Drivers for the Week Ahead

  • Risk assets continue to fight a tug of war between improving economic data and worsening virus numbers; the dollar is likely to remain under pressure
  • Congress returns from recess Monday and the outlook for fiscal stimulus in the US remains uncertain; Trump said the next stimulus package “must” include a payroll tax cut
  • Regional Fed manufacturing surveys for July will continue to roll out; weekly jobless claims will be reported Thursday; Canada reports some important data
  • The EU summit produced no deal; eurozone preliminary July PMI readings will be reported Friday; UK has a fairly busy data week
  • Japan has a fairly heavy data week; RBA minutes will be released Tuesday

Risk assets continue to fight a tug of war between improving economic data and worsening virus numbers. Sentiment may be hurt early this week over lack of consensus in the EU and the US regarding further fiscal stimulus. Sentiment may recover as July data show further improvement, but record virus numbers in many US states will b difficult to overlook.

The dollar is likely to remain under pressure. It ended last week on a soft note, trading at the bottom of recent trading ranges. The big question is whether these recent ranges will hold or whether last week’s brief downside break presages further dollar weakness. Recent price action whereby markets sell into dollar strength rather than buy the dollar dip supports our view that the market bias for the dollar is further broad-based weakness ahead.

AMERICAS

Congress returns from recess Monday and the outlook for fiscal stimulus in the US remains uncertain. Lawmakers have only a small window to strike a deal before going back on recess in early August, and the two sides remain far apart. Republican lawmakers would like to cap this next package at $1 trln, while House Democrats last month passed a $3.5 trln plan that contains many provisions that are unlikely to past the Republican Senate. Of note, the extra $600 per week in jobless benefits expires at the end of the month and there is no agreement yet on any sort of extension.

Reports suggest President Trump said the next stimulus package “must” include a payroll tax cut. That is a non-starter for the Democrats and many Republicans. The reason? Bad optics, as the payroll tax funds Social Security and Medicare. Another reason? It would only benefit those that are still working and does nothing to help the 17 mln that are still unemployed. Other reports suggest the White House opposing new funding proposed for virus testing and contact tracing, as well as extra funding for the Centers for Disease Control and Prevention. Again, the optics are bad, and it remains to be seen whether Republican lawmakers will support these efforts ahead of November elections.

Ex-Fed Chairs Bernanke and Yellen both warned last week that a slow and uneven recovery from the pandemic may require further Fed action. In testimony before the House Friday, they said it was “possible but not certain” that the Fed adopt Yield Curve Control. They also said the Fed would likely provide forward guidance and maintain asset purchases to keep downward pressure on long-term rates. Like current Chair Powell, both called on further fiscal stimulus, with Yellen saying it would be a “catastrophe” if Congress did not extend the enhanced unemployment benefits. Due to the media embargo, there are no Fed speakers until Powell’s post-decision press conference.

The regional Fed manufacturing surveys for July will continue to roll out. Kansas City reports Thursday and is expected at 5 vs. 1 in June. Last week, the Empire survey came in at 17.2 vs. 10.0 expected and -0.2 in June, while the Philly Fed survey came in at 24.1 vs. 20.0 expected and 27.5 in June while. Markit preliminary July PMI readings will be reported Friday. Manufacturing is expected at 52.0 vs. 49.8 in June, while services is expected 51.0 vs. 47.9 in June.

Weekly jobless claims will be reported Thursday. Initial claims are expected at 1.293 mln vs. 1.30 mln last week, while continuing claims are expected at 16.9 vs. 17.338 mln last week. Of note, these initial claims cover the BLS survey week containing the 12th of the month, while continuing claims are reported with a one-week lag. Despite the strong jobs report for June, the fact that initial claims are still coming in at over 1 mln every week suggests the labor market is still under some stress.

Other than that, there are only minor US data reports out this week. June Chicago Fed National Activity Index will be reported Monday and is expected at 4.00 vs. 2.61 in April. June existing home sales will be reported (22.8% m/m expected) Tuesday, while new home sales (3.6% m/m expected) will be reported Friday. June leading index comes out Thursday and is expected to rise 2.1% m/m vs. 2.8% in May.

Canada reports some important data. May retail sales will be reported Tuesday. Headline expected to rise 20.0% m/m vs. -26.4% in April, while ex-auto are expected to rise 11.8%m/m vs. -22.0% in April. June CPI will be reported Wednesday. Headline is expected to rise 0.2% y/y vs. -0.4% in May, while common core is expected at to rise 1.3% y/y vs. 1.4% in May. Bank of Canada just met last week and left policy steady. It sounded relatively upbeat but warned of downside risks that likely require low interest rates for a very long time. Next policy meeting is September 9 and no change is expected then.

EUROPE/MIDDLE EAST/AFRICA

The EU summit produced no deal. Talks continued Sunday in an effort to nail down the EUR750 bln recovery package. European Council President Michel floated another compromise, cutting the grant portion by EUR100 bln to EUR400 bln. The surplus nations led by the Netherlands and Austria want grants capped at EUR350 bln. However, reports suggest Denmark, Sweden, and Finland are not as opposed, suggesting a break within the so-called frugal group. We do expect an eventual compromise, but the horse-trading makes for bad optics when markets have become used to quick and decisive action during this crisis.

Last week, the ECB signaled it was steady as she goes for the time being. It will release new staff forecasts at the next meeting September 10. Barring any huge surprises, we expect the ECB to remain on hold then as well. Madame Lagarde was right to call for an ambitious fiscal effort to complement monetary stimulus but so far, the EU has not been able to deliver.

Eurozone preliminary July PMI readings will be reported Friday. Headline manufacturing PMI is expected at 50.0 vs. 47.4 in June, services is expected at 51.0 vs. 48.3 in June, and the composite is expected at 51.0 vs. 48.5 in June. Looking at the country breakdown, the French composite is expected at 53.3 vs. 51.7 in June while the German composite is expected at 50.1 vs. 47.0 in June. We continue to believe that the eurozone economy is likely to outperform the US in Q3 due to its more robust actions taken to contain the pandemic.

The UK has a fairly busy data week. CBI industrial trends for July will come out sometime this week. June public sector net borrowing will be reported Tuesday. June retail sales and preliminary July PMI readings will be reported Friday. Headline sales are expected to rise 8.3% m/m vs. 12.0% in June. Manufacturing PMI is expected at 52.0 vs. 50.1 in June, services is expected at 51.3 vs. 47.1 in June, and the composite is expected at 51.1 vs. 47.7 in June. UK data last week was mostly disappointing, and so this week’s data will be important.

ASIA

Japan has a fairly heavy data week. June trade will be reported Monday. Exports are expected to contract -24.7% y/y vs. -28.3% in May, while imports are expected to contract -17.6% y/y vs. -26.2% in May. June national CPI and department store sales will be reported Tuesday. Headline inflation is expected to remain steady at 0.1% y/y, while ex-fresh food is expected at -0.1% y/y vs. -0.2% in May. Preliminary July PMI readings will be reported Wednesday and will likely set the tone for other countries’ PMI readings later in the week.

RBA minutes will be released Tuesday. At the July 7 meeting, the RBA kept rates steady as it noted “The downturn has been less severe than earlier expected” and conditions have stabilized recently.” However, the RBA continued to underscore that policy will remain on hold for a long time given the high levels of uncertainty. Governor Lowe also speaks Tuesday. Preliminary June retail sales will be reported Wednesday. Preliminary July PMI readings and preliminary June trade will be reported Friday.