Inflation data from the US and China and GDP data from the UK will highlight the slow summer week.

USD 

ISM manufacturing for the month of July came in at 52.8 vs 52 as expected. The most watched component, as indicator of inflation pressures, prices paid, fell to 60 from 78.5 in June while expectations were for a modest decline to 75. Production index is holding at healthy 53.5 level but it is down from 54.9 the previous month and it looks increasingly likely that it will continue to decline. New orders component dropped to 48, a second consecutive month of contraction. Employment climbed back to 49.9, basically back to expansion territory after 47.3 reading in June. Additionally, new export orders rose to 52.6 from 50.7 the previous month indicating improving foreign demand for US goods. 

ISM Non-Manufacturing index in July surprised to the upside after poor S&P Global services reading and came in at 56.7 vs 53.5 as expected and up from 55.3 in June. Business activity increased sharply to 59.9 from 56.1 the previous month with new orders also posting 59.9, up from 55.6 the previous month. Prices paid plunged to 72.3 from 80.1 and declines were seen also in inventories and supply deliveries, all good declines. Employment rose to 49.1 from 47.4 and is on the way to return into expansion. 

San Francisco Fed president Mary Daly, a well known dove, said that Fed has a long way to go in fight with inflation. She added that Fed is looking at incoming data to decide whether to slow down with rate hikes or whether to continue with current pace. When a famous dove gets out with a hawkish stance markets pay special attention and USD gained strength on the back of her comments. Later on, during the week, Daly added that if inflation continues to rise strongly a 75bp rate hike may be appropriate in September. 

US printed another stellar job report. July NFP printed a staggering 528k, more than double 250k as expected. The unemployment rate slipped to 3.5% from 3.6%, however participation rate also slipped to 62.1% from 62.2% the previous month. Average hourly earnings rose 0.5% m/m and 5.2% y/y which will keep the inflation elevated. There is no hints in report regarding much-talked-about recession. Chances of a 75bp rate hike in September jumped significantly post report. 

The yield on a 10y Treasury started the week at 2.68%, ran above 2.7% level on the back of Daly’s comments and then hovered around 2.8% after the NFP. Spread between 2y and 10y Treasuries went as low as -43bp after the NFP. FedWatchTool sees the probability of a 50bp rate hike at 35.5% while probability of a 75bp rate hike is at 64.5%. 

This week we will have inflation data for July. We may see some slowdown due to the falling oil prices.

Important news for USD: 

Wednesday:

CPI 

EUR 

Final manufacturing PMI in July improved to 49.8 from 49.6 as previously reported on the back of small improvement in German reading as well as number from Netherlands which came at healthy 54.5, but still represents a twenty-month low. The number indicates that manufacturing is barely in the contraction territory, however details paint a much bleaker image. New orders are falling almost uncontrollably with production following the suit. With declines in new orders and new export orders inventories are surging to unprecedented levels which in turn will lead to even lower production. One bright spot is that supply chains are showing signs of improvement which in turn leads to drops in input prices, except for energy prices which are still highly elevated. Services reading was upwardly revised to 51.2 from 50.6 as preliminary reported on the back of revisions in German and French readings as well as beat in Spanish reading. Composite basically returned back to expansion by printing 49.9. The report notes quickly fading reopening rebound as surging energy prices increase cost-of-living. 

GBP 

BOE delivered a 50bp rate hike as it was widely expected lifting the rate to 1.75%. The vote for a rate hike was 8-1 with Tenreyro voting for a 25bp rate hike increase instead. Inflation is expected to continue rising and is now seen reaching whopping 13% in Q4, staying elevated during 2023 and then dropping to 2% in two years. Risks to these projections are extremely large at the present. Statement shows “The United Kingdom is now projected to enter recession from the fourth quarter of this year.” Recession is expected to last for five quarters and delete 2% from real GDP growth in that period. Statement adds that they are not on a pre-set path regarding policy thus echoing RBA from earlier in the week. BOE will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response. BOE will start with active QT program by selling £10bn of gilts acquired during pandemic every quarter for the next 12 months. Latest polls show Foreign Minister Liz Truss gaining ground over Rishi Sunak in the race for Conservative Party leader and thus a new Prime Minister of the UK. 

This week we will have a preliminary Q2 GDP reading expected to show a modest increase. 

Important news for GBP: 

Friday:

GDP 

AUD 

RBA has delivered a 50bp rate hike as expected and lifted cash rate to 1.85%. Bank’s projections see inflation peaking at around 7.75% near the end of the year before falling back to targeted band of 2-3%. It is, however, still expected that inflation will be a little over 4% in 2023 and around 3 % over 2024. Labor market is tight and consumer proves resilient, although, the behavior of household spending remains the main uncertainty. GDP growth is expected to be 3.25% over 2022 and 1.75% in 2023 and 2024. In the final paragraph it says “The Board expects to take further steps in the process of normalizing monetary conditions over the months ahead, but it is not on a pre-set path. The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labor market.” This indicates that they are moving away from clear forward guidance, like Fed and ECB did, and switch to data dependent stance which will allow them more flexibility in the future. Australia posted a record high trade surplus in the month of June of AUD17.67bn. Statement on Monetary Policy showed that all of the bank’s projections are based on rates reaching 3% by the end of the year and declining a little by the end of 2024. Additionally, wage price index is seen at 3% by the end of 2022, 3.6% by the end of 2023 and 3.9% by the end of 2024. 

Official PMI data from China for the month of July saw manufacturing slump back into contraction territory at 49 from 50.2 in June. Insufficient demand was stated as one of the main culprits as both new orders and new export orders fell below the 50 level. Non-Manufacturing reading fared much better and came in at 53.8, a healthy number nowhere near contraction. Composite dropped to 52.5 from 54.1 the previous month. Caixin manufacturing reading also slipped form June but unlike the official reading it held in expansion territory (50.4, down from 51.7 in June). The report shows slow increases in new orders and input as well as big drops in employment and input costs. Caixin services continued its upward trajectory and came in at 55.5 vs 54.5 the previous month. It was, however, not enough to offset negative impact of manufacturing reading on composite which came in at 54 vs 55.3 in June. The report states that both supply and demand improved, although supply at a higher rate, with employment staying weak and business costs continuing to rise.

This week we will have inflation data from China. 

Important news for AUD: 

Wednesday:

CPI (China) 

NZD 

Employment data for the Q2 started to show some slowdowns in a tight labor market. Employment change came in flat q/q, while Q1 employment change was revised down to also print flat. Thus, the last time employment increased was in Q4 of 2021. The unemployment rate ticked up to 3.3% from 3.2% in Q1 while participation rate ticked down to 70.8% from 70.9% in the previous quarter. Wages continued to improve coming in at 3.4%. 

CAD 

Unlike their southern neighbors Canada posted a weak July jobs report. Employment change came in at -30.6k vs 20k as expected and thus printed second consecutive month of falling jobs. The unemployment rate was unchanged at record low 4.9%, but participation rate declined to 64.7% from 64.9% in June. Full-time employment dropped -13.1k while part-time employment fell -17.5k. Wage growth remained at healthy 5.2% y/y. 

JPY 

Final manufacturing PMI reading slipped to 52.1 from 52.2 as preliminary reported. Details of the report show new orders component declining along with backlog of orders. Inventories are building while producers still remain rather optimistic about outlook for output in the next 12 months. After a reopening surge in past couple of months services PMI plunged back to 50.3 from 54 the previous month dragging with it composite which printed 50.2. 

CHF 

July inflation data saw headline number unchanged at 3.4% y/y while core inflation ticked up to 2% y/y from 1.9% y/y in June. More inflation data is needed but if it shows that inflation is plateauing in Q3 SNB may decide to continue with current monetary policy and not raise interest rate.

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