- Credit conditions continue to tighten; yet the U.S. economy remains firm; ISM manufacturing PMI will be the highlight; we get quite a few labor market indicators ahead of the jobs report Friday
- Final eurozone manufacturing PMIs were reported; market expectations for ECB policy remain subdued; biggest U.K. teaching unions voted to accept the government’s proposed pay deal
- Japan reported June labor market data and final July manufacturing PMI; RBA kept rates steady at 4.10%; Australia also reported soft data; Caixin reported weak manufacturing PMI; Korea reported soft July trade data
The dollar remains firm ahead of key data releases. DXY is trading higher for the second straight day near 102.159. Clean break above key level near 102.046 sets up a test of the July high near 103.572. The euro is trading lower near $1.0975 and clean break below $1.10 sets up a test of the July low near $1.0835. Sterling is trading lower near $1.2810 and clean break below $1.28 sets up a test of the late June low near $1.2590. USD/JPY is trading higher near 142.75 as markets test the BOJ’s tolerance for higher yields and weaker yen. Break above 142 sets up a test of the June 30 high near 145. AUD is the worst performing major after the RBA left rates steady at 4.10% (see below). We believe the relative fundamental story should continue to shift back in favor of the greenback. As we expected, the FOMC, ECB, and BOJ decisions last week as well as the economic data underscore the divergence theme and so further dollar gains seem likely.
Credit conditions continue to tighten. According to the Fed’s loan officer survey for Q2, the percentage of banks reporting tighter credit standards for commercial and industrial loans to large and medium sized firms rose to 50.8% vs. 46.0% in Q1. Elsewhere, the percentage of banks reporting weaker demand for commercial and industrial loans from large and medium-sized firms fell to 51.6% vs. 55.6% in Q1. At his post-decision press conference last week, Chair Powell was asked about credit conditions and he replied that “it’s broadly consistent with what you would expect. You’ve got lending conditions tight and getting a little tighter, you’ve got weak demand, and you know, it gives a picture of a pretty tight credit conditions in the economy.” We concur. Despite all the concerns about a deep credit crunch due to banking sector stresses, it seems that the typical credit cycle is playing out.
Yet the U.S. economy remains firm. After posting 2.4% SAAR growth in Q2, it appears that the momentum is carrying over into Q3. The Atlanta Fed’s initial GDPNow estimate for Q3 came in at 3.5% SAAR. We know this is likely to be revised significantly as the data come in and the first update comes later today. The Atlanta Fed’s initial estimate for Q2 was 1.66% SAAR on April 28 and ranged between 1.64% and 2.89% before ending at 2.41% last week and lining up perfectly with the official Q2 reading. The economy remains robust and another quarter of growth at or above trend seems likely. Current Bloomberg consensus for Q3 is 1.5% SAAR.
The Fed outlook remains totally data-dependent, as it should. WIRP suggests odds of a hike September 20 are around 20% but we think this should be much higher. Those odds top out near 40% November 1 but should move higher if the data remain firm.
July ISM manufacturing PMI will be the highlight. Headline is expected at 46.9 vs. 46.0 in June. Keep an eye on employment and prices paid, which stood at 48.1 and 41.8 in June, respectively. ISM services PMI will be reported Thursday, with headline expected at 53.0 vs. 53.9 in June. Keep an eye on employment and prices paid, which stood at 53.1 and 54.1 in June, respectively. Chicago PMI was reported yesterday and came in at 42.8 vs. 43.5 expected and 41.5 in June.
Regional Fed surveys for July will wrap up. Dallas Fed services index will be reported today. Yesterday, its manufacturing survey came in at -20.0 vs. -22.5 expected and -23.2 in June. June construction spending (0.6% m/m expected) and July vehicle sales (15.70 mln annual rate expected) will also be reported.
We get quite a few labor market indicators ahead of the jobs report Friday. June JOLTS job openings will be reported today and is expected at 9.60 mln vs. 9.824 mln in May. ADP reports its private sector jobs estimate tomorrow and is expected at 183k vs. 497k in June. July Challenger job cuts, Q2 unit labor costs, and weekly jobless claims will be reported Thursday. For Friday, consensus for NFP has crept higher to stand at 200k vs. 209k in June, while the unemployment rate is expected to remain steady at 3.6%. Average hourly earnings are expected to ease a couple of ticks to 4.2% y/y.
Final eurozone manufacturing PMIs were reported. The headline was unchanged from the preliminary 42.7. Looking at the country breakdown, Germany was unchanged at 38.8 while France was revised up to 45.1 vs. 44.5 preliminary. Italy and Spain reported for the first time and came in at 44.5 and 37.8, respectively. The slump in manufacturing is a global one and so the eurozone story is a familiar one. Final services and composite PMIs are more important and will be reported Thursday. Elsewhere, German unemployment fell a tick in July to 5.6%.
Market expectations for ECB policy remain subdued. WIRP suggest odds of another 25 bp hike stand near 35% September 14, rising to 55% October 26 and topping out near 65% December 14. These odds will rise and fall with the data but Madame Lagarde clearly accentuated the negative last week and that’s what markets should focus on. What’s very interesting to us is that the ECB may stop hiking before the Fed does and we don't think the markets have priced this risk in yet.
The biggest U.K. teaching unions voted to accept the government’s proposed pay deal. Nearly 90% of teachers in the National Education Union voted to accept the 6.5% pay increase and so the strikes planned for the fall have been called off. The NEU was joined by two other unions that also said an overwhelming majority of members had accepted the deal. A fourth one had already accepted the pay deal earlier in July. Of note, U.K. doctors have rejected the deal and will go ahead with planned strikes.
Japan reported June labor market data and final July manufacturing PMI. Unemployment was expected to remain steady but instead fell a tick to 2.5%, while the job-to-applicant ratio was expected to rise a tick to 1.32 but instead fell a tick to 1.30. Final manufacturing PMI was revised up two ticks from the preliminary to 49.6.
Reserve Bank of Australia kept rates steady at 4.10% There was a big split between the analysts and market pricing. Of the 26 analysts polled by Bloomberg, nearly half looked for steady rates while WIRP suggested only 10% odds of a hike. Governor Lowe said “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data.” The RBA releases its Statement on Monetary Policy Friday that will contain new macro forecasts. Some forecasts were revealed today that suggest very little change in the outlook. Inflation is seen easing to around 3.25% by end-2024 and falling within the 2-3% target range by end-2025, while GDP growth is seen around 1.75% for 2024 and unemployment is seen rising to around 4.5% by end-2024.
Australia also reported soft data. Final July manufacturing PMI was unchanged from the preliminary 49.6, while June home loan data and building permits came in soft. Owner-occupied loans came in at -2.8% m/m vs. a revised 5.1% (was 4.0%) in May, while investor loans came in at 2.6% m/m vs. a revised 5.9% (was 6.2%) in May. Elsewhere, total permits came in at -7.7% m/m vs. -8.0% expected and a revised 20.5% (was 20.6%) in May while private sector permits came in at -1.3% m/m vs. a revised 0.8% (was 0.9%) in May. The y/y rates worsened for both.
Caixin reported weak manufacturing PMI. Headline came in at 49.2 vs. 50.1 expected and 50.5 in June. Its services and composite PMIs will be reported Thursday. Services is expected at 52.4 vs. 53.9 in June. If so, the Caixin composite PMI would likely fall significantly from 52.5 in June. With the economy still slowing, more stimulus is likely to be seen in Q3.
Korea reported soft July trade data. Exports came in at –16.5% y/y vs. 15.0% expected and -6.0% in June, while imports came in at -25.4% y/y vs. -25.0% expected and -11.7% in June. Exports were the weakest since 20202 while imports were the weakest since 2009, suggesting greater headwinds on the economy as China reopening continues to disappoint.