Drivers for the Week Ahead

  • The added jobless benefits expired Friday; the Fed made it clear that more fiscal stimulus is needed
  • Late Friday, Fitch moved the outlook on its AAA rating for the US from stable to negative; July jobs data Friday will be the data highlight of the week; Canada has a busy data week
  • BOE meets Thursday and no change in policy is expected; sterling tends to weaken on BOE decision days; eurozone reports final PMI readings this week
  • Japan has a busy data week; RBA meets Tuesday and no change in policy is expected

The dollar saw broad-based losses last week. Yet the week ended on a bit of a risk-off note as concerns intensified about the resurgent virus and the impact on the still-weak global economy. This sentiment may carry over into this week as markets await final July global PMI readings earlier in the week and key US jobs data Friday. For now, we continue to believe that further losses are in store for the greenback.

AMERICAS

The added jobless benefits expired Friday. There is a lot of finger-pointing from all involved, but we cannot rule out an eventual deal. Republicans offered an extra week of $600 payments but Democrats rejected it. Talks will likely continue. It remains to be seen how this plays out in the court of public opinion, but there will surely be political costs to be paid when the November elections come around.

The Fed made it clear that more fiscal stimulus is needed. We continue to think that the Fed will not add stimulus until there has been more done on the fiscal side. By standing pat, the Fed is putting subtle (or perhaps not too subtle) pressure on Congress and the White House to strike a deal. With the FOMC media embargo over, there are several Fed speakers this week. Bullard, Barkin, and Evans all speak Monday. Mester speaks Wednesday, followed by Kaplan and Singh Thursday.

Late Friday, Fitch moved the outlook on its AAA rating for the US from stable to negative. the agency cited ongoing deterioration in public finances and the absence of a credible fiscal consolidation plan as the main driver, adding “High fiscal deficits and debt were already on a rising medium-term path even before the onset of the huge economic shock precipitated by the coronavirus.” We concur. In our most recent sovereign ratings model, we noted that “we do think that the significant deterioration in its credit metrics means that the US stands a strong chance of losing its Aaa and AAA ratings from Moody’s and Fitch, respectively.”

Yet US yields continue to edge lower. Back in 2011, US yields barely budged when S&P downgraded the US to AA+, and this seems to be playing out again. The 10-year yield fell to 52 bp Friday, the lowest since March 9. The year’s low from that day was 31 bp. The 5-year yield is making new all-time lows near 22 bp. We eagerly await the FOMC minutes and we suspect there was little discussion (if any) of yield curve control. Why would there be when the market is doing the Fed’s job in keeping yields low?

July jobs data Friday will be the data highlight of the week. Consensus for July jobs has worsened and is currently at 1.578 mln vs. 4.8 mln in June, while unemployment is expected to fall to 10.5% from 11.1% in June. So far, the clues point to a soft reading. Both initial and continuing claims rose in the BLS survey week containing the 12th of the month.

Ahead of that, we will get other important clues to the health of the US economy. July ISM manufacturing PMI will be reported Monday and is expected at 53.5 vs. 52.6 in June. July auto sales will also be reported Monday and are expected at a 14.0 mln annualized rate vs. 13.05 mln in June. June factory orders will be reported Tuesday and are expected to rise 5.0% m/m. ADP’s reading on July private sector will be released Wednesday, where consensus sees a 1.25 mln rise. ISM non-manufacturing PMI will also be reported Wednesday and is expected to fall to 55.0 from 57.1 in June. June trade Wednesday and consumer credit Friday will round out the picture.

Weekly jobless claims will be reported Thursday. Initial claims are expected at 1.415 mln vs. 1.434 mln the previous week, while continuing claims are expected at 16.94 mln vs. 17.108 mln the previous. In other words, not much improvement is expected. Despite the strong jobs report for June, the fact that initial claims are still coming in at nearly 1.5 mln every week suggests the labor market is still under some stress.

Canada has a busy data week. Like the US, the highlight will be jobs data Friday, where a gain of 390k jobs is expected vs. 952.9k in June. Unemployment is seen falling to 11.2% from 12.3% in June. Ahead of that reading, July Markit manufacturing PMI will be reported Tuesday. June trade will be reported Wednesday, and Ivey PMI will be reported Friday. The Bank of Canada has acknowledged the improved outlook but remains cautious and unlikely to shift policy anytime soon.

EUROPE/MIDDLE EAST/AFRICA

Bank of England meets Thursday and no change in policy is expected. At its last meeting June 18, the bank eexpanded its QE by GBP100 bln but slowed the pace of purchases by stretching this amount out to year-end. Given the recent re-closings, the UK outlook has gotten cloudier since the June meeting and so we believe the BOE will have to acknowledge this with a stance closer to Fed Chair Powell’s more sober outlook.

Sterling tends to weaken on BOE decision days. Of the past thirteen BOE decision days dating back to last March, cable has weakened on eight occasions. Ahead of the decision, final UK PMI readings will roll out, with manufacturing Monday, services and composite Wednesday, and construction Thursday.

Eurozone reports final PMI readings this week. Manufacturing will be reported Monday. Spain and Italy are expected to improve sharply from June. Final services and composite PMIs will be reported Wednesday, with Spain and Italy again expected to improve sharply from June. Eurozone also reports June retail sales Wednesday, which are expected to rise 6.3% m/m vs. 17.8% in May. Germany reports June factory orders Thursday, which are expected to rise 9.7% m/m vs. 10.4% in May. German then reports June IP, trade, and current account data Friday.

ASIA

Japan has a busy data week. Final Q2 GDP remained steady at -2.2% SAAR vs. -2.8% expected. However, final July manufacturing PMI came in at 45.2 vs. 42.6 preliminary. July Tokyo CPI will be reported Tuesday, with headline and ex-fresh food both expected to remain steady at 0.3% y/y and 0.2% y/y, respectively. Final services and composite PMI readings come out Thursday. June real cash earnings and household spending will be reported Friday. For now, the Bank of Japan is on hold but we see scope for further fiscal stimulus if the recent lockdowns hurt the growth outlook.

Reserve Bank of Australia meets Tuesday and no change in policy is expected. At the July meeting, the bank noted that “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. The bank said then that it remains ready to boost asset purchases as need to keep the yield curve under control. There was little discussion about the level of the currency. That same day, June trade and retail sales will be reported. Ahead of the decision, final manufacturing PMI reading will come out Monday, followed by final services and composite PMI readings Wednesday. Finally, the RBA will issue its Statement on Monetary Policy Friday.