Drivers for the Week Ahead

  • US has an important data week; the US economy remains in solid shape
  • US-China relations remain strained; China reports July new loan and money supply data this week
  • Eurozone reports some key data this week; UK has a heavy data week
  • Norges Bank meets Thursday and is expected to keep rates steady at 1.25%
  • The only EM central bank to meet this week is Banco de Mexico

US has an important data week.  July budget statement will be reported Monday, where a deficit of -$120 bln is expected.  If so, the 12-month total would rise to -$962.1 bln and nearing the cycle high of -$985 bln back in May.  The -$1 trln mark will likely be surpassed soon, something we haven’t seen since February 2013.

July CPI will be reported Tuesday, with headline inflation expected to pick up a tick to 1.7% y/y and core to remain steady at 2.1% y/y.  Regional Fed manufacturing surveys for August kick off with Philly Fed and Empire readings Thursday.  They are expected at 10.0 and 1.9, respectively, and would represent slowing from July.  Friday brings July housing starts and building permits, as well as August preliminary Michigan consumer sentiment.

July retail sales Thursday will be the most important US data release this week.  Headline is expected to rise 0.3% m/m and ex-autos 0.4% m/m.  The so-called control group used for GDP calculations is expected to rise 0.4% m/m.  IP will also be reported Thursday (0.1% m/m expected), along with June business inventories (0.1% m/m expected) and TIC data.

Overall, the US economy remains in solid shape.  The Atlanta Fed’s GDPNow model is tracking 1.9% SAAR growth in Q3.  This is still close to trend (~2%) and little changed from the preliminary 2.1% SAAR in Q2.  Elsewhere, the NY Fed’s Nowcast model is tracking 1.6% SAAR growth in Q3.

Even though the FOMC media embargo has ended, there are no Fed speaking engagements on the schedule.  US rates markets remain too pessimistic, in our view.  Nearly five cuts in all are priced in by end-2020, and WIRP suggests 100% odds of a cut September 18.  The 3-month to 10-year US curve inversion has eased but remains too low at -24 bp.

We would like to underscore our broad macro calls.  That is, we believe the US rates markets continue to overstate the case for Fed easing, based on our call for no imminent US recession.  This underscores our bullish dollar call.  Given ongoing global trade tensions, we remain bearish on EM.

US-China relations remain strained.  Despite his claims that things are going “very well”, President Trump admitted that the September talks might be cancelled.  This is very negative for EM.  In a sign that China is digging in for the long haul, reports suggest China policymakers are holding back from adding aggressive stimulus measures now, keeping them in reserve for later.

China reports July new loan and money supply data this week, but no date has been set.  July IP and retail sales will be reported Wednesday and are expected to rise 6.0% and 8.6% y/y, respectively.  While we expect further stimulus measures, we think a PBOC rate cut is unlikely at this juncture.  Such a move would likely add to yuan weakness and we do not think policymakers want to put more pressure on the currency.

Eurozone reports some key data this week.  Preliminary Q2 GDP will be reported Wednesday, with growth expected to remain steady at 1.1% y/y.  Ahead of that, Germany reports preliminary Q2 GDP Tuesday, with the economy expected to contract -0.3% y/y vs. +0.6% in Q1.  Eurozone June IP will also be reported Wednesday, which is expected to contract -1.4% m/m.  WIRP suggests 100% odds of a cut September 12, with 44% odds of a 20 bp cut now seen.

The political timeline for Italy may become a little clearer this week.  Polls suggest Salvini’s League would win 40% in upcoming elections, allowing it to lead a center-right coalition.  Salvini admitted that cutting taxes by flouting EU budget rules will be the main goal of any government led by the League.  Italy must present its 2020 budget plans to Brussels in mid-October, and so we expect a replay of last fall’s budget drama.

The UK has a heavy data week.  It reports labor market data Tuesday.  July CPI will be reported Wednesday, with headline and CPIH both expected to fall a tick to 1.9% and 1.8% y/y, respectively.  July retail sales will be reported Thursday, with both headline and ex-auto fuel expected to contract -0.2% m/m.  Last week saw Q2 GDP contracting q/q, leading easing bets to increase.

Weak UK data and a more dovish perception of the BOE have conspired to lead sterling lower.  Cable is trading at new multi-year lows and the next targets are the January 2017 low near $1.1985 and then the October 2016 low near $1.1840.  EUR/GBP also made a new high for this move and is on track to test the October 2016 high near .9415.

Norges Bank meets Thursday and is expected to keep rates steady at 1.25%.  At its last meeting in June, the bank hiked rates 25 bp to 1.25%, as expected.  It also flagged another hike before year-end, but Governor Olsen said he can’t be more precise on the timing.  He added that he sees one last hike around summer 2020, which is consistent with the bank’s forward guidance that sees the policy rate topping out at 1.75%.

Japan reports July machine tool orders Tuesday, followed by June core machine orders Wednesday.  The stronger than expected Q2 GDP print last week has not deterred the markets from looking for a September cut.  WIRP suggests 33% odds of a cut September 19, up from 22% at the start of this month.  Yet USD/JPY continued to make new lows for this cycle last week, and the January flash crash low near 104.85 is nearing.

Australia reports July employment data Thursday.  Employment is seen rising 14k while the unemployment rate is seen steady at 5.2%.  The RBA has signaled that the labor market will be an important determinant of monetary policy.  WIRP suggests 50% odds of a cut at the September 3 meeting, rising to 75% for October 1.

The only EM central bank to meet this week is Banco de Mexico.  It is expected to keep rates steady at 8.25%.  However, the market is split.  Of the 20 analysts polled by Bloomberg, 8 see a 25 bp cut, 11 see no cut, and 1 sees a 50 bp cut.  The economy remains weak while inflation is back within the 2-4% target range.  The peso may be the deciding factor, with excessive weakness likely to delay a cut until the next meeting September 26.