Drivers for the Week Ahead

  • Markets are looking for more signs of life this week for the global economy; the dollar remains under pressure
  • A stimulus package is unlikely until September, if at all; Democratic lawmakers have been called back to Washington to address the postal service crisis
  • Regional Fed surveys for August will start to come out; FOMC minutes will be released Wednesday; weekly jobless claims will be reported Thursday; Canada has a big data week
  • EU and UK will hold a sixth round of trade talks in Brussels starting Tuesday; ECB releases the account of its July 15-16 meeting Thursday; eurozone preliminary August PMI readings will be reported Friday
  • UK has another heavy data week; Norges Bank meets Thursday and is expected to keep rates steady at zero
  • Japan has a heavy data week; RBA releases its minutes Tuesday

Markets are looking for more signs of life this week for the global economy. Preliminary August PMI readings fit the bill, as do the first regional Fed surveys. Data out of the US suggests the economy continues to improve, albeit at a slower pace. Though the virus numbers in the US have started to improve, the stalemate on the next round of stimulus is a significant headwind for the US economy.

The dollar remains under pressure.  DXY is now down four straight days and the break below 93.05 sets up a test of last week’s low near 92.52.  The euro is finding support near $1.18 and we see an eventual test of this month’s high near $1.1915.  USD/JPY is struggling after running into stiff resistance around 107 and will likely move lower if risk-off impulses continue. Delays to the next round of stimulus support our view that the US economy will underperform in Q3, which should translate into dollar underperformance as well.

 

AMERICAS

With Congress now on summer recess, a stimulus package is unlikely until September, if at all. Senate leader McConnell did say that the chamber will remain on 24-hour notice in case a deal is reached. Barring that, he said no more votes will be held until after Congress returns September 8. It seems the biggest stick point remains aid to state and local governments, but differences also remain on liability shields and enhanced unemployment benefits. We had been confident that a deal would eventually be struck, but now we are not so sure.

In related news, House Speaker Pelosi has called Democratic lawmakers back to Washington to address the postal service crisis. The Postal Service warned last week that 46 states may not be able to deliver their ballots on time for the November election. A vote on the proposed “Delivering for America Act” is likely to take place on Saturday, according to senior Democratic officials. Pelosi said that the bill “prohibits the Postal Service from implementing any changes to operations or level of service it had in place on January 1, 2020.”   Due to the pandemic, the issue of voting by mail is now front and center.

Regional Fed surveys for August will start to come out. Empire survey kicks things off Monday and is expected at 15.0 vs. 17.2 in July.   This will be followed by Philly Fed business outlook Thursday, which is expected at 21.0 vs. 24.1 in July.  These will be the first snapshots for August and will be watched closely for further signs of slowing in the US economy.  Markit reports its preliminary August PMI readings Friday, with manufacturing expected at 51.5 vs. 50.9 in July and services at 50.9 vs. 50.0 in July.

FOMC minutes will be released Wednesday. At the July 29 meeting, all policy settings were left unchanged and a sober outlook was presented.  The Fed warned that the pandemic still poses considerable risks, noting that there are signs that the recent rise in the virus numbers is weighing on the economy.  With the US economy losing some momentum in Q3, we suspect Fed officials will maintain this very dovish tone.  There are not many Fed speakers this week. Bostic speaks Monday and Daly speaks Thursday.

Weekly jobless claims will be reported Thursday.  Initial claims are expected at 920k mln vs. 963k the previous week, while continuing claims are expected at 15.0 mln vs. 15.486 mln the previous week.  Initial claims are at the lowest since mid-March and continuing claims the lowest since early April. All told, the data suggest the labor market is still healing, albeit slowly, as initial claims near 1 mln every week shows. Note that this week’s initial claims data will be for the BLS survey week containing the 12th of the month.

Some other minor US data round out the week. June TIC data will be reported Monday, followed by July building permits and housing starts Tuesday. July leading index will be reported Thursday, followed by existing homes sales Friday.

Canada has a big data week. The highlight will be June retail sales Friday, with headline expected to rise 24.5% m/m and ex-autos 14.9% m/m. Last week, June manufacturing sales rose a stronger than expected 20.7% m/m and so there may be some upside potential here. Ahead of that, June wholesale trade sales and July CPI will be reported Wednesday. Headline inflation is expected to fall a couple ticks to 0.5% y/y, while common core is expected to rise a tick to 1.6% y/y.

 

EUROPE/MIDDLE EAST/AFRICA

The EU and UK will hold a sixth round of trade talks in Brussels starting Tuesday. Recent comments have been upbeat but we reman skeptical. Irish Prime Minister Martin said he sees a “landing zone” for a deal, leading UK chief negotiator Frost to predict that a deal could be reached in September. The EU’s top negotiator Barnier has set October as the real deadline for talks. Barnier and Frost will kick off the talks with dinner Tuesday and wrapping things up Friday. Talks could continue next week if enough progress is made.

The ECB releases the account of its July 15-16 meeting Thursday. It delivered no surprises then, with all policy settings left unchanged.  New staff forecasts will be released at the September 10 meeting and even then, the bank is likely to remain on hold to see how its past stimulus impacts the economy.  That said, another top up to its QE program is widely expected by year-end.

Eurozone preliminary August PMI readings will be reported Friday. Manufacturing PMI is expected to improve to 52.7 from 51.8 in July, services is expected to drop a tick to 54.6, and the composite is expected to rise a couple ticks to 55.1. Looking at the country breakdown, both Germany and France are expected to mirror the headline eurozone readings. Ahead of that, eurozone reports June construction Monday followed by June current account and final July CPI Wednesday.

UK has another heavy data week. July CPI data will be reported Wednesday, with both headline and CPIH expected to remain steady at 0.6% y/y and 0.8% y/y, respectively. This will be followed by July public sector net borrowing and retail sales data Friday. Headline sales are expected to rise 2.0% m/m vs. 13.9% in June. Preliminary August PMI readings will also be reported Friday. Manufacturing PMI is expected to rise to 54.0 from 53.3 in July, services PMI is expected to rise to 57.0 from 56.5 in July, and yet the composite is expected to fall to 56.7 from 57.0 in July.

Norges Bank meets Thursday and is expected to keep rates steady at zero. The discussion may be complicated by rising underlying inflation, which hit a multi-year high of 3.5% y/y in July. At the last meeting June 18, the bank set a modestly hawkish tone by saying it does “not envisage making further policy rate cuts.”  It also noted then that “activity has picked up faster than expected,” supporting their updated policy rate path of rate hikes starting in 2022, earlier than the previous end-2023 guidance.

 

ASIA

Japan has a heavy data week. Q2 GDP data will be reported Monday, with the economy expected to have contracted -26.9% SAAR vs. -2.2% in Q1. July trade and June core machine orders will be reported Wednesday, with exports expected to contract -20.7% y/y and imports by -23.0% y/y. July convenience store sales will be reported Thursday, followed by July national CPI, preliminary August PMI readings, and July supermarkets and department store sales Friday. Headline inflation is expected to rise a couple ticks to 0.3% y/y, while ex-fresh food is expected to rise a tick to 0.1% y/y.

Reserve Bank of Australia releases its minutes Tuesday. At that August 4 meeting, it kept policy unchanged but restarted its bond purchases “to keep yields consistent with the target.”  The 3-year yield had been trading above the 0.25% target for several weeks and so the restart was not a big surprise.  The RBA acknowledged then that the negative impact that will come from the renewed lockdown in Victoria but added that “the downturn is not as severe as earlier expected and a recovery is now underway in most of Australia.”  July leading index will also be reported Tuesday. Preliminary August PMI readings, and preliminary July retail sales will be reported Friday.