Drivers for the Week Ahead

  • The dollar has been stuck in narrow ranges as markets contend with conflicting drivers
  • Last week’s jobs reports has likely set expectations high for the rest of the June data
  • Data highlight this week is likely to be ISM non-manufacturing PMI Monday; Canada reports June jobs data Friday
  • Chancellor Sunak addresses UK Parliament Wednesday Press reports suggest that Bank of England Governor Bailey is laying the groundwork for negative interest rates
  • Brexit talks between the UK and the EU continue this week; talks on the EU recovery fund will continue
  • Japan has a heavy data week; RBA meets Tuesday and is expected to keep policy unchanged

The dollar has been stuck in narrow ranges as markets contend with conflicting drivers. On the one hand, better than expected economic data and continued stimulus has tended to boost market sentiment, but the virus news stream has gotten worse for many countries, including the US. DXY has largely traded between 96-98 since late May. Similarly, the euro has largely traded between $1.12-1.14 since early June while USD/JPY has traded between 106-108 since mid-June. We look for continued dollar weakness this week as risk-on sentiment should persist after last week’s jobs data.

AMERICAS

Last week’s jobs reports has likely set expectations high for the rest of the June data. Yet we continue to caution investors against getting too optimistic. Jobs data is collected in the week that contains the 12th of every month. Since mid-June, many states have reversed or paused their reopening and that has led some workers that were recently rehired to be let go again. We really need to watch the virus numbers but at this rate, Q3 is likely to start off slowly as July is spent trying to control the virus again. How the rest of Q3 develops will depend on whether those problem states can bend the curve down enough to permit reopening.

The data highlight this week is likely to be ISM non-manufacturing PMI Monday. It is expected to improve to 50.0 from 45.4 in May. Given that services account for nearly 70% of the US economy, this is arguably more important than the manufacturing (around 11% of GDP) reading. Markit’s final services and composite PMI readings will also be reported Monday. Consensus sees a slight improvement from the preliminary readings of 46.7 and 46.8, respectively.

Weekly jobless claims will be reported Thursday. Initial claims came in at 1.427 mln last week, while continuing claims came in at 19.290 mln last week. Despite the strong jobs report for June, the fact that initial claims are still hovering close to 1.5 mln every week suggests the labor market is still under some stress. Indeed, taken at face value, the recent movement in both these claims series would suggest that workers are still becoming unemployed and are eating into the numbers of those becoming employed again. In a sense, new workers pouring into the labor market are being offset by those leaking from it.

June PPI Friday is likely to be a non-event. Headline PPI is expected to fall -0.2% y/y vs. -0.8% in May, while core is expected to rise 0.5% y/y vs. 0.3% in May. It’s clear from the FOMC minutes and Fed official comments that inflation just isn’t a concern right now. Indeed, some on the FOMC discussed forward guidance that signaled the Fed would allow inflation to run above target for some time in order to ensure the recovery was sustainable.

There are other minor data reports. May JOLTS job openings will be reported Tuesday and are expected at 4800 vs. 5046 in April. If so, this would be the lowest since November 2014 and reflects ongoing weakness in the labor market. May consumer credit will be reported Wednesday and is expected to fall -$15.0 bln vs. -$68.77 bln in April. May wholesale trade sales and inventories will be reported Thursday.

FOMC minutes last week were about as dovish as one could expect. The key takeaways were that the Fed will rely on a combination of outcome-based forward guidance and QE to meet its objectives, and that there is still no rush for yield curve control. The main point that the Fed is trying to hammer home is that there can be no sustainable economic recovery until the health care crisis has been addressed. We concur, and that is why we remain very concerned with the rising US virus numbers. This week, there are a few Fed speakers. Bostic, Daly, and Barkin all speak Tuesday. Bostic speaks again both Wednesday and Thursday.

Canada reports June jobs data Friday. Consensus sees 550k jobs added vs. 193.5k in May, which is the equivalent to 5.5 mln added in the US. The unemployment rate is expected to fall to 12.5% from 13.7% in May. Ahead of that, results for the Bank of Canada’s Q2 business outlook survey will be released Monday. Ivey PMI for June will be reported Tuesday, followed by June housing starts Thursday. Next Bank of Canada meeting is July 15 and no change is expected at this first one chaired by Governor Macklem. At its last meeting June 3, the bank was a bit more upbeat, noting that the pandemic impact appears to have peaked whilst warning of an uncertain recovery.

EUROPE/MIDDLE EAST/AFRICA

Chancellor Sunak addresses UK Parliament Wednesday. He may use the opportunity to outline further stimulus measures after Prime Minister Johnson’s so-called New Deal for infrastructure spending was deemed insufficient. It’s possible that Sunak may outline plans for increased spending or perhaps even a VAT cut. Over the weekend, he announced a GBP1.6 bln plan to support theaters, museums, and music venues, with much of it in the form of grants.

Press reports suggest that Bank of England Governor Bailey is laying the groundwork for negative interest rates. In a letter sent last month, Bailey wrote that adapting to negative rates would be a “significant operational undertaking for firms,” adding that many would need a year to update computer systems, alter contracts designed for positive rates, and to communicate this new era to clients. Yet taken at face value, the problems that Bailey cites could really be seen as reasons NOT to go negative. We do not believe the BOE will go negative, and the short sterling strip concurs. Yet the UK curve remains negative in the 1- to 6-year space, with the short and long ends surrounding it barely positive. Perhaps the BOE is trying to engage in yield curve control on the cheap, by simply continuing to talk about negative rates rather than taking any real action.

Brexit talks between the UK and the EU continue this week. Reports suggest the EU may back down from its demands to maintain the same access to UK fishing waters and to have the European Court of Justice play a role in policing any agreement. The EU may also rethink its position on the so-called level playing field, but now expects the UK to make similar concessions. Yet expect a lot of headline driven volatility as talks progress.

Germany reports May factory orders Monday. Orders are expected to rise 15.4% m/m vs. -25.8% in April, while the y/y WDA rate is expected to improve to -24.0% from -36.6% in April. That same day, eurozone May retail sales will be reported. Sales are expected to rise 15.0% m/m vs. -11.7% in April, while the y/y rate is expected to improve to -6.5% from -19.6% in April. Germany then reports May IP Tuesday, which is expected to rise 10.5% m/m vs. -17.9% in April. The y/y WDA rate is expected to improve to -16.9% from -25.3% in April. Trade and current account data will be reported Thursday, with exports expected to rise a seasonally adjusted 14.0% m/m and imports by 12.4% m/m. All signs suggest the recovery got under way in Q2, with further improvement expected in Q3.

Talks on the EU recovery fund will continue. European Council President is expected to present a compromise plan this week in an effort to broker an agreement that would bridge the gap between the less stringent Franco-German proposal and the more stringent Frugal Four. The upcoming EU summit July 17-18 may offer the final opportunity to strike a deal before the dog days of summer are upon us. Most officials agree that time is of the essence, but that has never prevented European policymakers from waiting until the last possible moment to get something done.

ASIA

Japan has a heavy data week. Real cash earnings and household spending for May will be reported Tuesday. Earnings are expected to remain steady at -0.8% y/y, while spending is expected to worsen to -11.8% y/y. May current account data will be reported Wednesday, where an adjusted JPY716.8 bln surplus is expected. May core machine orders and June machine tool orders will be reported Thursday. The former is expected to contract -16.8% y/y vs. -17.7% in April. Lastly, June PPI will be reported Friday and is expected to fall -2.0% y/y vs. -2.7% in May. Next Bank of Japan decision is July 15. At its last decision June 16, the bank didn’t change its policy rate of -0.1% or the 10-year target of 0.0%. However, it did increase its Special Program to Support Financing in Response to Covid-19 by ¥35 trln to ¥110 trln total.

Reserve Bank of Australia meets Tuesday and is expected to keep policy unchanged. It kept rates steady at its last meeting June 2. At that meeting, the bank sounded upbeat and Governor Lowe noted that “It is possible that the depth of the downturn will be less than earlier expected.” However, he warned that “It is likely that this fiscal and monetary support will be required for some time.” The message then seemed to be “steady as she goes” and so for now, we expect no change to policy.