Drivers for the Week Ahead

  • Risk assets came under pressure last week as the virus news stream worsened; the dollar continues to benefit from risk-off sentiment
  • This is likely to be one of the most important US data weeks we’ve had in a while; it comes at a time when US economy is taking a step back just as Q3 is about to get under way
  • Jobs data is the highlight Thursday; claims data suggest market consensus of +3 mln s way too optimistic; FOMC minutes will be released Wednesday
  • France and Germany will meet Monday to discuss strategy on getting a deal struck on the EU pandemic rescue package
  • UK and EU begin their “intensified timetable” for Brexit negotiations; Riksbank meets Wednesday and is expected to keep rates on hold at zero; Japan has a heavy data week

Risk assets came under pressure last week as the virus news stream worsened. It’s clear that large parts of the US will be forced to delay reopening until their virus numbers improve. Markets had gotten too bullish on the US recovery story and so this reality check soured sentiment. This is a very important week for US data, and we think risk sentiment will remain under pressure ahead of what we think will be a likely downside surprise in the US jobs number Thursday.

The dollar continues to benefit from risk-off sentiment. DXY traded Friday at the highest level since June 22 and is on track to test that day’s high near 97.739. DXY has retraced nearly half of its May-June drop and a break of the 98.348 area is needed to set up a test of the May 25 high near 99.975. The euro remains heavy but has found some near-term support near $1.12. Sterling is struggling to stay above $1.23, pushing the EUR/GBP cross to new cycle highs. Risk-off sentiment has kept USD/JPY hovering around 107.

AMERICAS

This is likely to be one of the most important US data weeks we’ve had in a while. While we have gotten some glimpses of June data already, this week brings the first major reads on the US economy. The highlight will of course be the jobs data, but we will also get more readings on the manufacturing sector. Auto sales data Wednesday are expected to come in at an annualized 13.0 mln pace vs. 12.21 mln in May, which will give us a window into retail sales.

The data come at a time when US economy is taking a step back just as Q3 is about to get under way. The states that are experiencing higher virus numbers are a significant part of the US economy. California accounts for nearly 15% of GDP, followed by Texas at nearly 9%. Florida accounts for 5% of GDP so those three states together account for almost 30% of total US GDP. With many reopenings on hold now, this will be a headwind that carries over into Q3. If these states can quickly bend the curve back down, perhaps the recovery can proceed but as of now, we are getting more pessimistic about the US economy.

Jobs data will be reported Thursday due to the long holiday weekend in the US. Consensus sees a gain of 3.0 mln jobs in June, up from 2.509 mln in May. Unemployment is expected to fall to 12.4% from 13.3% in May, but the data have been rife with errors the past two months. Ahead of the data, ADP will release its reading of private sector jobs Wednesday, with consensus at 2.95 mln currently. Note that last week’s continuing claims for the June survey week fell -767k. Compare this to May, when continuing clams for the survey week fell -4.1 mln and May NFPs came in at +2.5 bln. This latest reading of -767k suggests market consensus of +3 mln is way too optimistic.

Weekly jobless claims will be reported Thursday. Initial claims are expected at 1.336 mln vs. 1.48 mln last week, while continuing claims are expected at 18.904 mln vs. 19.522 mln last week. The fact that initial claims are still hovering close to 1.5 mln suggests the labor market is still under some stress. Indeed, taken at face value, the movement in both claims series would suggest that workers are still becoming unemployed and are eating into the numbers of those becoming employed again.

Important June manufacturing data will come out throughout the week. Dallas Fed survey will be reported Monday and is expected at -22.0 vs. -49.2 in May. The regional Fed surveys so far have all come in better than expected for June, with the Philly Fed even posting a positive reading of 27.5. June Chicago PMI will be reported Tuesday and is expected to come in at 44.0 vs. 32.3 in May. This will be followed by ISM manufacturing PMI Wednesday, which is expected at 49.5 vs. 43.1 in May. The employment component will be closely watched for the final clue to Thursday’s jobs data. Final Markit manufacturing PMI will also be reported Wednesday.

Other minor data will be reported. May pending homes sales will be reported Monday (18.0% m/m expected), followed by April S&P CoreLogic house price index and June Conference Board consumer confidence (90.5 expected) Tuesday. June Challenger job cuts and May construction spending (0.9% m/m expected) will be reported Wednesday, followed by May trade (-$53.0 bln expected) and factory orders (7.9% m/m expected) Thursday.

FOMC minutes will be released Wednesday. Not much insight is expected, as Powell went ultra-dovish at the press conference (“we’re not even thinking about thinking about hiking rates”). Daly and Williams speak Monday, while Williams speaks again Tuesday along with Kashkari. Powell and Mnuchin speak before the House Financial Panel Tuesday. Evans hosts a community forum Wednesday.

EUROPE/MIDDLE EAST/AFRICA

Germany reports June CPI Monday. Headline inflation of 0.6% y/y is expected. The eurozone-wide measure will be reported Tuesday, where headline inflation of 0.2% y/y is expected. Germany then reports May retail sales and June unemployment Wednesday. Sales are expected to rise 3.5% m/m vs. a revised -6.5% (was -5.3%) in April, while unemployment is expected to rise 120k vs. 238k in May,

Eurozone final June PMIs will be reported this week. Manufacturing will be reported Wednesday. Italy and Spain are expected to improve significantly from May to 47.8 and 45.1, respectively, while France and Germany are seen steady from the flash readings at 52.1 and 44.6, respectively. This will be followed by final services and composite PMIs Friday. Italy and Spain composites are expected to improve significantly from May to 46.8 and 45.4, respectively, while France and Germany composites are seen steady from the flash readings at 51.3 and 45.8, respectively. We think it is becoming increasingly that the eurozone economy will outperform the US in H2, as policymakers there have succeeded in keeping the virus numbers down, at least for now.

France and Germany will meet Monday to discuss strategy on getting a deal struck on the EU pandemic rescue package. These two have spear-headed the most aggressive approach but have run into resistance from the so-called Frugal Four. Talks come ahead of a planned EU summit July 17-18. EC President von der Leyen stressed last week that time pressure is high as an agreement is needed before the summer holiday. She added that it is important for all EU countries to get behind this plan.

Elsewhere, the UK and EU begin their “intensified timetable” for Brexit negotiations. Five rounds of weekly talks will be held starting this week. To be quite honest, this acceleration should have happened long ago. Still, we remain skeptical that such a complicated trade deal can be wrapped up by year-end. As such, we believe markets are underestimating the odds of a hard Brexit. On the other hand, UK industry seems to see the writing on the wall as reports suggest many firms are making contingency plans for a no-deal outcome.

The Riksbank meets Wednesday and is expected to keep rates on hold at zero. We not expect a return to negative rates during this cycle and so the bank should extend its flat rate path. At the April meeting, its rate path was kept flat for only one year out due to the uncertain situation. If further easing is needed, we expect the Riksbank to expand its QE as needed. Both headline and CPIF inflation were 0% in May, well below the 2% target, but the economy is showing some signs of life and so we think the bank is likely to take a wait and see approach this week.

ASIA

Japan has a heavy data week. May department store sales will be reported Monday, which are expected to contract -18.2 %y/y vs. -22.1% in April. May IP and labor market will be reported Tuesday. IP is expected to contract -5.7% m/m, while the jobless rate is expected to rise to 2.8%. Q2 Tankan survey and final June manufacturing PMI will be released Wednesday. Large manufacturing index is expected at -30 vs. -8 in Q1, while large non-manufacturing index is expected at -20 vs. +8 in Q1. Large all industry capex is expected to rise 1.3% vs. 1.8% in Q1. Final services and composite PMI readings will be reported Friday. The economy started to turn the corner in June, but full recovery is unlikely until we move through Q3. For now, the Bank of Japan is in wait and see mode.