Drivers for the Week Ahead

  • This is likely to be one of the most eventful weeks we’ve seen in a while; the dollar remains within recent well-worn ranges
  • The US rates markets suggest trouble ahead; June retail sales report Thursday is likely to be the data highlight for the week; BOC meets Wednesday
  • The ECB meets Thursday; EU summit will be held Friday and Saturday in Brussels; UK has a heavy data week
  • OPEC+ meets Wednesday to discuss whether to extend its full output cuts; BOJ meets Wednesday; Australia reports June jobs data Thursday

This is likely to be one of the most eventful weeks we’ve seen in a while. Not only do three major central banks meet, but we also get important June and July data from the US, the first Q2 GDP reading from China, an OPEC+ meeting, and an EU summit. This comes as markets are grappling with still-rising virus numbers in the US and resurgent numbers in many other countries that call into question the durability of the economic recovery. With so many events impacting virtually all assets, we expect a volatile week ahead for the markets.

The dollar remains within recent well-worn ranges. DXY has for the most part traded between 96 and 98 since early June. Similarly, the euro has traded between $1.12 and $1.14 and sterling between $1.22 and $1.27 since early June. USD/JPY has traded within a 106-108 range since mid-June. Right now, the dollar is pretty much in the middle of all these trading ranges. We look for continued swings in market sentiment this week as markets grapple with the conflicting drivers of improved economic data and rising virus numbers.

AMERICAS

The US rates markets suggest trouble ahead. The 10-year Treasury yield traded below 0.60% Friday to the lowest level since April 21. This may be a bad omen for the risk rally, likely suggesting increased pessimism over the outlook for the US economy in the context of the still challenging pandemic outlook. Elsewhere, the Fed Funds futures strip continues to move up its outlook for negative rates. The market is currently pricing in a negative Fed Funds rate by May 2021.

We see several factors behind this more dovish outlook. Fed officials this past week for unfailingly dovish, with many speaking of the potential for further Fed stimulus (though not to the point of hinting at negative rates). Second, the US outlook has become more uncertain with the increase in virus numbers. Data this week should help determine whether this increased pessimism is warranted.

US June retail sales report Thursday is likely to be the data highlight for the week. Headline sales are expected to rise 5.0% m/m vs. 17.7% in May, while ex-autos are expected to rise 5.1% m/m vs. 12.4% in May. The so-called control group used for GDP calculations is expected to rise 3.9% m/m vs. 11.0% in May. The big question remains whether the strong May/June recovery can be extended in Q3. July will be the true test, as many states began to suspend or reverse their reopening efforts.

June CPI out Tuesday may hold a bit more interest in usual given the downward trajectory in US Treasury yields. Consensus sees headline inflation of 0.6% y/y vs. 0.1% in May, and core inflation of 1.1% y/y vs. 1.2% in May. After last Friday’s downside miss in PPI (headline -0.8% y/y vs. -0.2% expected), we see similar risks for CPI.

Regional Fed surveys for July will start to come out. Empire survey kicks things off Wednesday and is expected at 8.4 vs. -0.2 in June. Also out Wednesday will be June IP, which is expected to rise 4.3% m/m vs. 1.4% in May. This will be followed by Philly Fed business outlook Thursday, which is expected at 19.1 vs. 27.5 in June. These will be the first snapshots for July and will be watched closely.

The Fed releases its Beige Book report Wednesday for the upcoming FOMC meeting. It will likely cover the period when parts of the country began shutting down again and so this report may hold more interest than usual. There are plenty of Fed speakers this week too. Williams and Kaplan speak Monday, followed by Brainard and Bullard Tuesday. Harker and Logan speak Wednesday, followed by Evans and Williams Thursday.

Weekly jobless claims will be reported Thursday. Initial claims are expected at 1.25 mln vs. 1.314 mln last week, while continuing claims are expected at 17.55 vs. 18.062 mln last week. Despite the strong jobs report for June, the fact that initial claims are still rising over 1 mln every week suggests the labor market is still under some stress.

Of the other minor data out this week, June budget statement Monday will likely be of most interest. Consensus sees a -$863 bln deficit vs. -$398.8 bln in May. If so, this one month would nearly eclipse the deficit for all of FY2019 and would bring the 12-month total to another record high of nearly -$3 trln. June import/export prices will be reported Wednesday, while May business inventories (-2.3% m/m expected) and TIC data will be reported Thursday. Friday brings June building permits (6.9% m/m expected) and housing starts (20.9% m/m expected) and July University of Michigan consumer sentiment (79.0 expected).

Bank of Canada meets Wednesday. The bank meets after a strong June jobs report last week, with 952.9k jobs added in June vs. 700k consensus and 289.6k in May. 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. Data since then have confirmed this, though it is clearly too early to sound the all clear. We see the bank on hold for the time being.

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank meets Thursday. At its last meeting June 4, the bank added EUR600 bln to its QE program and so no change is expected this week. Since then, the economic data have improved, and peripheral spreads have narrowed. At this point, the bank is likely to remain on hold to see how its past stimulus impact the economy. That said, another top up to its QE program is widely expected by year-end. The euro has strengthened the past two ECB decision days but that followed three straight decision days of weakness. Also of note, the STOXX Europe 600 has weakened all five ECB decision days this year.

The EU summit will be held Friday and Saturday in Brussels. Last week, the EU released its compromise recovery plan that sought to bridge the gap between the Franco-German axis and the so-called Frugal Four. The horse-trading will continue at the EU summit and some have warned that a deal may not be struck then. The EU will also be simultaneously trying to set the EU budget plan for the next seven years and so it has a full plate.

It appears that eurozone membership is still growing, not shrinking. Croatia and Bulgaria were cleared to join ERM-2 at base rates of 7.5345 per euro and 1.95583 per euro. The currencies will be allowed to fluctuate within a band of +/- 15% around these central parities and if the pegs hold for two years, the two nations can formally join the eurozone. If they are successful, they would be the 20 and 21 nations to adopt to euro.

Ahead of the ECB, eurozone IP will be reported Tuesday. The headline reading is expected at 15.0% m/m vs. -17.1% in April. Note that Germany came in weaker than expected at 7.8% m/m, while France and Italy both surprised to the upside at 19.6% m/m 42.1% m/m, respectively. As such, risks to the eurozone reading are likely tilted to the upside. Eurozone also reports May trade data Thursday and final June CPI Friday.

UK has a heavy data week. May GDP, IP, construction output, services, and trade will be reported Tuesday. GDP is expected to rise 5.0% m/m, IP by 6.0% m/m, construction output by 15.0% m/m, and services by 4.9% m/m. June CPI will be reported Wednesday, with headline expected to remain steady at 0.5% y/y and CPIH expected to slow a tick to 0.6% y/y. June jobless claims and May employment will be reported Thursday.

OPEC+ meets Wednesday to discuss whether to extend its full output cuts. Back in June, the group delayed its plan to start tapering its output cuts from 9.7mln bbl/day by one month to the end of July. However, softer oil prices may lead the group to delay this. The original plan agreed to in April was to see cuts taper from the end of June to 7.7 mln bbl/day at the end of 2020. Cuts would continue tapering in 2021 to 5.8 mln from through April. Last week, the International Energy Agency upgraded its global oil demand forecasts but warned that the rebound could be derailed by the resurgence of the virus around the world.

ASIA

Bank of Japan meets Wednesday. No action is expected even though it just released a dismal regional Sakura report. The BOJ lowered its assessment for all nine of Japan’s economic regions for the second straight quarter, noting all had either “deteriorated” or were “in a severe situation.” Yet we believe the bank is on hold for now to see how past monetary and fiscal stimulus work their way through the economy.

Australia reports June jobs data Thursday. Ahead of that, several sentiment indicators will be reported. Weekly ANZ consumer confidence and June NAB business conditions will be reported Tuesday, followed by July Westpac consumer confidence Wednesday. Next RBA meeting is August 8. At its last meeting July 7, the RBA sounded fairly upbeat but signaled rates would stay low for quite some time. We believe the bank will remain in wait and see mode for the time being.