BOE and RBA meetings, both expected to deliver a 50 bp rate hike, NFP and employment data from Canada and New Zealand coupled with inflation data from Switzerland and PMI data from China will highlight yet another jam packed trading week.
USD
Fed stayed true to their word and delivered a 75bp rate hike bringing the rate to a range of 2.25-2.5%. The statement showed that “the Committee is highly attentive to inflation risks” that recent indicators of spending and production have been weakening and that labor market is tight. The decision today was unanimous and further rate hikes are appropriate. At the press conference Chairman Powell stated that pace of further rate hikes will depend on the incoming data. Essentially, they are brushing aside forward guidance, same as the ECB did, for data dependence and meeting-by-meeting approach. The markets assessed this statement as less aggressive rate hike path from the Fed and USD suffered. He added that they are at neutral level now as the June dot plot showed and admitted that some signs of slowdown start to appear in the economic data. Additionally, he acknowledged that they have front-loaded rate hikes and that their full effects are yet to be seen.
Advanced reading of Q2 GDP came in at -0.9% annualized vs 0.5% as expected. Combined with Q1 which came in at -1.6% annualized it makes two consecutive quarters of negative GDP which constitutes a technical recession. GDP deflator came in at 8.9% vs 7.9%, a full percentage point higher than expected and it took away from the GDP reading due to strong inflation. Looking deeper into the contribution by the categories we see that business investment was a huge drag, taking away -2.73pp from the GDP while net exports managed to add 1.43pp to the reading.
PCE inflation data jumped in July to 6.8% y/y from 6.3% y/y the previous month. Core inflation ticked up to 4.8% y/y from 4.7% y/y in June thus breaking the streak of three consecutive months of declining core inflation. Personal spending jumped to 1.1% while personal income ticked up to 0.6%. With Fed now being data dependent with attention being paid to inflation reading we may see markets to start pricing in bigger rate hikes at September meeting. New home sales for the month of June continued to decline and came in at 590k vs 642k the previous month. Rising mortgage rates are dissuading home buyers and it is something that home builders already warned about.
The yield on a 10y Treasury started the week at 2.8% and generally moved lower throughout the week. Spread between 2y and 10y Treasuries went as low as -25bp during the week. FedWatchTool sees the probability of a 50bp rate hike at 64% while probability of a 75bp rate hike is at 36%.
This week we will have ISM manufacturing and non-manufacturing data as well as jobs data on Friday. Headline NFP number is expected to come at around 300k while the unemployment rate will stay unchanged at 3.6%.
Important news for USD:
Monday:
ISM Manufacturing PMI
Wednesday:
ISM Non-Manufacturing PMI
Friday:
NFP
Unemployment Rate
EUR
A member of the ECB Governing Council, Robert Holzmann, stated over the weekend that ECB may be forced to tolerate a mild recession. Ifo reading for July printed declines across all three measures as companies get increasingly pessimistic about the future. Ifo economist commented that reading indicates that if the situation continues developing as it is currently full on recession cannot be ruled out. The energy question is the biggest concern for the economy as Germany needs to fill up to 90% of its current gas reserves. Reserves are currently almost 2/3 full but the prospect of reaching 90% till the Winter starts seems bleak. Nord Stream 1 gas flow was lowered to 20% of its capacity on Wednesday. Gazprom, pipeline’s operator, stated difficulties in acquiring turbine parts and legal difficulties imposed due to sanctions as the main reason for reduction in gas flow.
Preliminary inflation data for the month of July saw a new record high of 8.9% y/y vs 8.6% y/y in June. Even more troublesome for the ECB is that core inflation rose 4% y/y vs 3.8% y/y as expected and up from 3.7% y/y the previous month. First reading of Q2 GDP surprised to the upside with 0.7% q/q vs 0.2% q/q as expected. French, Italian and Spanish readings were above expectations while Germany lagged and came in flat in Q2. Incoming data in July does not bode well for the Q3 GDP and combined with the looming gas crunch threat we could see first negative reading of the year.
GBP
The pound had a volatile week. It had gained more than 250 pips against the USD and then almost gave back all of it after the PCE report only to finish the week strong. GBPJPY rose almost 350 pips until the Fed meeting and then gave it all back toward the end of the week and lost additional 150 pips.
This week we will have a BOE meeting. A 50bp rate hike is expected, which is a very rare case in BOE’s history. With recession risks looming over the UK’s economy the window of rate hike opportunity is closing for the bank, They may feel forced to do as much as they can and opt for a 50bp rate hike.
Important news for GBP:
Thursday:
BOE Interest Rate Decision
AUD
Q2 inflation data saw headline number rise 1.8% q/q as expected, down from 2.1% q/q in Q1 and 6.1% y/y vs 6.2% y/y as expected, a very rare miss in inflation and 5.1% y/y in the previous quarter. Core inflation measure, trimmed mean, came in at 1.5% q/q as expected and up from 1.4% in Q1 and 4.9% y/y, a big up from 3.7% y/y. RBA targets yearly core inflation in range of 2-3% and with it currently running at almost 5% they will have to go for a 50bp next week.
This week we will have RBA meeting where a third 50bp rate hike in a row is expected. We will also get Caixin PMI data from China.
Important news for AUD:
Monday:
Caixin Manufacturing PMI (China)
Tuesday:
RBA Interest Rate Decision
Wednesday:
Caixin Services PMI (China)
Caixin Composite PMI (China)
NZD
RBNZ Governor Adrian Orr stated that they are reviewing recent monetary policy conduct. The goal of the review is to assess the impact on inflation and employment according to the targets they set and decisions they made in the process. Business confidence in July improved to -56.7 from -62.6 in June but it is still at a painfully low level.
This week we will have Q2 employment data.
Important news for NZD:
Wednesday:
Employment Change
Unemployment Rate
CAD
GDP for May came in flat, down from 0.3% m/m in April. Preliminary projection for June GDP is at 0.1% m/m. The transportation and warehousing sector were positive contributors while the manufacturing sector contracted.
This week we will have employment data.
Important news for CAD:
Friday:
Employment Change
Unemployment Rate
JPY
Minutes from the BOJ June meeting showed members willingness to shelter economy from the rising commodity prices and moves in the currency markets. Members agreed that BOJ must keep easy policy to achieve their price goal in sustained, stable fashion coupled with rising wages. A few members stated that in the light of recent events it will be necessary to ramp up bond purchases in order to achieve monetary guidance, essentially to defend the upper yield target. Japanese government has raised their view on the overall economy stating that “the economy is picking up gently”. The outlook for private consumption, employment as well as imports were raised.
July inflation data for the Tokyo area saw increases in all three readings. Headline inflation rise to 2.5% y/y vs 2.3% y/y in June, ex fresh food rose to 2.3% y/y from 2.1% y/y while ex fresh food, energy rose to 1.2%, crossing the 1% level for the first time in more than three years. Industrial production improved in June 8.9% m/m, a record monthly increase in series’ history, while retail sales continued to stumble and came in at -1.4% m/m.
CHF
SNB total sight deposits for the week ending July 25 came in at CHF746.6bn vs CHF745.4bn the previous week. Yet another negligent change in the reading as SNB feels comfortable with current Swissy valuation.
This week we will have inflation data.
Important news for CHF:
Wednesday:
CPI
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Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets. Please remember that our accounts have Market Execution. Please note how Execution works during high impact news and other times of low liquidity.
