• U.S. yields continue to rise as markets reprice Fed policy; FOMC minutes showed a rather large split; the data highlights will be ADP private sector jobs and June ISM services PMI; Banco de Mexico releases its minutes
  
• The eurozone reported soft May retail sales; Germany reported firm May factory orders; BOE tightening expectations continue to rise; Poland is expected to keep rates steady at 6.75%
  
• Australia reported soft May trade data; Bank Negara kept rates steady at 3.0%, as expected

The dollar is soft ahead of ADP and ISM. DXY is trading lower near 103.045 after three straight up days despite the continued rise in U.S. yields. The euro is trading higher near $1.0885 while sterling is trading higher near $1.2765. USD/JPY remains heavy after being unable to break above 145 and is currently trading near 143.85. With markets now starting to increasingly price in that second Fed hike this year (see below), 2-year differentials continue to move in the dollar’s direction and further gains are likely. Jobs data this tomorrow will be key to this repricing, though we will get plenty of other important U.S. data ahead of that today. We would use today’s dollar weakness as an opportunity to go long at better levels.

AMERICAS

U.S. yields continue to rise as markets reprice Fed policy. A 25 bp hike in July is nearly priced in while the odds of another 25 bp hike after that have risen to around 35%. If the U.S. data continue to come in strong this week, those odds should rise further. Furthermore, Fed easing is starting to get pushed out to next July rather than June. Simply put, the market is finally starting to believe the Fed’s “higher for longer” message. This has boosted U.S. yields and in turn this has helped the dollar get traction. The data this week will be key for an extended rally. The U.S. 2-year yield traded at a new cycle high near 4.98% today and is on track to test the March high near 5.08%, while the 10-year yield traded at a new cycle high near 3.98% today and is on track to test the March high near 4.09%. The differentials continue to move in the dollar’s favor and so we would use today’s dollar weakness as an opportunity to go long at better levels.

FOMC minutes showed a rather large split. In making its decision, the Fed noted that “Almost all participants judged it appropriate or acceptable to maintain the target range for the federal funds rate at 5% to 5.25%.” However, “Some participants indicated that they favored raising the target range for the federal funds rate 25 bp at this meeting or that they could have supported such a proposal.” This means that while there were no official dissents, there were some unofficial ones and certainly underscore how big the split has become between the hawks and the doves. The minutes also showed that “almost all” officials saw the decision to keep rates steady as “appropriate or acceptable but at the same time expected more rate hikes this year. Barring a complete collapse in the economy, it’s hard to make a case against a 25 bp hike at the July 25-26 meeting. This was the compromise that allowed the doves to prevail last month and the hawks to prevail this month. Since the June decision, retail sales have come in strong and weekly claims data suggest the labor market remains tight. PCE readings show inflation easing, albeit slowly. This week’s jobs data will be very important for the July decision, though CPI and PPI next week and retail sales the week after will have a big impact too. Logan speaks today.

The data highlight will be ADP private sector jobs estimate. It was delayed a day due to the holiday and is expected at 225k vs. 278k in May. Consensus for NFP tomorrow is currently 225k vs. 339k in May but the whisper number is 260k as the latest weekly claims data suggest the labor market remains robust. The unemployment rate is expected to fall a tick to 3.6%, while average hourly earnings are expected to fall a tick to 4.2% y/y.

June ISM services PMI will also be important. Headline is expected at 51.2 vs. 50.3 in May. Keep an eye on employment and prices paid, which stood at 49.2 and 56.2 in May, respectively. Last week, Chicago PMI came in at 41.5 vs. 43.8 expected and 40.4 in May.

Other labor market data will be reported. May JOLTS job openings (9.885 mln expected) and June Challenger job cuts will also be reported today along with weekly jobless claims. Initial claims are expected at 245k vs. 239k last week. May trade data will be reported and is expected at -$69.0 bln vs. -$74.6 bln in April. Of note, the Atlanta Fed's GDPNow model is currently tracking 1.9% SAAR for Q2, down from 2.2% previously. Next model update comes today after the data. It’s worth noting that after the upward revision in Q1 GDP growth to 2.0% SAAR, the economy has grown four straight quarters at or above trend at a time when the Fed wants below trend growth to bring down inflation.

Banco de Mexico releases its minutes. At the June 22 meeting, the bank kept rates steady at 11.25% in a unanimous decision. The bank said rates need to remain on hold for a “prolonged period” due to risks from a weak peso and persistent core inflation. In recent weeks, bank officials have said that rates would be kept on hold for 2-3 meetings. With June out of the way, this suggests no change at the August 10 or September 28 meetings, leaving November 9 and December 14 as potential starts to the easing cycle. This lines up with the swaps market, which is pricing in steady rates for the next three months followed by the start of an easing cycle with a cautious 25 bp of easing over the subsequent three months. Of course, it will all depend on the data and June CPI will be reported tomorrow. Headline is expected at 5.04% y/y vs. 5.84% in May, while core is expected at 6.86% y/y vs. 7.39% in May. If so, headline would be the lowest since March 2021 but still well above the 2-4% target range.

EUROPE/MIDDLE EAST/AFRICA

The eurozone reported soft May retail sales. Sales were flat m/m vs. 0.2% expected and flat in April. As a results, the y/y rate came in at -2.9% vs. -2.7% expected and a revised -2.9% (was -2.6%) in April.

Germany reported firm May factory orders. Orders came in at 6.4% m/m vs. 1.0% expected and a revised 0.2% (was -0.4%) in April. As a result, the y/y rate improved to -4.3% vs. -9.7% expected and a revised -9.3% (was -9.9%) in April. Germany reports May IP tomorrow and is expected flat m/m vs. 0.3% in April. The biggest news this week is that final June composite PMIs suggest Italy (49.7) was the first to follow France (47.2) Into recession. We thought it would be Germany but its composite PMI of 50.6 suggests it is still growing (barely). While today’s orders data suggest some short-term improvement, Germany and the rest of the eurozone will fall into recession as the ECB continues to hike.

ECB tightening expectations remain steady. WIRP suggests odds of a 25 bp hike are near 90% July 27. Odds of another 25 bp hike stand near 60% September 14, rise to nearly 90% October 26, and is fully priced in December 14. This is noteworthy as it appears the market believes the doves even though core inflation remains uncomfortably high.

BOE tightening expectations continue to rise. WIRP suggests another 50 bp hike is largely priced August 3, followed by 25 bp hikes September 21, November 2, December 14, and now February that would see the bank rate peak near 6.5% vs. 6.25% at the start of this week. There have been no major data reports this week that would cause this last 25 bp hike to be tacked on and yet here we are. This would represent the most aggressive tightening cycle in the majors so far in terms of absolute magnitude and yet the benefits to sterling of a higher BOE rate path are starting to wane. That’s because a recession is now back on the table after some earlier optimism. Update macro forecasts will come at the August meeting and will have to acknowledge the worsening backdrop.

National Bank of Poland is expected to keep rates steady at 6.75%. Minutes of its June 6 meeting will be released Friday. At that meeting, the bank kept rates steady and Governor Glapinski said rates wouldn’t be cut until the bank is sure that inflation is heading to the target. CPI rose 11.5% y/y in June vs. 13.0% in May and was the lowest since March 2022 but still well above the 3.5-5.5% target range. The swaps market is pricing in the start of an easing cycle with a 25 bp cut over the next three months followed by another 50 bp of cuts in the subsequent three months.

ASIA

Australia reported soft May trade data. Exports rose 4% m/m vs. a revised -6% (was -5%) in April while imports rose 2% m/m vs. 2% in April. In y/y terms, however, imports came in at 3.4% vs. 8.0% in April and are likely slowing as domestic consumption softens, while exports came in at -1.8% vs. 1.6% in April and are likely slowing as the mainland economy weakens. Of note, the y/y drop in exports was the first since March 2021. These trends should continue in H2 as RBA tightening bites further and China continues to slow.

Bank Negara kept rates steady at 3.0%, as expected. Recall that at the last policy meeting May 3, Bank Negara delivered a hawkish surprise and hiked rates 25 bp to 3.0% vs. an expected hold. This came after two straight holds in January and March after a 25 bp hike in November. The bank said the economy grew more moderately in recent months and warned of risks to the domestic outlook because global growth remains subject to downside risks. It also saw limited risks of future financial imbalances. This is a big change in tone from the May meeting, when Bank Negara said that “In light of the continued strength of the Malaysian economy, the MPC also recognizes the need to ensure that the stance of monetary policy is appropriate to prevent the risk of future financial imbalances.” We now believe the tightening cycle is over. However, the swaps market is still pricing in 25 bp of tightening over the next twelve months that would see the policy rate peak near 3.25%.