Drivers for the Week Ahead

  • As of this writing, stimulus talks remain dead in the water; President Trump made a series of executive orders over the weekend, as expected
  • July retail sales data Friday will be the data highlight for the US; ahead of that, July inflation readings will be seen
  • US Treasury plans to sell a record $112 bln of bonds at this week’s quarterly refunding
  • Eurozone reports Q2 GDP revision and June trade Friday; UK has a big data week
  • Japan has a light data week; Australia reports July jobs data Friday; RBNZ meets Wednesday and is expected to keep rates steady at 0.25%

The dollar got some traction against the majors towards the end of last week. However, we continue to view this dollar bounce with skepticism, as risks of US economic underperformance continue to rise due to the lack of an aggressive stimulus bill. The dollar bonce helped weigh on EM FX last week, with the high beta currencies TRY, BRL, CLP, and ZAR leading the losers. We downplay risk of contagion from Turkey, but we acknowledge it will keep investors wary of the countries with poor fundamentals. Failure to pass the next stimulus bill in the US may weigh on market sentiment as the week begins.

AMERICAS

As of this writing, stimulus talks remain dead in the water. After the last round of talks ended Friday, top Democrats said they had offered to cut $1 trln from their proposed $3.5 trln plan in exchange for Republicans raising their proposed $1 trln plan by the same amount. Treasury Secretary Mnuchin said that the Democrats offered no concessions on enhanced unemployment benefits and aid to state and local governments. However, he said he stands ready to talk anytime the Democrats want.

President Trump made a series of executive orders over the weekend, as expected. These include an eviction moratorium, an extension of enhanced employment benefits at $400 per week, and deferral of payroll taxes. All are likely to be challenged in court for subverting Congress’ power of the purse. But even fully enacted, these measures fall far short of the aid needed for schools as well as state and local governments.

This is all political brinksmanship at its finest. Coming less than three months ahead of elections, however, it carries heightened risks. To state the obvious, it also carries economic risks as the nearly 30 mln collecting unemployment benefits will take a huge hit. This will hurt consumption and retail sales in the coming weeks.

July retail sales data Friday will be the data highlight for the US. Headline sales are expected to rise 1.9% m/m vs. 7.5% in June, while sales ex-autos are expected to rise 1.3% m/m vs. 7.3% in June. The so-called control group used for GDP calculations is expected to rise 0.8% vs. 5.6% in June. Whatever the reading, we can assume that August will show renewed weakness due to the loss of enhanced unemployment benefits. Also on Friday, IP is expected to rise 3.0% m/m vs. 5.4% in June, while preliminary August University of Michigan consumer sentiment is expected at 71.9 vs. 72.5 in June.

Ahead of that, July inflation readings will be seen. PPI comes out Tuesday, with headline expected to risk a tick to -0.7% y/y and core expected to fall a tick to flat y/y. CPI comes out Wednesday with headline expected to rise a tick to 0.7% y/y and core expected to fall a tick to 1.1% y/y. The 5- and 10-year TIPS breakeven inflation rates have crept higher but remain below what they were in February. In other words, runaway inflation is not being priced in yet.

There are a handful of Fed speakers this week. Evans speaks Monday, followed by Barkin and Daly Tuesday. Rosengren, Kaplan, and Daly all speak on Wednesday, followed by Bostic Thursday. With the US economy losing some momentum in Q3, we suspect Fed officials will maintain the very dovish tone established at the July 29 meeting.

Weekly jobless claims will be reported Thursday. Initial claims are expected at 1.1 mln vs. 1.186 mln the previous week, while continuing claims are expected at 15.8 mln vs. 16.107 mln the previous. Despite the strong jobs report for June and the solid one for July, the fact that initial claims are still coming in at over 1 mln every week suggests the labor market is still under some stress.

The US Treasury plans to sell a record $112 bln of bonds at this week’s quarterly refunding. Of this, $49.5 bln will cover maturing paper and $62.5 bln will raise new cash. $48 bln of 3-year notes will be sold Tuesday, $38 bln of 10-year notes will be sold Wednesday, and $26 bln of 30-year bonds will be sold Thursday. The balance of its borrowing needs will be met through weekly bill auctions, cash management bills, TIPS, and floating rate notes.

There are lots of other US data to keep markets busy. June JOLTS job openings will be reported Monday and expected to rise to 5300 from 5397 in May. The July budge statement Wednesday will hold plenty of interest, coming in the middle of the quarterly refunding process. A deficit of -$151.5 bln expected. July import/export prices will be reported Thursday, while Q2 productivity and unit labor costs and June business inventories will be reported Friday.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reports Q2 GDP revision and June trade Friday. Advance GDP report showed contractions of -12.1% q/q and -15.0% y/y. Ahead of that, August ZEW expectations will be reported Tuesday and June IP Wednesday. German IP rose 8.9% m/m, French IP rose 12.7% m/m, and Italian IP rose 8.2% m/m. As such, we see upside risks to the consensus eurozone reading of 10.0% m/m.

UK has a big data week. July jobless claims and June employment data will be reported Tuesday, with employment expected to fall -288k vs. -125k in May. June and Q2 GDP, IP, construction output, services, and trade will all be reported Wednesday. IP is expected to rise 9.7% m/m, construction by 15.0% m/m, and services by 8.0% m/m. On the other hand, Q2 GDP is expected to contract -20.5% q/q and -22.0% y/y.

The Bank of England delivered a less dovish than expected hold last week. It was criticized by many for being too upbeat in the face of resurgent virus numbers. The labor market data this week in particular may serve as a wake-up call, especially with the government’s job furlough program set to expire this fall. Many, including us, look for the BOE to eventually add to its QE before year-end despite its stated plan to end purchase by then.

ASIA

Japan has a light data week. Highlight will most likely be July machine tool orders Wednesday. June current account data will be reported Tuesday, followed by July PPI Thursday. With the recovery very uneven and Prime Minister Abe’s support falling due to his perceived handling of the pandemic, we suspect the government will opt for another round of stimulus in H2. The Bank of Japan, however, is likely on hold for the time being. Next policy meeting is September 17 and no change is expected then.

Australia reports July jobs data Friday. Employment is expected to rise 30k vs. 210.8k in June, but the unemployment rate is expected to rose to 7.8% from 7.4% in June. Ahead of that, July NAB business survey will be released Tuesday, followed by August Westpac consumer confidence Wednesday. The RBA just left policy steady last week, noting that it stands ready to change if needed as it awaits more information on the potential impact of the widening lockdown in Victoria. Next policy meeting is September 1 and no change is expected then.

RBNZ meets Wednesday and is expected to keep rates steady at 0.25%. At the last meeting June 24, the bank kept policy on hold while saying it stands ready to provide more stimulus “as necessary.” It noted that besides possibly expanding its asset purchases, “it continues to prepare for the use of additional monetary policy tools as needed.” Furthermore, the bank did not reaffirm its previous guidance that the policy rates would remain at current levels until at least March 2021.

At the June meeting, the RBNZ warned that recent NZD appreciation had placed further pressure on exports and damped the outlook for inflation. Since then, NZD has appreciated another 3% and so we would expect further pushback on the exchange rate. Indeed, Kiwi tends to weaken on RBNZ decision days, losing value on the last three and five of the last seven.