ECB and BOJ meeting, preliminary PMI data from the Eurozone and the UK as well as inflation data from the UK, Canada and New Zealand will be highlights of another packed week. We will also get US housing data and if they come “materially stronger than expected” it will increase chances of a 100bp rate hike in July.

USD 

Inflation in June printed an unwelcome surprise. It rose 9.1% y/y vs 8.8% y/y as expected and up from 8.6% y/y in May. This is a new 40-year high. Monthly reading came in at 1.3% m/m vs 1.1% m/m as expected and up from 1% m/m the previous month. Gasoline posted the biggest rise in prices. With oil prices dropping below $100 in the past few weeks we could see this reverse in July reading. Energy component of the CPI contributed 7.5%, nearly half of the all items increase. Fuel oil prices rose 98.5% y/y. The report shows that almost 75% of components that go into CPI basket saw price increases of more than 4% in the last 12 months. With inflation running scorching hot the markets were pricing almost 25% chance of a 100bp rate hike at July meeting after the CPI print. Advance retail sales for the month of June came in at 1% m/m vs 0.8% m/m. Control group came in at 0.8% m/m vs 0.3% m/m as expected. Ex autos and ex autos and gas also beat the expectations. 

The yield on a 10y Treasury had a roller coaster ride. It started the week at around 3.09%, then fell below 3% only to jump over it again after the CPI print and come back below it shortly after. The spread between 2y and 10y Treasuries dropped to -27bp thus making the infamous yield curve inversion. After the CPI report FedWatchTool sees the probability of a 75bp rate hike at 16.7% with other 83.3% seeing a full 100bp rate hike. Once Fed Weller, biggest hawk in the Board of Governors, stated that he is leaning more toward 75bp rate hike in July, but if retail sales and housing data “materially stronger than expected” he will be up for a 100bp rate hike, the probability turned to 50:50. Markets concluded that results of retail sales were not “materially stronger than expected”, therefore the USD declined and probability of a 75bp rose to 64.4% with the remaining 35.6% expecting 100bp rate hike. 

EUR 

ZEW survey for the month of July showed atrocious numbers. Current situation fell to -45.8 from -27.6 in June, expectations were for a decline to -34.5. Economic sentiment slumped to -53.8 from -28 the previous month while it was expected to drop to -38.3. ZEW cites rising energy prices, ECB rate hikes, war in Ukraine and supply chain issues from further restrictions in China as detriment to the outlook. 

Forward looking 5y5y swaps, widely used as a sign for inflation expectations, dropped below 2% for the first time since March of this year indicating that fears of slowing growth are gripping the markets. Political crisis in Italy, nothing out of ordinary for that region, led to yield on Italian government bonds rising. As a result of it, the spread between them and German government bonds widened causing additional worries about “fragmentation” in the European bond markets. 

This week we will have preliminary July PMI numbers as well as ECB meeting. A 25bp rate hike was telegraphed last month and it will be first rate hike in more than a decade (last rate hike was in 2011). 

Important news for EUR: 

Thursday:

ECB Interest Rate Decision

Friday:

S&P Global Manufacturing PMI (EU, Germany, France)

S&P Global Services PMI (EU, Germany, France)

S&P Global Composite PMI (EU, Germany, France) 

GBP 

BOE Governor Bailey stated that there are options other than a 25bp rate hike in August on the table. He reiterated their commitment to act forcefully if inflation shows signs of persistence. It is expected that inflation will come down sharply in 2023. At the moment of his speech markets were pricing a probability of a 50bp rate hike in August at almost 60%, 

GDP data surprised in May as it came at 0.5% m/m vs flat as expected. Additionally, April’s reading was revised higher. Services expanded 0.4%, production 0.9% and construction activity grew by 1.5% m/m. If June reading comes in positive the UK could escape a quarter of negative growth. After the second round of votes for the leadership place in Conservative Party there are still 5 members in the running with former Chancellor of the Exchequer Rishi Sunak leading the way with 101 votes. His closest follower is Penny Mordaunt with 83 votes. All members will be going into the next round of voting. 

This week we will have employment, inflation and preliminary July PMI numbers. 

Important news for GBP: 

Tuesday:

Claimant Count Change

Unemployment Rate

Wednesday:

CPI

Friday:

S&P Global Manufacturing PMI

S&P Global Services PMI

S&P Global Composite PMI 

AUD 

Employment report for the month of June was a stellar one. The employment change came in at 88.4k vs 25k as expected. The unemployment rate dropped to 3.5% from 3.9% in May and is now at the lowest level in history. This was all accomplished along with participation rate ticking up to 66.8% from 66.7% the previous month, making the feat of falling unemployment rate even more impressive. Full-time employment was at 52.9k while part-time was at 25.5k. Now the pressure is on the RBA with 50bp rate hike in August being the base case while 75bp rate hike talks gather momentum. 

Inflation data from China for the month of June saw CPI continue to rise and coming in at 2.5% y/y vs 2.1% y/y in May while PPI continued to decline coming in at 6.1% y/y vs 6.4% y/y the previous month. PPI has been on the decline since November of 2021 and it is at levels not seen since March of 2021. With CPI inflation low compared to the rest of the world China will have easier job introducing monetary easing to stimulate the economy. In CNY terms exports in H1 have risen by 13.2% y/y while imports rose 4.8% y/y. Trade balance data for June showed trade surplus widening to $97.94bn from $78.76bn in May with exports rising 17.9% while imports rose meekly 1%. Imports were impacted by the restrictions and they should bounce back in the next couple of months. 

Q2 GDP data saw economy plunge -2.6% q/q vs -1.5% q/q as expected. Lockdowns and restrictions have impaired economic activity much more than expected. Yearly figures managed to print a positive number, but it was a measly 0.4% y/y vs 1% y/y as expected. June data show a much welcomed relief after restrictions were lifted. Industrial production rose 3.9% y/y vs 0.7% y/y in May while retail sales showed first growth in three months and came in at 3.1% y/y vs -6.7% y/y the previous month. 

NZD 

RBNZ has delivered a much expected 50bp rate hike thus raising the Official Cash Rate to 2.5%. The accompanying announcement saw that Committee is comfortable with rate hike path outlined in the May Monetary Policy Statement. They will continue increasing OCR in order to bring inflation down to the targeted range of 1-3% while supporting maximum employment. Currently core CPI is around 4%. Members have acknowledged near-term upside risks to inflation as well as medium-term downside risks to economic activity. The statement ends with “Once aggregate supply and demand are more in balance, the OCR can then return to a lower, more neutral, level.” which indicates that they are prepared to raise above neutral rate. 

This week we will have inflation data for Q2. 

Important news for NZD: 

Monday:

CPI 

CAD 

BOC decided to surprise the markets and raise rates by full 100bp. Expectations were for a 75bp rate hike. The hike brought rate to 2.5%, matching it with New Zealand’s. The accompanying statement showed that rate BOC decided to front-load the path to higher interest rates which are to come at the following meetings. The statement shows that CPI will likely to remain around 8% in the next few months and that more than half of the components that make up the CPI are now rising by more than 5%. Inflation is expected to come down to 3% by the end of 2023 and return to bank’s 2% target by the end of 2024. The Canadian economy is characterized as overheated and in excess demand and labor market conditions are tight. New projections for GDP are downgraded and are expected to be at 3.5% in 2022, 1.75% in 2023 and 2.5% in 2024. During the press conference BOC Governor Macklem stated that front-loading of rates is necessary in order to avoid need for even higher rates in the future. Additionally, front-loading should help in achieving “soft landing”, reaching of which he finds doable. When asked about the terminal rate he said that it will all depend on the economy. The biggest problem is the housing market. Housing prices are notoriously sensitive to interest rate hikes. With the market already being in the bubble cracks will soon start to appear and if BOC pushes on with aggressive hiking we could see a bubble bursting with an innumerable consequences for the economy. 

This week we will have inflation data 

Important news for CAD: 

Wednesday:

CPI 

JPY 

Core machinery orders for the month of May fell -5.6% m/m while rising 7.4% y/y. The biggest drops were seen in petroleum and coal products followed by transportation & postal activities. Finance and insurance also saw big declines as was the case with business-oriented machinery. There are talks that companies are delaying investments due to surging energy and raw material prices. Prime Minister Kishida gave orders to bring back online nine nuclear power plants in order to help economy and citizens with surging energy prices. Nuclear plants should be online by the winter in Japan. Covid cases are again on the rise and government is considering introducing extraordinary measures. 

This week we will have a BOJ meeting. No changes to the monetary policy are expected. 

Important news for JPY: 

Thursday:

BOJ Interest Rate Decision 

CHF 

SNB total sight deposits for the week ending July 8 came in at CHF745bn vs CHF748.4bn the previous week. Deposits continue to decline as SNB is satisfied with current Swissy strength and lets market do its job.

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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.