Week Ahead: RBA, FOMC Minutes and Non-Farm Payrolls

Week Ahead: RBA, FOMC Minutes and Non-Farm Payrolls

Volatility may pickup later in the week as the RBA makes its decision on an interest rate hike and the US releases FOMC Minutes, as well as NFP.

Central Bank heads were in the spotlight last week at the European Central Bank Forum. Fed Chairman Powell, ECB President Lagarde, and BOE Governor Bailey told the same message: We must get inflation lower at any cost, even if it causes a recession.  Will the news and data due out this week continue to paint a picture of a world economy with high inflation and slower growth?  The RBA meets on Tuesday and is expected to hike 50bps, though AUD/USD has fallen to its lowest level since June 2020.  Will the decision help the ailing currency pair?  On Wednesday, the US will release June’s FOMC meeting minutes.  What was the discussion regarding the decision to hike 75bps?  Also, on Friday, the US releases Non-Farm Payrolls.  Will the jobs picture continue to point towards a strong labor market?

RBA

The RBA meets on Tuesday this week for its July Interest Rate decision meeting.  Markets are expecting an increase of 50 bps, which would raise the key rate level from 0.85% to 1.35%.  At the last meeting on June 7th, the board decided that due to inflationary pressures and a strong labor market, there would be further tightening to come.  However, for those who may be hoping for an increase of 75bps at this week’s meeting (just as the FOMC), RBA Governor Lowe already shut that down, saying in late June that the decision at the upcoming meeting will be between 25bps and 50bps.  Since the June meeting, the Employment data, PMI data, Retail Sales and Inflation Expectations all came in stronger than expected. However, global fears of a recession have also crept into the market, causing commodity currencies to move lower. AUD/USD made a low print of 0.6764, its lowest level in 2 years and holding the 50% retracement level from the pandemic lows in March 2020 to the highs of February 2021 at 0.6757.  Will the RBA be hawkish enough to give the Aussie a bounce?

FOMC Minutes

At the June FOMC meeting, the Committee hiked by 75bps. Markets were excepting a 50bps until just a few days before the meeting, when the Fed leaked the news to the Wall Street Journal that it would be hiking 75bps due to the higher than expected CPI and Michigan Inflation Expectations Index.  Markets will be watching to see how much of a discussion took place to hike the 75bps vs 50bps.  In addition, the Committee raised its rate forecast to 3.4% by the end of year.  The current rate sits at 1.75%.  Inflation forecasts were also increased.  Powell noted in this press conference that the Fed is “highly attentive” to inflation risks and that the Committee continues to see risks for inflation to the upside.  Was the entire discussion around lowering inflation?  How much of the discussion surrounded the possibility that the Fed could hike rates “too high” and push the economy into a recession?  The Minutes released on Wednesday will give us a better view of the FOMC’s thinking at the June meeting.

Non-Farm Payrolls

At the June FOMC meeting, Powell indicated that “our goal is to bring inflation down to 2%, while the labor market remains strong”.  On Friday, the US will get a better sense as to if the jobs numbers are still strong.  The expectation for the headline print is +265,000 vs May’s reading of +390,000.  Last month’s print was higher than expectations, but the lowest reading since May 2020 after the pandemic struck.  In addition, the Unemployment Rate is expected to remain at 3.6% while Average Hourly earnings is also expected to remain unchanged at 0.3% MoM. However, there is risk that the headline NFP print comes in weaker than expected as the four-week moving average for initial claims up ticked to 231,750, the highest since the middle of December 2021.  If employment growth begins to slow, or even worse, turn negative, how hawkish will the Fed be when it comes to raising rates?  This will be an important economic data point for the Fed to watch this week!

Earnings

The beginning of the 3rd quarter brings with it a new round of earnings releases for Q2.  However, earnings season doesn’t begin in earnest until next week.  There are a few names releasing this week, including Sainsbury’s and Currys.

Economic Data

US Non-farm payrolls will be the main attraction in terms of economic data this week.  However, there are some other data points which can cause volatility.  On Tuesday, China will release its Caixin Services PMI and the US will release Factory Orders.  The EU will release Retail Sales on Wednesday and on Thursday, the US will release the ADP Employment Change.  In addition to the US NFP on Friday, Canada will also be releasing its Employment Change.  Other important economic data due out this week is as follows:

Monday

  • Australia: Building Permits (MAY)
  • Australia: Home Loans (MAY)
  • Germany: Trade Balance (MAY)
  • EU: PPI (MAY)
  • Canada: Manufacturing PMI Final (JUN)

Tuesday

  • Global: Services PMI Final
  • New Zealand: NZIER Business Confidence (Q2)
  • Australia: Retail Sales Final (MAY)
  • China: Caixin Services PMI (JUN)
  • Australia: RBA Interest Rate Decision
  • US: Factory Orders (MAY)

Wednesday

  • Australia: RBA Chart Pack
  • Germany: Factory Orders (MAY)
  • EU: S&P Global Construction PMI (JUN)
  • EU: Retail Sales (MAY)
  • US: Global Services PMI Final (JUN)
  • US: ISM Non-Manufacturing PMI (JUN)
  • US: FOMC Minutes
  • Crude Inventories

Thursday

  • Australia: Trade Balance (MAY)
  • Germany: Industrial Production (MAY)
  • UK: Halifax House Price Index (JUN)
  • Mexico: CPI (JUN)
  • US: ADP Employment Change (JUN)
  • Canada: Trade Balance (MAY)
  • US: Trade Balance (MAY)
  • Canada: Ivey PMI s.a. (JUN)

Friday

  • Canada: Employment Change (JUN)
  • US: Non-Farm Payrolls (JUN)

Chart of the Week: Weekly US 10-year yields

Source: Tradingview, Stone X

US 10-Year yields moved back below 3% this week and fell to a low of 2.791%, closing the week down over 7%. Yields had been moving lower since early November 2018 when they were near 3.232%.  At the beginning of the pandemic, 10-year yields made a low at 0.333% in March 2020, then slowly began moving higher in a symmetrical triangle formation.  Yields finally broke above the top of the top of the triangle as they approached the apex during the 1st week of January 2022.  The target for the breakout of a symmetrical triangle is the height of the triangle, added to the breakout point., which is near 3.30%.  Bonds moved lower and yields continued to move higher during the first half of 2022, reaching the target within 6 months!  During the week of June 13th, yields took out the highs November 2018 and formed a shooting star candlestick formation with the RSI in overbought territory, a signal that yields may pull back.  The high for the move was 3.497%.   Since then, yields have pulled back aggressively and are trading near 2.9%.  First support is at the lows from the week of May 30th at 2.643. Below there, price can fall to the 38.2% Fibonacci retracement from the lows of March 2020 to the recent highs of June 13th near 2.288%, then horizontal support at 2.063%.  First resistance is at last weeks high of 3.258%, then the highs from the week of June 13th at 3.497%.  Above there, yields can move up to the highs of 2011 at 3.737%.

It’s the beginning of a new month and a new quarter, as well as the start of the second half of the year.  With a US holiday on Monday, the week may start off slow.  However, volatility may pickup later in the week as the RBA makes its decision on an interest rate hike and the US releases the FOMC Minutes, as well as NFP.  Also, watch for new money flows to come into the market at the beginning of the week.

If you are celebrating the US holiday on Monday, enjoy.

Have a great weekend!

Weekly Economic & Financial Commentary: U.S. Recession Is Likely, and Global Contagion Is Unavoidable

Weekly Economic & Financial Commentary: U.S. Recession Is Likely, and Global Contagion Is Unavoidable

Summary

United States: Running on Empty

  • Consumers staying power is showing signs of running out as inflation persists and confidence moves sharply lower. While consumers still have the ability to rely on their balance sheets to support spending, it’s uncertain for how much longer they will continue to do so. Piling on the tough news was the weak ISM manufacturing report for June, which illustrates that we are not just seeing weakness out of the consumer, but investment spending as well.
  • Next week: ISM Services (Wed), Trade Balance (Thu), Nonfarm Payrolls (Fri)

International: China’s Economy Starting to Recover, U.K. Recession Seems Inevitable

  • This week, we received further evidence that China’s economy is on the road to recovery from its lockdown-induced slump. On the other hand, as U.K inflation accelerates further this year, and we expect the U.S. economy to slow late this year and fall into recession during 2023, we believe that could also be enough to tip the U.K. economy into recession by early next year.
  • Next week: Reserve Bank of Australia (Tue), Central Bank of Peru (Thu), Mexico CPI (Thu)

Credit Market Insights: Pay Ya Later

  • Consumers have increasingly relied on their balance sheets to fund spending, and as consumers tap credit, a less traditional service, Buy Now, Pay Later, has received increased attention. This week, we unpack what we know and importantly what we do not yet know about the service.

Topic of the Week: U.S. Recession Is Likely, and Global Contagion Is Unavoidable

  • Inflation has trended uncomfortably high in many countries around the world, even as policymakers have ramped up monetary tightening cycles. The worldwide inflation problem has created an interesting dichotomy for the global economy, and as a result, we have made significant changes to our forecast profile for many central banks and economies.

Full report here.

Week Ahead – Peak Fed Tightening?

Week Ahead – Peak Fed Tightening?

Or further to go?

The focus has shifted in recent weeks from how far central banks are going to go in their tightening cycles to how much of an economic slowdown we are facing and if a recession is still avoidable.

There’s no easy answer to that question and while there are signs that markets are starting to price in a recession, there is no consensus. Of course, the fate of some countries looks more certain than others but in most cases, it’s far from a foregone conclusion. For this reason, the economic data over the next week, as well as the views of policymakers, could be huge in determining how markets will behave.

The bank holiday on Monday means it’s a late start for the US but the rest of the week is anything but quiet. The US jobs report and Fed minutes are the obvious standouts but there’s plenty more on top that will ensure it’s another fascinating week.

US

A shortened trading week on Wall Street will have traders focusing on the FOMC minutes, a few Fed speakers, and the June nonfarm payroll report. The Fed’s minutes to the last meeting will likely bolster the case for another massive rate hike as inflation remains stubbornly high.  The June nonfarm payroll report is expected to show the economy added 250,000 jobs in June, a deceleration from the 390,000 jobs added in the prior month.  The unemployment rate is expected to remain steady at 3.6% and average hourly wages might maintain the same 0.3% pace from a month ago.

A couple of Fed hawks, Bullard and Waller will likely make the case for the Fed to be aggressive with the tightening of monetary policy.  Fed’s Williams will also speak and has recently noted that 50 or 75 bps will be the debate at the July FOMC meeting.

EU

I don’t think there’s any such thing as a quiet week for Europe at the moment but next week is probably as close as it gets. The bulk of the week is made up of tier two and three data like final services PMIs which are typically not subject to large revisions.

The ECB meeting accounts will naturally be of interest although I’m not sure what we’ll get from them considering how explicit the central bank has been in its intentions. What’s happened since has probably been more significant as it could influence how aggressive they’ll be with the lift-off in a few weeks. For this reason, comments from President Lagarde and her colleagues will be more significant.

UK

A light week on the data front, with the highlight being the final services PMI on Tuesday. But there are a number of BoE policymakers appearing next week including Governor Bailey on Tuesday, with traders keen to know if the MPC will finally join the super-sized club or continue with the slow and steady approach.

Russia

Inflation and PMI data next week, with the former of particular note. That said, the central bank has made clear its intention to continue cutting rates as inflation falls. The Key Rate has already fallen back to 9.5% from 20% where it was hiked to after the invasion. But further cuts could follow in an attempt to support the economy and offset the strength of the rouble.

South Africa

The whole economy PMI on Tuesday is the only notable release next week.

Turkey

Restrictions on lira lending last week had the desired effect on the currency, seeing the USDTRY fall more than 8% over the next couple of days before pulling back. It’s now only 3.5% from the highs, suggesting the government has more to do. A 25% increase in the minimum wage announced on Friday will neither tame inflation nor make people’s lives dramatically easier. Further pain ahead. CPI data on Monday is expected to show annual inflation jumped to 78.35% in June from 73.5% in May.

Switzerland

Inflation data on Monday could support the argument for further rate hikes from the SNB. They do love to spring a surprise on the markets, in contrast to every other central bank, so we can’t ignore the possibility of an inter-meeting decision, even if it appears unlikely at the moment.

China

China continues to have relatively low inflation, in sharp contrast to skyrocketing inflation in most major economies. The June inflation report will be released on Friday. The estimate stands at 2.2% YoY, a notch higher than the 2.1% gain in May. The modest inflationary pressures have allowed the PBOC to continue to inject more stimulus into the economy in order to boost growth.

India

Services PMI is the only release of note next week.

Australia 

The RBA holds its policy meeting on Tuesday. In June, the RBA raised rates by 0.50%, surprising the markets which had expected a much smaller increase. Still, with the cash rate currently below 1%, the central bank will have to press the rate pedal to the floor in order to curb soaring inflation. Another 0.50% increase is widely expected at the upcoming meeting, which would bring the cash rate to 1.35%.

New Zealand

It’s a quiet week out of New Zealand, with Wednesday’s Reserve Bank of New Zealand Statement of Intent the only tier-1 event. The RBNZ will present its objectives for the next three years and the markets will be looking for insights into the Bank’s future rate policy. The cash rate is currently at 2.0% and the Bank is expected to raise rates when it meets on July 13th.

Japan

Japan releases household spending on Friday. Japan’s inflation of 2.1% has been much more moderate than in the UK or the US, where inflation is close to double digits. Still, consumers are not used to prices rising, after 15 years of very low inflation.  A weaker yen has made imports more expensive, and the Japanese consumer is holding tighter to their purse strings. Household spending is expected to fall by 0.9% in May, after a decline of 1.7% in April.

Singapore

Singapore releases retail sales on Tuesday. The May release came in at 12.1% YoY, pointing to a sharp gain in consumer spending.

Economic Calendar

Saturday, July 2

Economic Events

  • ECB’s Schnabel speaks on the world economy, monetary policy and the Russia-Ukraine war

Sunday, July 3

Economic Events

  • German Chancellor Scholz gives a traditional “summer interview” on ARD TV

Monday, July 4

Economic Data/Events

  • US markets closed for Independence Day
  • Turkey CPI
  • Switzerland CPI
  • Australia building approvals, inflation gauge, home loans value
  • Canada Manufacturing PMI
  • Euro area PPI
  • Germany trade
  • Japan monetary base
  • Singapore electronics sector index, PMI
  • Spain unemployment
  • The Ukraine Recovery Conference occurs in Switzerland

Tuesday, July 5

Economic Data/Events

  • US factory orders, durable goods
  • Thailand CPI
  • European PMIs: Eurozone, France, Russia
  • Australia PMI
  • RBA rate decision: Expected to raise rates by 50bps to 1.35%
  • India PMI
  • Singapore PMI
  • South Africa PMI
  • China Caixin PMIs
  • France industrial production
  • Japan labor cash earnings, PMI
  • Mexico international reserves
  • New Zealand commodity prices, house prices
  • Singapore retail sales
  • BOE releases financial stability report

Wednesday, July 6

Economic Data/Events

  • US PMIs, ISM services index, JOLTS job openings, FOMC minutes
  • Euro area retail sales
  • Germany factory orders
  • Spain industrial production
  • UK PM Johnson appears before Parliament’s Liaison Committee
  • UN posts annual “The State of Food Security and Nutrition in the World” report.
  • ECB’s Rehn speaks on a panel on Finnish foreign policy and security
  • BOE Chief Economist Pill delivers the keynote speech on the second day of the Qatar Centre for Global Banking & Finance’s annual conference in London
  • BOE Deputy Governor Cunliffe speaks on a panel about central bank digital currency

Thursday, July 7

Economic Data/Events

  • US ADP employment change, initial jobless claims, trade
  • G20 foreign ministers meet in Bali
  • Fed’s Waller speaks at National Association for Business Economics event
  • Fed’s Bullard speaks at an event hosted by Little Rock Regional Chamber
  • BOE releases its decision maker survey.
  • ECB publishes accounts of its June policy meeting.
  • ECB’s Stournaras, Centeno and Herodotou speak at the Annual Economist Government Roundtable in Athens
  • BOE’s Mann speaks at the LC-MA Forum on current monetary-policy issues
  • Mexico CPI
  • China foreign reserves
  • Australia Foreign reserves, trade
  • Singapore foreign reserves
  • Germany industrial production
  • Poland rate decision: Expected to raise rates by 75bps to 6.75%
  • Canada trade
  • Switzerland unemployment rate
  • Chile copper exports
  • Hungary one-week deposit rate
  • Japan leading index
  • Mexico releases monetary policy minutes
  • Russia foreign exchange, gold reserves
  • Thailand consumer confidence
  • EIA crude oil inventory report

Friday, July 8

Economic Data/Events

  • US nonfarm payrolls, unemployment, wholesale inventories, consumer credit
  • Fed’s Williams speaks at an event hosted by the University of Puerto Rico
  • ECB’s Lagarde, Schnabel, Villeroy and Stournaras speak at The French Davos, Recontres Econmiques forum
  • ECB posts climate-risk stress test results for European banks
  • Russia CPI
  • Italy industrial production
  • France trade
  • Canada unemployment
  • Japan household spending, BoP, trade balance, bank lending, bankruptcies
  • New Zealand heavy traffic index
  • Thailand forward contracts, foreign reserves
  • Turkey current account

Sovereign Rating Updates

  • Greece (Fitch)
  • Turkey (Fitch)
  • EFSF (Fitch)
  • ESM (Fitch)
  • Netherlands (DBRS)
U.K. Recession Now on the Economic Horizon

U.K. Recession Now on the Economic Horizon

Summary

  • While the U.K. economy showed some resilience at the start of 2022, there are increasing signs that a more meaningful slowdown is approaching. Elevated inflation should contribute to declining real incomes, weighing on consumer spending and overall GDP. With the U.S. economy, in our view, now expected to fall into recession in 2023, we also expect the U.K. to experience an economic recession by early next year.
  • Activity indicators for the second quarter suggest that a slowdown might already be underway. Activity data on retail sales, the service sector and overall GDP, along with recent confidence surveys, all hint at U.K. economic contraction in Q2 2022.
  • Still even with this uncertain outlook, intensifying inflation pressures suggest the Bank of England will need to continue with its monetary tightening cycle for a while yet. We expect a steady series of 25 bps policy rate increases at upcoming meetings in August, September and November, which would lift the policy rate to 2.00%. Eventually, once the U.K. economy stumbles and inflation recedes, we expect the Bank of England to beginning lower interest rates by late 2023.
  • Overall, this mix of measured monetary tightening and rapid inflation, combined with a U.K. economic downturn, provides an underwhelming backdrop for the U.K. currency. We have revised our forecast for the pound lower, and now see a trough in the GBP/USD exchange rate around $1.1700 in mid-2023.

The U.K.’s Early 2022 Economic Resilience Seems Unlikely to Last

The U.K. economy displayed resilience during the early part of 2022, but there are increasing signs a more meaningful slowdown is approaching. Indeed, given that we now see a U.S. recession as more likely than not, and with the global economic and market backdrop unsettled as well, we now also anticipate a U.K. economic recession by early 2023.

The final estimate of U.K. Q1 GDP showed a still respectable pace of economic growth of 0.8% quarter-over-quarter and 8.7% year-over-year. Within the details, consumer spending rose 0.6% quarter-over-quarter, but business investment fell 0.6%. While U.K. inflation has been on a rising trend for some months now, price growth appeared to have only a modest dampening effect on Q1 economic growth. That said, inflation pressures have intensified even further since April, with the latest round of electricity price increases now in effect. Indeed, for April alone, electricity prices jumped 40.5% month-over-month and natural gas prices jumped 68.8%. Those increases contributed to a headline inflation rate of 9.1% year-over-year as of the latest read, for May. Those energy price increases, as well as broader prices increases more generally, are increasingly expected to weigh on real household incomes and consumer purchasing power going forward. Another sizable electricity price increase is slated for October, perhaps in the region of 30%-40%, which the Bank of England estimates could lift headline CPI inflation up to, or above, 11% year-over-year.

It is against this backdrop that the household income and spending trends from the first quarter GDP report were somewhat worrisome. In nominal terms household disposable income rose by 1.5% quarter-over-quarter, but that increase in nominal incomes was outstripped by higher inflation, meaning the real household disposable income dipped 0.2% quarter-over-quarter, the fourth quarter in a row that real incomes have declined on a sequential basis. As a result, real household disposable income is down 1.3% compared to Q1 2021, in contrast to a 12.6% increase in real consumer spending over the same period. Meanwhile, the household saving rate held steady at 6.8% of disposable income in Q1, which is actually slightly below the historical average that prevailed in the two decades prior to the pandemic of 7.1%. With price pressures intensifying even further over the balance of 2022, and even given some additional fiscal stimulus announced by the government in May, it seems clear that declining real household incomes will weigh even more heavily on consumer spending and overall GDP growth in the months and quarters ahead.

Signs of A Slowdown Showing Through

Indeed, more recent data for the second quarter is starting to reveal the contours of that economic growth slowdown. On the consumer side, April retail sales rose 0.4% month-over-month, but that was more than offset by a 0.5% decline in May sales. As a result, the level of retail sales for the April-May period is 0.8% below their Q1 average, hinting at potential drop in consumer spending in the second quarter. Meanwhile, the broader activity data from the monthly GDP figures is more dated, but still hints at a possible contraction in activity in Q2. For April, the level of overall GDP was 0.4% below its Q1 average and services activity was 0.3% below its Q1 average. Without a sharp rebound in activity in either May or June—which seems rather unlikely—the U.K. economy seems on course for a contraction in the second quarter. Finally, the U.K. PMI surveys also point to moderate growth. In particular the U.K. services PMI fell sharply to 53.4 in May and held at that more subdued level in June, an indicator of slowing economic momentum ahead.

Overall, both the consensus forecast and the Bank of England forecast is for GDP to decline in the second quarter. However, it is not just Q2 2022 that could spell trouble for the British economy. As U.K inflation accelerates further this year, and as the U.S. economy slows late this year and falls into recession during 2023, we believe that could also be enough to tip the U.K. economy into recession by early next year. We expect U.K. GDP growth to come to a standstill by Q4 this year, and with respect to sequential growth, see U.K. GDP declining 0.4% quarter-over-quarter (not annualized) in both Q1 and Q2 of 2023. In terms of calendar year growth, we expected U.K. GDP to rise 3.8% in 2022, but to dip by 0.1% in 2023.

However, even against this uncertain growth backdrop, intensifying inflation pressures suggest the Bank of England will need to continue with its monetary tightening cycle for a while yet. In fact, at its latest monetary policy announcement in June the Bank of England raised its policy rate 25 bps to 1.25%, while policymakers also said they would be “particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response.” Six policymakers voted in favor of the 25 bps increase, while three policymakers dissented in favor of a larger 50 bps increase. Clearly further Bank of England tightening will be forthcoming and while we do not, at this time, expect the Bank of England to deliver the larger 50-75 bps rate increases that some other central banks have delivered, we do anticipate a short, sharper rate hike cycle from the U.K. central bank. Specifically we see a steady series of 25 bps policy rate increases at upcoming meetings in August, September and November, which would lift the policy rate to 2.00%. We expect a pause from the Bank of England in December, a pause that we believe will ultimately prove to be the end of the rate hike cycle. As the U.K economy tips into recession by early 2023, and inflation begins to slow meaningfully from the current elevated levels, we anticipate eventual monetary easing from the Bank of England. We expect the U.K. central bank to begin lowering its policy interest rate during the second half of 2023, by a cumulative 50 bps to 1.50% by the end of next year.

Overall, this mix of gradual monetary tightening and rapid inflation (meaning that real U.K. policy interest rates will remain substantially in negative territory), combined with a U.K. economic downturn, provides an underwhelming backdrop for the U.K. currency. We have revised our forecast for the pound lower, and now see a trough in the GBP/USD exchange rate around $1.1700 in mid-2023. Even as the U.S. economy falls into its own recession and the Fed begins to lower interest rates by late next year, we believe that headwinds facing the U.K. economy will mean only a modest rebound for the pound, and we target a GBP/USD exchange rate of $1.1900 by the end of 2023.

Week Ahead – RBA to Hike Again But Spotlight on NFP Amid Recession Angst

Week Ahead – RBA to Hike Again But Spotlight on NFP Amid Recession Angst

Worries about a looming recession are dragging stock markets lower again. There’s a raft of data on the way that could lessen or heighten those concerns, most notably, the latest jobs report in the United States. But even if there is some possibility of positive relief from next week’s releases, central banks pose a downside risk to sentiment. The minutes of the Federal Reserve’s and European Central Bank’s policy meetings will likely reiterate their hawkish stance, while the Reserve Bank of Australia is expected to deliver another double rate hike.

RBA to raise by 50 bps; can it go bigger?

In May, the RBA began its rate hike cycle in earnest, lifting the cash rate by a total of 75 basis points. It is widely expected to follow up June’s 50-bps increment with a similar move at its July meeting on Tuesday. Given all the panic about the surge in inflation globally, a bigger rise cannot be ruled out as policymakers are in a rush to front load as many rate increases as they can now while their economies are on a solid footing.

However, rate hike bets in money markets have cooled lately as investors are becoming more wary about the need for aggressive tightening by central banks amid all the pessimism about the growth outlook. A 50-bps rate rise by the RBA was almost fully priced in just over a week ago, but expectations have now fallen to about 85%.

With markets so fearful about a recession, a hawkish surprise would probably only modestly boost the risk-sensitive Australian dollar. The currency is back testing the key $0.68 level and its best chances of re-establishing a foothold above $0.70 is if risk appetite bounces back. Next week’s mid-tier data (building approvals are due Monday and the AIG services index is out Wednesday) are unlikely to offer much support either.

Bullish dollar to turn sights to NFP

There’s just no keeping the US dollar down these days as the world’s reserve currency can’t hide its haven appeal at a time when there’s so much doom and gloom about sky-high inflation and the real risk of a major economic downturn. One of the pivotal moments for investor sentiment has been signs that consumption in America has already started to soften and businesses are scaling back some of their hiring plans.

Friday’s all-important nonfarm payrolls report will probably confirm this trend. The US economy is expected to have added 295k jobs in June, slowing from May’s print of 390k. The unemployment rate is projected to hold steady at 3.6% and average hourly earnings are forecast to maintain monthly growth of 0.3%, which would point to real wage growth remaining negative in June in a further red flag about future spending.

A day earlier, the ADP private employment report will be watched for clues as to what to anticipate on Friday. The ADP figures are normally released on a Wednesday but will be delayed next week due to US markets being shut on Monday for Independence Day. Factory orders (Monday) and the JOLTS job openings (Wednesday) will be eyed too.

But aside from the NFP data, a more crucial indicator for traders is the ISM non-manufacturing PMI for June due Wednesday, as they will want to gauge the impact of the Fed’s recent hefty rate increases as well as oil’s resurgence in late May/early June on business activity and cost pressures.

Fed minutes might pose a threat to premature rate cut bets

In the current climate, the dollar could find support whichever way the data go, but there is a danger that markets may get caught off guard by the FOMC minutes that will be published on Wednesday. Investors have priced out about 50-bps out of the Fed’s tightening cycle, bringing forward the date at which rates are expected to peak as recession fears have intensified. Not only that, but they are also anticipating that the Fed will begin cutting rates as early as the second half of 2023.

However, the message from Chair Powell has been pretty clear – inflation is their number one priority. Hence, growth jitters won’t deter them from moving aggressively just yet and so the minutes of the June meeting could provide a bit of a reality check for traders thinking that the Fed will balk at the first sign of trouble.

Loonie outshines its rivals

The Canadian dollar is one of the better performing currencies of 2022 so far, and although it has been on a steady downtrend versus the greenback for the past year, it has logged impressive gains against most other majors. One of the reasons for the loonie’s relative strength is of course the big rally in oil prices as the commodity is Canada’s largest export. The other is the tight labour market.

That puts the Bank of Canada in a position to match the Fed in its hawkish rhetoric and a 75-bps rate hike is almost fully priced in for the next meeting on July 13.

Unless there is a massive miss, the June employment numbers out on Friday are not anticipated to alter those expectations significantly. Yet, the loonie might find it difficult to navigate through stormy seas if the market mood doesn’t perk up in the coming days.

Euro is battling recession blues

In the euro area, the ECB is prepping a new tool to keep periphery yield spreads down before it kicks off its first rate rise in more than a decade in July. But investors have doubts and they remain nervous about how tighter policy will affect not just Eurozone yield spreads but the broader economy as well.

The flash PMI readings for June raised some alarm bells about slowing growth in the euro bloc. Any revisions to the final services PMI on Tuesday will be carefully scrutinized. May retail sales figures on Wednesday might attract some attention too and German industrial output data on Thursday could also sway opinion on recession risks.

However, in an otherwise quiet week, the account of the ECB’s June meeting on Thursday could be a more important driver for the euro. Several ECB policymakers are pushing for rate increases of 50-bps or higher for the subsequent meetings after July and the minutes might offer some insights as to how widely this view is shared among Governing Council members.

The question for the euro is, would hawkish sounding minutes bolster or weaken it? If optimism continues to fade, aggressive rate hike talk is more likely to hurt the single currency against the likes of the dollar and Swiss franc.

The euro just broke below parity versus the franc for a second time this year, hitting 7½-year lows, as the Swiss currency is benefiting from the combination of safe-haven flows and the SNB’s unexpected early liftoff.

CPI numbers for June out of the Alpine nation on Monday will be monitored for any acceleration in inflation as investors are trying to decipher for how long SNB rate increases will outpace the ECB’s.

Weekly Focus – Inflation Pressure Builds Further

Weekly Focus – Inflation Pressure Builds Further

Stock markets continue to struggle as inflation pressures build and both Fed’s Powell and ECB’s Lagarde, at the central banking forum in Sintra, stressed the need to fight inflation even if it involves some pain for the economy.

After supply worries drove oil prices higher, oil dropped again in the wake of OPEC+ confirmation of faster production hikes in July and August. IEA data released earlier in the week showed much larger drawdown of crude oil stock levels than expected, and US president Biden will travel to the Middle East and try to convince the Saudis to increase oil production further later this month. Natural gas and electricity prices continued to increase this week from already very high levels.

High energy prices are fuelling recession fears, which is particularly visible in industrial metals markets these days. Here we have seen a selloff across the board over the last couple of weeks. Copper in particular has declined to a 16-month low, driven not least by Chinese lockdowns. PMI figures indicated a strong rebound in the service sector on the back of an easing of restrictions, which also drove Chinese stock markets higher. That said, President Xi confirmed this week that zero COVID policy remains the right policy for China, which will likely pull economic growth below potential going forward. Easing restrictions also pulled manufacturing PMIs higher. The overall trend for the global manufacturing sector is still pointing down, though, with most Asian PMIs printing lower and the Bank of Japan’s quarterly Tankan business survey also disappointing for the manufacturing sector. Chinese lockdown is a key drawdown here, and easing restrictions could maybe give some relief over the summer.

Inflation continues to increase across Europe. Spanish inflation increased above 10% in June. The German fuel tax rebate and cheap public transport over the summer pulled German inflation lower in June. That said, the underlying price pressure continues to build and we will likely see another spike here when we exit the summer months. The Riksbank reacted to the increased inflation pressure by hiking rates by 50 bps as expected.

Next week, in the euro area, we will look out for ECB minutes and different views in the Governing Council about the pace of monetary tightening. Also, we will keep an eye on a meeting between German chancellor Scholz, unions, employer representatives, Bundesbank staff and leading economists to discuss ways to support consumers while avoiding a wage-price-spiral from emerging.

In the US, we get a new jobs report. A tight labour market supports the case for further Fed tightening. The FOMC minutes will probably not be so important since we have heard from several members since the meeting. We expect the Reserve Bank of Australia to hike rates by 50 bps next week on the back of still persistent global inflation pressures and we expect the National Bank of Poland to hike by 75 bps but with risk of more. Over the summer we will follow how the headwinds for the global economy accumulate, not least inflation pressures. We expect ECB to hike by 25 and Fed by 75 bps in July.

Full report in PDF.

Forward Guidance: Canadian Inflation Expectations Under the Microscope

Forward Guidance: Canadian Inflation Expectations Under the Microscope

With the Bank of Canada’s July interest rate decision looming, all eyes will be on next week’s business outlook and consumer surveys. The bank’s Q4 Business Outlook Survey (BOS) will very likely identify limits on production due to labour shortages as the biggest issue for businesses. There have been signs of easing in global supply chain disruptions. Shipping costs in particular are down sharply year-to-date. But inflation has continued to surge, and the bank will be concerned about that pressure seeping further into longer-run expectations.

Following an uptick in medium-term consumer inflation expectations, the U.S. Fed announced a 75 basis point rate increase earlier this month. A similar uptick in Canada would raise the odds of the BoC following suit with a hike at least as large. The last BOS for Q1 showed business inflation expectations surging higher for the next 2 to 3 years, then holding around the central bank’s 2% price growth target beyond that. The separate survey of consumer expectations suggested a similar view. But with inflation continuing to surprise on the upside, the risk is both move higher.

Friday’s labour market data won’t give the bank any pause about moving too quickly. We expect Canadian employment growth slowed to 15,000 in June—driven by a dwindling supply of workers rather than a lack of demand. The number of job openings edged lower, but is still running almost 70% above pre-pandemic levels. And with the unemployment rate already at its lowest level on record in May, those businesses are competing shrinking number of available workers. The travel and hospitality sector in particular has struggled to re-staff as demand soars.

Week ahead data watch:

Canada’s unemployment rate likely held at 5.1%. But wage growth probably accelerated again, as businesses compete for fewer available workers.

We expect an increase of 300,000 jobs in the U.S. in June fuelled by the recovery in close-contact service industries. As in Canada, tight labour markets will continue to limit employment growth. The unemployment rate is expected to hold steady at 3.6%
The Canadian trade surplus likely edged up to $2 billion with a jump in oil prices boosting the energy trade balance.

Silver and Gold in Search for a Bottom

Silver and Gold in Search for a Bottom

Gold dived below $1800 on Friday morning, testing this year’s low at $1790. It has managed to get support from buyers on a dip below the important round level in the last six months, but this time buyers may come to the rescue much later.

The latest financial market dynamics (falling equity prices and yields) suggest the markets are banking on a recession. Meanwhile, central banks are only picking up speed in tightening monetary policy, creating pressure on long-term inflation expectations. In such an environment, demand for gold as insurance against inflation promises to decline in the coming weeks. A reversal in gold may not occur until G7 central banks begin to soften their rhetoric, which could take months.

The performance of silver is even more pessimistic. Gold’s little sister is far more sensitive to production cycles. Since the beginning of last month, signs of an economic slowdown have formed a downward momentum in silver, forming a bearish technical picture.

The drop of silver below $21 earlier this week marked a consolidation below the local lows of early May after a corrective bounce. The next stopping point for silver might be the $18.10 (8.5% below today’s price), where the 161.8% level of the March-May decline lies. In addition, here is the former resistance area from 2017 to 2020. It now has the potential to become an equally important long-term support.

For gold, the significant downside milestone is now the $1700-1730 area, where last year’s lows and the 61.8% retracement level from the 2018 to 2020 rally are concentrated. If that level also falls in the coming weeks, the following line of gold defence gold could be the $1650 level, where the 200-week average and the 50% retracement level from the two-year rally pass through.

Euro Slides as Inflation Jumps

Euro Slides as Inflation Jumps

The euro is sharply lower on Friday and is currently trading just above the 1.04 line, down 0.76%.

Eurozone inflation outperforms

Eurozone CPI for June was higher than expected, at 8.6% YoY. The estimate stood at 8.4% and inflation rose sharply from the May reading of 8.1%. This marked a record-high. There was better news from the core reading, which dropped marginally to 3.7% YoY, down from 3.8% in May. Investors have given the inflation data a thumbs-down today and sent the euro tumbling ahead of the weekend.

With inflation continuing to accelerate and the ECB revising downwards its growth forecast, the spectre of stagflation in the bloc remains very real. The ECB is no doubt dismayed that inflation was higher than expected, but it’s unclear if the record-high CPI release will be enough to deliver a supersize 0.50% hike for its lift-off next month. At this week’s ECB forum, ECB head Lagarde talked tough and downplayed concerns over a recession, but there are plenty of dark clouds hovering above the eurozone economy. High inflation, weak growth and the energy crisis with Russia mean that there is certainly good reason to be concerned about a significant downturn in the eurozone economy.

In the US, there are worrying signs that the economy is weakening. US Personal Spending fell to 0.3%, down from 0.6% (0.4% exp.). Inflation appears to be declining slowly and the labour market is in solid shape. CME’s FedWatch is putting the likelihood of a supersize 0.75% rate increase at 75%, as markets expect the Fed to remain aggressive against inflation. Can a recession be avoided? Fed Chair Powell is saying all the right things in downplaying concerns about the “R” word, but many market participants have their doubts and feel that the US economy will not be able to avoid a recession.

EUR/USD Technical

  • EUR/USD is testing support at 1.0408. The next support level is at 1.0346
  • There is resistance at 1.0482 and 1.0544

EUR/USD Remains Undermined on Mixed Eurozone CPI

EUR/USD Remains Undermined on Mixed Eurozone CPI

The Eurozone CPI data came in earlier, although we already had inflation data from several countries in the block earlier in the week, meaning it didn’t have a significant impact on the markets. Nevertheless, the Eurozone inflation rose to a fresh record high, while consumer, business and investor sentiment all continue to drop. Stagflation is the key risk facing the Eurozone, which means the euro is going struggle to shine much even as the ECB has paved the way for aggressive 75 basis point rate hikes in July and September. Additionally, the fact that inflation has been diverging across the eurozone means the ECB will have a tough time with its anti-fragmentation tool and may make a bigger mess out of the whole situation.

The headline CPI accelerated to a fresh record high of +8.6% in June, compared to +8.4% y/y expected and +8.1% in May. This clearly lays down the case for bigger rate hikes, which the ECB has already pre-committed to. However, there was some good news: Core CPI eased to +3.7% vs +3.9% y/y expected, edging lower from +3.8% in May. This is arguably positive in that core prices have – for now at least – stopped accelerating.

But there is a bigger problem: intra-Europe inflation divergence:

  • Spain 10.2%
  • Italy 8.0%
  • Germany 7.6%
  • France 5.8%
  • Eurozone 8.6%

The fact that inflation so variant across the zone means it will be uncomfortable for the likes of Germany and France to back aggressive hikes from the ECB while also allowing the central bank to buy bonds of peripheral countries to mitigate the bond market sell-off in those nations. What all this points to is messy monetary policy and potentially political disorder.

Against this backdrop, and given tensions related to the war in Ukraine and now NATO’s expansion, it makes it a difficult environment for investors to confidently invest in the Eurozone.

With the 1.05 handle broken, you would feel that the EUR/USD is now almost certain to drop to a new low for the year, after a very poor performance in the first half of the year.