Drivers for the Week Ahead

  • The dollar remains under pressure; widespread social unrest will have significant social, political, and economic costs here in the US
  • The US has a very heavy data week containing several major reports; May US jobs data Friday will be the main event
  • BOC meets Wednesday and is expected to keep policy steady; Canada also reports May Jobs Friday
  • ECB meets Thursday and is expected to ease; next round of Brexit negotiations will be held this week by video; final May UK and eurozone PMI readings will be reported
  • Japan has a light data week; RBA meets Tuesday and is expected to keep policy steady

The dollar came under widespread weakness last week despite what we saw as elevated risks regarding US-China relations.  Yet Trump’s threats against China turned out to be much ado about nothing and so risk assets ended the week on a strong note.  This week, markets will be looking for some sort of response from China but quite honestly, Trump did so little that we may not see anything beyond some snarky Tweets from the Global Times.  For now, the dollar is likely to remain under modest pressure ahead of the ECB meeting Thursday.

DXY traded Friday at the lowest level since March 16 just below 98 before recovering slightly.  Just below that is the key 97.837 level, as a break below that would set up a test of the March 9 low near 94.65.  The euro traded Friday at its highest level since March 30 and is likely to test that day’s high near $1.1165.  A break above that level would set up a test of the March 9 high near $1.15.  Sterling has lagged and so EUR/GBP has broken above the .90 area to trade Friday at the highest level since March 27.  Lastly, USD/JPY remains stuck just below the 108 level.

 

AMERICAS

Widespread social unrest will have significant social, political, and economic costs here in the US.  Any loss of life is of course incalculable.  So too is the impact on the already strained social fabric.  The protests and racial divisions of today call to mind the race riots of 1968, which then led to a period where nation became even more divided over the Vietnam War.  During the 1970s, there were two oil shocks that battered the economy.  We are recounting these events only to say that this nation is resilient.  We have been through so much over the past fifty years.  Pessimists can say that nothing has changed; optimists can say that many things have changed.  In this regard, we are optimists.

It is too soon to say what the political costs will be.  Does the current administration take a hardline approach to the protests and perhaps benefit from being perceived as a “law and order” candidate and ride to victory as Richard Nixon did in 1968?  Or does sustained racial tensions bring out minority voters eager for a change in the national dialogue?  These developments come at a time when the pandemic has already fed into an “us vs. them” debate for many US states.

The economic costs go beyond just the destruction and damage.  The economy was already reeling from the pandemic and the resulting restrictions that led to a deep economic downturn.  Just as some parts of the country have begun reopening, these widespread protests, if sustained, could help derail the recovery.  As we saw in Hong Kong last year, ongoing social unrest can have a chilling impact on economic activity.  Who will feel comfortable going out risking potential infection or potential injury from the protests?

With all these questions still unanswered, the US has a very heavy data week containing several major reports.  ISM reports its May manufacturing PMI Monday, which is expected to improve to 43.7 from 41.5 in April.  ISM non- manufacturing PMI will be reported Wednesday, which is expected to improve to 44.5 from 41.8 in April.  There are some downside risks to ISM after Chicago PMI missed to the downside last week.  May auto sales will be reported Tuesday and are seen improving to an annualized rate of 11.0 mln from 8.58 mln in April.

May US jobs data Friday will be the main event.  Consensus for the May jobs report is currently -8.0 mln vs. -20.537 mln in April, with the unemployment rate seen rising to 19.6% from 14.7% in April.   Ahead of that, there will be some other labor market readings.  ADP will provide the final clue with its private sector jobs data.  Here, consensus stands at -9.5 mln.

Weekly jobless claims Thursday are expected to rise 1.8 mln vs. 2.123 mln last week.  If so, this would mean that around 43 mln have become jobless over the last nine weeks, which is nearly 30% of the labor force.  The good news is that continuing claims fell last week for the first time since the pandemic began, and by a whopping 3.86 mln.  This suggests some workers have been able to go back to work in May, and consensus sees another 2 mln drop here.  If sustained, this drop in continuing claims would be a very good sign.

Other minor US data will be reported throughout the week.  April construction spending (-6.0% m/m expected) and final May Markit manufacturing PMI (40.0 expected) will come out Monday.  Final May Markit services and composite PMI readings will come out Wednesday, along with April factory orders (-14.2% m/m expected).  May Challenger job cuts and April trade (-$49.1 bln expected) will be reported Thursday.  April consumer credit will be reported Friday.  With the media embargo in effect for the June 10 FOMC meeting, there are no Fed speakers this week.

Bank of Canada meets Wednesday and is expected to keep policy steady.  This will be the first meeting under incoming Governor Macklem.  His predecessor Poloz has done much of the heavy lifting already, and so Macklem can take a wait and see approach for now.  However, Macklem has already made several dovish comments that suggest he would not hesitate to add more stimulus if needed.  Canada also has a fairly busy data week.  Markit May manufacturing PMI will be reported Monday, followed by April trade Thursday.  May jobs data will be reported Friday.  “Only” 500k jobs are seen lost compare to nearly -2 mln in April.  Still, this is equivalent to a -5 mln reading in the US.

 

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank meets Thursday and is expected to ease.  ECB President Lagarde and Vice President De Guindos said GDP is set to shrink between 8-12%, calling its “mild” scenario out of date.  Lagarde added that “We’ll have a better sense in a few days as we publish our numbers in early June, but it’s likely we will be in between the medium and severe scenarios.”  Bloomberg consensus sees a EUR500 mln increase in the ECB’s asset purchases but no change in rates.  Some see a tweak to the tiering system that would make more funds exempt from negative rates.  Looking further out, WIRP suggests nearly 60% odds that the ECB will go more negative by early 2021.

Eurozone reports final May PMI readings this week.  Manufacturing PMIs will be reported Monday, with Italy and Spain seen improving to 36.8 and 37.8 from 31.1 and 30.8 in April, respectively.  Services and composite PMIs will be reported Thursday, with Italy and Spain again seen improving sharply from April.  Eurozone also reports April retail sales that day and are expected to fall -15.0% m/m vs. -11.2% in March.  Germany reports April factory orders Friday and are expected to fall -19.7% m/m vs. -15.6% in March.

The next round of Brexit negotiations will be held this week by video.  The last round ended with a lot of blame and finger-pointing by both sides, and so we do not hold out much hope of a breakthrough in this next round.  Top UK negotiator Frost has admitted that a deal on fisheries was unlikely by the June 30 deadline, while EU Trade Commissioner Phil Hogan said “We’re not making much progress at the moment.  Perhaps the United Kingdom has come to the conclusion that there’s not going to be a deal.”  Lastly, top EU negotiator Barnier warned that “The British haven’t understood, or don’t want to understand, that Brexit will have consequences for them.”  Hard Brexit risks will impact sterling the most but the euro is likely to suffer collateral damage.

UK also reports final May PMI readings this week.  All are expected to improve a couple of ticks from the preliminary readings.  Manufacturing PMI will be reported Monday.  Services and composite PMIs will be reported Wednesday, followed by construction PMI Thursday.  The UK lockdown will start to ease this week.  While May could end up being the worst month for the UK economy, much will depend on how the lockdown lifting unfolds in June.

 

ASIA

Japan has a light data week.  Final May manufacturing PMI will be reported Monday, followed by final May services and composite PMI readings Wednesday.  April household spending will be reported Friday and is expected to contract -12.8% y/y vs. -6.0% in March.  The BOJ just announced details of its lending scheme, while the government announced another fiscal stimulus package.  We see Japan policymakers on hold for the time being until the impact of these latest measures can be seen.

Reserve Bank of Australia meets Tuesday and is expected to keep policy steady.  Ahead of that, final May manufacturing PMI will be reported Monday.  Final May services and composite PMI readings will be reported Wednesday, along with Q1 GDP data.  Growth is expected to slow to 1.4% y/y vs. 2.2% in Q4.  April trade and retail sales will be reported Thursday.  Sales are expected to contract -17.9% m/m.  Despite ongoing weakness in the data, policymakers are likely in wait and see mode to see how the economic outlook develops as restrictions are lifted.