Weekly Market Outlook (24-28 July)

UPCOMING EVENTS:

Monday: EZ-UK-US PMIs.

Tuesday: US Consumer Confidence.

Wednesday: Australia CPI, FOMC Policy Decision.

Thursday: ECB Policy Decision, US Jobless Claims, US Q2 GDP.

Friday: BoJ Policy Decision, US PCE, US ECI.

Monday: The Eurozone Manufacturing PMI is expected to tick lower to 43.3 vs. 43.4 prior, while the Services PMI is seen at 51.4 vs. 52.0 prior. Eurozone economic data started to consistently surprise to the downside lately which signals a possible recession hitting the economy in H2 2023 and the ECB ending its rate hike cycle.

The UK Manufacturing PMI is expected at 45.9 vs. 46.5 prior, while the Services PMI is seen at 53.0 vs. 53.7 prior. This pattern of contractionary Manufacturing Sector and expansionary Services Sector has been the theme of this tightening cycle and what is probably delaying the recession as the Services Sector is less sensitive to rate hikes.

The US Manufacturing PMI is expected a touch higher at 46.4 vs. 46.3 prior, while the Services PMI is seen a touch lower at 54.0 vs. 54.4 prior. A downside surprise should weigh on the USD as the lower US inflation readings are still fresh in the market’s mind and may cause another dovish repricing in interest rates expectations. On the flip side, an upside surprise should give the USD some support as the market may start to price in another rate hike.

Tuesday: The US Consumer Confidence is expected at 113.0 vs. 109.7 prior. The last month, we saw a huge upside surprise in the report jumping from 104.0 to 109.7. The US Consumer may feel more upbeat due to a strong labour market, lower inflation (energy deflation increased disposable income) and higher stock market. In fact, the present situation index in the Consumer Confidence report is seen as a leading indicator for the labour market and it jumped from 146.8 to 155.3 the last month. The higher stock market prices, on the other hand, have a positive wealth effect that keeps the labour market strong and consumer spending healthy.

Wednesday: The Australia CPI Y/Y is expected at 5.4% vs. 5.6% prior, while the CPI Q/Q is seen at 1.0% vs. 1.4% prior. The RBA’s preferred measures of inflation, the Trimmed Mean and the Weighted Mean, are seen all lower. The Trimmed Mean Y/Y is expected at 5.9% vs. 6.6% prior, while the Q/Q figure is seen at 1.0% vs. 1.2% prior. The Weighted Mean Y/Y is expected at 5.4% vs. 5.8% prior, while the Q/Q reading is seen at 1.0% vs. 1.2% prior. The Australian Jobs report last week beat expectations across the board, and it tipped the expectations in favour for another rate hike, but a miss in the inflation report may give the RBA an excuse to keep the cash rate steady. As a reminder, the RBA’s inflation target is 2-3% per annum.

The Fed is expected to hike by 25 bps and bring the FFR to 5.25-5.50%. The market has already baked in this rate hike, so it won’t be a surprise at all. In fact, the market will focus more on hints for the next move as at the moment the Fed is seen as done with this July increase. In my opinion, it’s unlikely that the Fed will pre-commit to anything at this meeting as they remain data dependent and the recent lower Core inflation reading should increase their hopes for a soft landing. They will also see two more NFP and CPI reports before the September meeting, so I think this meeting is likely to be the most boring one of the year.

Thursday: The ECB is expected to hike by 25 bps and bring the deposit rate to 3.75%. This rate hike was pencilled in already at the last ECB rate decision as President Lagarde said that “inflation is projected to remain too high for too long” and that there was still “more ground to cover”. In fact, all the ECB speakers have been repeating week after week that they will hike at the July meeting and that the stronger debate will centre on the September decision, which will be much more data dependent. In fact, we are unlikely to see any pre-commitment at this meeting as the ECB is likely to just stress their data dependency and resoluteness to bring inflation back to target.

The US Jobless Claims report keeps on being one of the most market-moving events as the labour market continues to be at the top of the market’s focus. Last week, we saw another big beat in Initial Claims that sent the US Dollar higher across the board, while Continuing Claims ticked higher, although they lagged by one week the Initial Claims. As a reminder, the last week Initial Claims data coincided with the NFP survey week. This week Initial Claims are expected at 233K vs. 228K prior, and the Continuing Claims are seen at 1742K vs. 1754K prior.

Friday: The BoJ is expected to keep its monetary policy unchanged with rates at -0.10% and YCC to flexibly target 10yr yields within -/+ 0.50% target band. The BoJ will also release its Outlook Report where the central bank is expected to revise higher its inflation forecasts. There were some expectations coming into this meeting that the BoJ could tweak its YCC policy, but those were trumped first by dovish Governor Ueda’s comments and eventually by a Reuters report last Friday saying that the BoJ was leaning towards keeping yield control policy at the upcoming meeting.

The US Core PCE M/M is expected at 0.2% vs. 0.3% prior while there’s no expectation for the Y/Y figure at the moment, although the Cleveland Fed Inflation Nowcast points to a 4.2% reading vs. 4.6% prior. The market is likely to focus more on the US Employment Cost Index (ECI) though which is expected at 1.1% vs. 1.2% prior.