- The wider implications of yesterday’s hawkish hold from the RBA are worth discussing; within EM, the picture is mixed; ADP private sector jobs data is today’s highlight; ISM reports July services PMI; Brazil COPOM is expected to hike rates 100 bp to 5.25%
- U.K. reported firmer final July services and composite PMIs; eurozone reported softer final July services and composite PMIs; ECB is likely in wait-and-see mode
- New Zealand reported strong Q2 employment and earnings data; Thailand delivered a dovish hold, as expected
The dollar is stable ahead of U.S. data. DXY is up two straight days and traded at the highest level since July 30 near 92.20. The euro remains heavy after failing to make a clean break above $1.19 while sterling remains stuck just above $1.39. USD/JPY and EUR/CHF are lower, suggesting some flight to quality remains in play. For USD/JPY, a clean break below 109.05 would set up a test of the April 23 low near 107.50. While we remain positive on the dollar, we acknowledge that the rally is unlikely to resume in force until a more hawkish Fed narrative takes hold.
The wider implications of yesterday’s hawkish hold from the RBA are worth discussing. The biggest takeaway is that despite the spread of the delta variant, central banks around the world will continue to roll back emergency policy settings. This holds for BOE, BOC, and RBA (all tapering), along with Norges Bank (possible rate hike in September) and RBNZ (QE ended and likely rate hike in August 18) on deck as the first to hike. Add the Fed to the list as we still think tapering will be seen before year-end.
Within EM, the picture is mixed. Brazil, Chile, and Mexico have all started hiking, with Colombia on deck for a move in September. Peru may have to start leaning more hawkish once political uncertainty has cleared up. Czech, Hungary, and Russia have all hiked, with Poland the outlier there. Turkey can't ease like it wants, while South Africa can't hike like it wants. Asia seems to be leaning the most dovish, with only Korea anywhere near hiking even as China is easing. The bottom line is that global liquidity has peaked but we don't think investors fully appreciate what that implies for markets going forward.
ADP private sector jobs data is today’s highlight. It is expected to show a 683k gain vs. 692k in June and is one of the final clues to the July jobs report Friday. There, consensus sees 875k jobs added vs. 850k in June, with the unemployment rate seen falling two ticks to 5.7%. Weekly jobless claims will be reported Thursday, with initial claims expected at 382k vs. 400k the previous week and continuing claims expected at 3.26 mln vs. 3.269 mln the previous week. Claims data have been erratic lately and coming in higher than expected, increasing the risk of a big miss on jobs Friday.
ISM reports July services PMI. It is expected at 60.5 vs. 60.1 in June. Keep an eye on the employment component. ISM manufacturing PMI was reported Monday at 59.5 vs. 61.0 expected and 60.6 in June. For both series, sustained readings above 60 are very rare and so it’s natural to see some modest decreases. That said, readings in the high 50s still signify strength in the economy. Canada reports June building permits.
Brazil COPOM is expected to hike rates 100 bp to 5.25%. if so, it would be an acceleration from the three 75 bp hikes seen so far in this cycle. Bloomberg consensus sees the policy rate peaking at 6.75% by end-2021. However, there are likely upside risks as inflation continues to accelerate to 8.59% y/y in mid-July, well above the 2.25-5.25% target range. Elsewhere, the fiscal outlook remains cloudy after President Bolsonaro pledged to increase the Bolsa Familia social program by at least 50%. This also argues for tighter monetary policy ahead.
U.K. reported firmer final July services and composite PMIs. The former rose to 59.6 vs. 57.8 preliminary, while the latter rose to 59.2 vs. 57.7 previously. Data come a day ahead of the Bank of England decision. While inflation is running hot and the recovery continuing apace, we believe the bank will remain cautious and observe how the recent reopening progresses. Most on the MPC believe this spike in inflation is temporary and so we believe the BOE is likely to deliver a dovish hold.
Eurozone reported softer final July services and composite PMIs. For the headline readings, the former fell to 59.8 vs. 60.4 preliminary, while the latter fell to 60.2 vs. 60.6 previously. Looking at the country breakdown, German composite fell a tick from the preliminary to 62.4 while France fell two ticks to 56.6. Italy’s composite rose to 58.6 from 58.3 in June, while Spain’s fell to 61.2 from 62.4 in June. Eurozone June retail sales were also reported, rising 1.5% m/m vs. 1.7% expected. Looking ahead, the economic outlook is likely to soften as virus numbers rise across Europe.
The ECB is likely in wait-and-see mode. Governing Council member Kazaks said that with nearly EUR600 bln left to spend in PEPP, September is too early for a decision on whether to extend or phase out is QE. He noted that “Given the uncertainty, given how much time is left, there is no need to decide on that. We will discuss it, but at the moment it would still be premature.” With regards to forward guidance, Kazaks said “Our current forward guidance on rates is a balanced view on how we may react when we see inflation approaching 2%. Is this tying our hands too much or too far into the future? I don’t think so.” With a clear split on QE at the ECB, we expect the debate to continue through the fall but is likely to be eventually modified at the December ECB meeting.
New Zealand reported strong Q2 employment and earnings data. The unemployment rate fell to 4.0% vs. 4.4% expected and a revised 4.6% (was 4.7%) in Q1. Employment rose 1.0% q/q, while average hourly earnings rose 0.7% q/q vs. 0.8% expected and a revised 0.7% (was -0.1%) in Q1. Of note, unemployment is back to pre-pandemic levels and supports the notion that the RBNZ will hike rates soon. Next meeting is August 18 and a 25 bp hike is now fully priced in, with small odds seen of a 50 bp move. Looking ahead, a second 25 bp hike is also fully priced in before year-end, with some odds seen of a third hike.
Bank of Thailand delivered a dovish hold, as expected. It kept rates steady at 0.5% but cut its 2021 growth forecast for the second straight meeting to 0.7% from 1.8% previously. Of note, it was a 4-2 vote, the first split since May 2020 with the two dissents in favor of a 25 bp cut. Assistant Governor Titanun said “This round of the pandemic will affect the economy both this year and next year. The impact is greater than what we forecast, and the downside risk remains significant.” The government just expanded lockdowns to additional areas and now cover about 40% of the population, while existing restrictions in place since June 20 were extended to the end of August. We expect rates are likely to remain on hold through 2022, with risks of further backdoor easing via macroprudential measures. After this dissent, we cannot rule out another rate cut.