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by Charalambos Pissouros

Weekly Outlook: Jul 2 – Jul 6; US Jobs Report Takes Center Stage, RBA and Riksbank Decide on Interest Rates. UK PMIs and Fed Minutes Also in Focus

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Monday is manufacturing PMI day. During the European morning, we get the final manufacturing PMIs for June from several European nations and the Eurozone as a whole. As usual the final prints are expected to confirm the preliminary estimates. The bloc’s unemployment rate is also coming out and expectations are for the rate to have remained unchanged at 8.5%.

We get the manufacturing PMI for June from the UK as well, and expectations are for a decline to 54.1 from 54.4. At its latest policy meeting, the BoE kept interest rates unchanged via a 6-3 vote, instead of 7-2 as was expected, while officials maintained their view that the economic slowdown in Q1 was likely temporary, and they pointed to a +0.4% growth in Q2. This has prompted market participants to increase their bets with regards to an August hike. That said, the majority of policymakers said that there is value in seeing how the data evolve after the meeting. So, having that in mind, and although the May PMIs suggested that the UK economy may have started to turn the corner, investors may want to see further improvement in the June data before they become more confident on the prospect of a hike at the Bank’s upcoming gathering. At this point, we have to note that market participants are likely to place more emphasis on the services index, due out on Wednesday, as the service sector accounts for 80% of the UK GDP.

UK PMIs 020718

From the US, we get the ISM manufacturing index for the same month. Expectations are for the index to have declined slightly, to 58.2 from 58.7 in May.

In Canada, markets will be closed in celebration of Canada Day.

On Tuesday, during the Asian morning, the RBA concludes its monetary policy gathering. The Bank is expected to keep interest rates untouched once again. According to the Bank’s latest quarterly Statement on Monetary policy, the cash rate is expected to increase around the middle of next year. Lately, the RBA meetings have been non-events and we believe that this one will follow suit.

RBA rate 020718

Since the latest meeting, data showed that GDP accelerated to 3.1% yoy in Q1 from 2.4%, which, at least for now, is in line with the Bank’s view that GDP growth is likely to pick up and average a bit above 3% in 2018 and 2019. As for the labor market, the unemployment rate declined to 5.4% from 5.6%. Having these data in mind, we don’t expect major changes in the statement accompanying the decision. We expect officials to maintain their upbeat view on the domestic economy and the labor market, but to reiterate that inflation and wages remain low and that one continuing source of uncertainty is the outlook for household consumption. We also expect them to reiterate concerns about the direction of international trade policy.

During the European morning we have another central bank deciding on interest rates, the Riksbank. At its latest meeting, the world’s oldest central bank kept its repo rate unchanged at -0.50% and pushed back the timing of when it expects the rate to start rising. Since the last meeting, data showed that both the CPI and CPIF rates rose to +1.9% yoy and +2.1% yoy in May from 1.7% and 1.9% respectively, while the excluding energy CPIF rate ticked up to +1.5% yoy from +1.4%. All rates are near the same levels they were back in March, the data set Riksbank officials had in hand at the April meeting. So, bearing that in mind, we still expect them to reiterate the view that interest rates will begin to be raised towards the end of the year.

As for Tuesday’s economic indicators, Eurozone’s retail sales for May are anticipated to have risen at the same pace as in April (+0.1% mom). However, this will drag the yoy rate down to +1.4% from +1.7% previously.

In the UK, we have the construction PMI for June, which is expected to have ticked down to 52.4 from 52.5. As we noted when describing the manufacturing PMI, investors are likely to pay more attention to the services index, due out on Wednesday.

In the US, it is the day before the fourth of July holiday (Independence Day) and thus, markets will close early.

On Wednesday, during the Asian morning, we get Australia’s trade balance and retail sales data, both for May. Expectations are for the nation’s trade surplus to have increased somewhat, but retail sales are anticipated to have slowed to +0.3% mom from +0.4% in April. China’s Caixin Services PMI for June is also coming out.

During the European day, we will get the final services and composite PMIs from the nations of which we get the manufacturing prints on Monday. As it is usually the case, the final prints are anticipated to confirm the preliminary estimates.

In the UK, the services PMI is forecast to have risen for the third consecutive month. Specifically, the index is anticipated to have risen to 54.2 in June from 54.0 in May. Although the manufacturing and construction PMIs are expected to have declined somewhat, another increase in this index could keep hopes for an August hike by the BoE alive.

In the US, markets will stay closed in celebration of Independence Day.

On Thursday, during the European morning, we get Switzerland’s CPI for June. Expectations are for Swiss inflation to have accelerated to +1.1% yoy from +1.0%. Although this would be a move in the desired direction, inflation would still be below the Bank’s objective of 2%, and thus, we doubt that such a modest acceleration could impact SNB policymakers’ view around monetary policy. At their latest meeting, they kept interest rates unchanged at -0.75%, and although they upgraded their inflation forecasts for this year, they downgraded the long-term ones. They now see inflation averaging at +1.6% yoy in 2020 compared to +1.9% previously. What’s more, the forecasts are based on the assumption that the three-month Libor remains at –0.75% over the entire forecast horizon.

In the US, we get the minutes from the latest FOMC policy gathering, when the Committee decided to increase the Federal funds rate by 25bps, while the new “dot plot” pointed at two more rate increases by year end, instead of just one as the previous plot suggested. This was due to the fact that one of the policymakers who previously supported a total of three hikes in 2018 has changed his mind and called for four. What’s more, in the statement accompanying the decision, the Committee reiterated that the stance of monetary policy remains accommodative, but removed the part saying that “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run”. Thus, we will scan the minutes for any discussions or hints on how close interest rates are to their neutral level and what this means for policymakers’ future policy plans. Any discussions around the US-China trade dispute are also likely to gain attention.

As for the US indicators, we have the ADP employment report for June. Expectations are for the private sector to have gained 190k jobs, following May’s 178k. This could raise speculation that the NFP number, due out on Friday, may come slightly below its forecast of 200k. However, we have to repeat for the umpteenth time that although the ADP is the only major gauge for the non-farm payrolls, the correlation between the two time-series at the time of the release (no revisions are taken into account) has fallen in recent years. Taking into consideration data from January 2011, the correlation stands at around 0.45.

ADPvsNFP 020718

The US final services and composite PMIs for June are also to be released and they are expected to confirm their preliminary prints. The ISM non-manufacturing index for the same month is coming out as well and the forecast is for a small decline to 58.3 from 58.6 in May.

Finally, on Friday, the spotlight is likely to fall to the US employment report for June. The forecast suggests that non-farm payrolls increased 200k, after rising 223k the previous month. The unemployment is forecast to have held steady to its 18-year low of 3.8%, while average hourly earnings are expected to have risen at the same monthly pace as in June (+0.3% mom). Without any revisions to previous monthly rates, this could drive the yoy up to +2.8% from +2.7% as the monthly print of June 2017 that will drop out of the yearly calculation was +0.2%.

Av earnings 020718

Overall, the forecasts suggest that we are likely to get a strong report, consistent with further tightening in the labor market. Although the initial market response may come from the NFP number, barring any major deviations from the forecast, the aftermath direction is likely to be dictated by the yoy earnings rate. Accelerating wages mean more spending and thereby higher inflation in the foreseeable future, something that could lead the Fed to faster rate increases. Therefore, a higher earnings rate could strengthen further the case for two more rate hikes by year end. According to the Fed funds futures, there is a 73% chance for the next hike to come in September, while the probability for ending the year with a total of 4 rate increases stands at around 43%.

We get employment data for June from Canada as well. The unemployment rate is forecast to have held steady at its four-decade low of 5.8% for the fifth consecutive month, while the net change in employment is anticipated to show that the economy added 17.5k jobs, after losing 7.5k in May. Despite the disappointment in Canada’s CPI for May and retail sales for April, hawkish remarks by BoC Governor Poloz last week kept the market overwhelmed with regards to the prospect of a July rate hike, and a decent employment report could strengthen further the case. Canada’s trade data for May and the Ivey PMI for June are also coming out.

 

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