to cut rates. Turkey is problematic, as the meeting is the first since the previous Governor was sacked. Expectations are all over the place, with most analysts looking for cuts ranging from 50-350 bp. However, there is one outlier looking for an 800 bp cut to 16%. A greater than expected cut would be a true test of recent market sentiment regarding Turkey.