UPCOMING EVENTS:
- Monday: US Treasury Refunding Financing Estimates.
- Tuesday: Japan Unemployment Rate, Eurozone Flash Q2 GDP, US Job Openings, US Consumer Confidence.
- Wednesday: Japan Industrial Production and Retail Sales, Australia CPI, Chinese PMIs, BoJ Policy Decision, Eurozone Flash CPI, US ADP, Canada GDP, US ECI, US Treasury Refunding Announcement, FOMC Policy Decision.
- Thursday: China Caixin Manufacturing PMI, BoE Policy Decision, US Jobless Claims, Canada Manufacturing PMI, US ISM Manufacturing PMI.
- Friday: Australia PPI, Swiss CPI, Swiss Manufacturing PMI, US NFP.
Tuesday
The US Job Openings are expected at 8.025M vs. 8.140M prior. Job openings have been on a steady downtrend since peaking in March 2022 and they are getting close to the pre-pandemic level. This is good news for the Fed as the labour market continues to rebalance via less job availability rather than more layoffs. Nonetheless, the labour market is a spot to keep an eye on carefully in this part of the cycle.
The US Consumer Confidence is expected at 99.5 vs. 100.4 prior. The last report saw a slight dip in confidence although the index has been in a range since 2022. Dana M. Peterson, Chief Economist at The Conference Board said: “Confidence pulled back in June but remained within the same narrow range that’s held throughout the past two years, as strength in current labour market views continued to outweigh concerns about the future. However, if material weaknesses in the labour market appear, Confidence could weaken as the year progresses.”
Wednesday
The Australian Q2 CPI Y/Y is expected at 3.8% vs. 3.6% prior, while the Q/Q measure is seen at 1.0% vs. 1.0% prior. The Trimmed Mean CPI Y/Y is expected at 4.0% vs. 4.0% prior, while the Q/Q measure is seen at 0.9% vs. 1.0% prior. Finally, the Weighted Median Y/Y is expected at 4.3% vs. 4.4% prior, while the Q/Q reading is seen at 1.0% vs. 1.1% prior.
As a reminder, the market has been pricing a rate hike for the RBA following the last hot monthly CPI readings, but eventually RBA’s Hauser poured cold water on those expectations stating that it would be better to just keep the policy rate steady.
Another hot CPI report though will likely trigger a hawkish reaction and the probabilities for a rate hike might rise to roughly 50% (if not higher) from the current 22% chance. A soft report won’t change anything in the bigger picture, but it should quell the hawkish expectations.
The BoJ is expected to keep interest rates steady at 0.00-0.10%, although the market is assigning a 70% probability of a 10 bps hike. The central bank is expected to announce its taper plan with the majority looking for bond purchases to be trimmed to JPY 5tln per month (it’s currently around 6tln per month).
Meanwhile, there are no strong signals that point to a reacceleration in inflation. It’s hard to see a rate hike given that Japan strived to achieve inflation for decades and it might ruin this accomplishment by tightening policy too fast.
The Tokyo CPI ex Food and Energy slowed to 1.5% Y/Y last week, so I personally think that rate hike expectations are misplaced and it opens up for a “sell the fact” opportunity. It also looks like an asymmetric bet because if they do hike, they probably won’t be able to hike again for a long time and if they don’t hike, there’s lots of unwinding in store. Therefore, short Yen and long Nikkei look like some nice bets from a risk-reward perspective.
I can also see the BoJ meeting as being the most important event of the week for financial markets. In fact, it looks like most of the moves we’ve been seeing in the past 10 days were driven by deleveraging from strengthening Yen. Basically, the squeeze on the carry trades impacted all the other markets. The BoJ decision could be the clearing event to get back to the old script.
The Eurozone Flash CPI Y/Y is expected at 2.4% vs. 2.5% prior, while the Core CPI Y/Y is seen at 2.8% vs. 2.9% prior. The ECB members continue to repeat that September is a live meeting for another rate cut and that the markets expectations of two more cuts this year “seem reasonable”.
Having said that, after this report we will get another one at the end of August before the ECB decision on September 12th. The central bank will want to see the disinflationary trend to remain intact to deliver a rate cut in September, if we were to see a reacceleration, they might hold off and skip for another month.
The US Q2 Employment Cost Index (ECI) is expected at 1.0% vs. 1.2% prior. This is the most comprehensive measure of labour costs, but unfortunately, it’s not as timely as the Average Hourly Earnings data. The Fed though watches this indicator closely. Although wage growth remains high by historic standards, it’s been easing for the past two years.
The Fed is expected to keep rates steady at 5.25-5.50%. The overall decision will likely be dovish given the easing in the labour market and inflation, but it’s unlikely that they will pre-commit to anything. The market has already fully priced in a rate cut in September and December with some chances of a back-to-back cut in November.
The next CPI release will be key (barring a quick deterioration in the labour market) as another benign report will likely see Fed Chair Powell pre-committing to a rate cut in September at the Jackson Hole Symposium.
Thursday
The market is assigning a 50% probability of a 25 bps rate cut for the BoE, bringing the Bank Rate to 5.00% from the current 5.25% level. Again, I think expectations are misplaced as there should be a strong probability of rates being kept steady.
The BoE’s chief economist Huw Pill said that it was an open question of whether the time for a rate cut was now or not and added that more data will come before the next policy decision, but they had to be realistic about how much any one or two releases could add to their assessment.
This suggested that there wasn’t much willingness to deliver the first cut in August unless the inflation data came out extremely good or the jobs data showed an extremely ugly picture. Well, the latest UK CPI wasn’t good as the Core figure and the Services inflation remained unchanged. On the labour market side, the latest report was mostly in line with expectations with wage growth remaining elevated.
Therefore, I would say that the BoE is likely to keep rates steady at 5.25%.
The US Jobless Claims continue to be one of the most important releases to follow every week as it’s a timelier indicator on the state of the labour market.
Initial Claims remain pretty much stable around cycle lows and inside the 200K-260K range created since 2022. Continuing Claims, on the other hand, have been on a sustained rise, although they have stabilised more recently.
This shows that layoffs are not accelerating and remain at low levels while hiring is more subdued. This is something to keep an eye on. This week Initial Claims are expected at 236K vs. 235K prior, while Continuing Claims are seen at 1856K vs. 1851K prior.
The US ISM Manufacturing PMI is expected at 48.8 vs. 48.5 prior. Last week, the S&P Global US Manufacturing PMI slipped to 49.5 from 51.5 prior, although the commentary was largely positive.
The survey brought some more welcome news in terms of inflation stating that “the rate of increase of average prices charged for goods and services has slowed further, dropping to a level consistent with the Fed’s 2% target".
On the negative side, “both manufacturers and service providers are reporting heightened uncertainty around the election, which is dampening investment and hiring” and “input costs rose at an increased rate, linked to rising raw material, shipping and labour costs. These higher costs could feed through to higher selling prices if sustained or cause a squeeze on margins”.
Friday
The Swiss CPI Y/Y is expected at 1.3% vs. 1.3% prior, while the M/M measure is seen at -0.2% vs. 0.0% prior. As a reminder, the SNB cut interest rates by 25 bps to 1.25% at the last meeting and lowered its inflation forecasts.
For context, the central bank expected inflation to pick up slightly and average 1.5% in Q3, so this is the baseline for their decision and if inflation were to undershoot expectations, then the SNB will deliver another cut in September. The market is already assigning a 75% probability of a rate cut in September given that the last CPI report came out softer than expected.
The US NFP is expected to show 175K jobs added in July vs. 206K in June, and the Unemployment Rate to remain unchanged at 4.1%. The Average Hourly Earnings Y/Y is expected at 3.7% vs. 3.9% prior, while the M/M measure is seen at 0.3% vs. 0.3% prior. The Fed at the moment is very focused on the labour market as they fear a quick deterioration.
As a reminder, the Fed forecasted the unemployment rate to average 4% in 2024, so I can see them getting a bit uncomfortable and deliver a rate cut if unemployment rises to 4.2%. Again, this wouldn't be a surprise as a rate cut in September is already fully expected, so at the margin, the market might increase the probabilities for a back-to-back rate cut in November.
For now, the data suggests that the labour market is rebalancing via less hires rather than more layoffs and overall, there are no material signs of deterioration.
The last report was relatively softer than expected but still a decent one. The uptick in the unemployment rate at first impact was perceived as bad news, but looking at the details it wasn’t as bad.
In fact, the entire increase in unemployment during the first half of 2024 has been due to new entrants and re-entrants, and not layoffs. This is something we have also seen from other data like Job Openings and Jobless Claims where the softening in the labour market came from less hires rather than more layoffs.
For more information about the last report click here.
