- July jobs report is the main event; data will have a direct near-term impact on Fed policy the U.S. economy should continue to post strong growth in Q3; Canada also reports July jobs data
- BOE delivered a dovish hold; forward guidance was changed but there is less than meets the eye; eurozone countries reported weak IP data; South Africa Finance Minister Mboweni will step down
- Japan reported weak June real cash earnings and household spending; RBA released its Statement on Monetary Policy; Governor Lowe remained upbeat in his testimony before parliament; India kept rates steady at 4.0%, as expected
The dollar is firmer ahead of the jobs data. DXY is trading at the highest level since July 28 near 92.40 and has recouped nearly half of this month’s drop. A break above 92.653 is needed to set up a test of the July 21 high near 93.191. The euro is leading this move, as today’s break below $1.1810 sets up a test of the July 21 low near $1.1750. Sterling has held up slightly better after the BOE decision and is still trading just above $1.39. As such, the EUR/GBP cross is trading at new lows around .8490 and just above the April low near .8470. USD/JPY is trading at the highest level since July 29 near 109.90 and a clean break above this level sets up a test of the July 23 high near 110.60. We remain positive on the dollar, as stronger U.S. data and hawkish Fed comments are clearly taking hold.
July jobs report is the main event. Consensus has drifted lower this week to 858k currently vs. 850k in June, while the unemployment rate is seen falling two ticks to 5.7%. Keep an eye on hourly average earnings, which are expected to pick up to 3.9% y/y vs. 3.6% in June. The clues have been mixed, with ADP coming in weak and ISM employment components coming in strong. Claims data for the BLS July survey week were also mixed, as initial claims rose modestly vs. the June survey week and continuing claims fell modestly. Claims data have been erratic lately, increasing the risk of a big miss on jobs today. NFP is always a crap shoot but this month is even harder than usual. July wholesale trade sales, inventories, and consumer credit ($23.0 bln expected) will also be reported.
The data will have a direct near-term impact on Fed policy. We hate to put too much emphasis on the data series that is notoriously hard to forecast. That said, we know all Fed eyes are on the July and August jobs reports as officials try to map out the road to tapering. If today’s data come in strong, then all eyes are on the August 26-28 Jackson Hole Symposium as an explicit tapering announcement then becomes much more likely. If today’s data come in weak, then the timing likely gets pushed back to the September FOMC meeting. There are no Fed speakers today.
Despite the mildly disappointing read for Q2, the U.S. economy should continue to post strong growth in Q3. Atlanta Fed GDPNow model clocks in at 6.1% SAAR. That's down slightly from the 6.5% reported for Q2 but is still well above the NY Fed's Nowcast reading of 4.19% SAAR for Q3. Both models will be updated today. BBG consensus is 7.1% for Q3 but this is likely to edge lower after Q2 growth fell short of the 8.5% consensus. We still have fiscal stimulus in the pipeline and so we think growth around 6.0-6.5% in Q3 is quite likely.
Canada also reports July jobs data. Consensus sees 150k jobs added vs. 230.7k in June, while the unemployment rate is expected to fall to 7.4% from 7.8% in June. Recall that the June gain was due solely to part-time jobs, with full-time jobs posting a -33.2k drop. July Ivey PMI will also be reported, which stood at an astounding 71.9 in June. Earlier in the week, Markit manufacturing PMI came in at 56.2 vs. 56.5 in June. The Canadian economy continues to recover, which allowed the Bank of Canada to continue tapering at its last meeting July 14. Like its counterpart here in the U.S., the BOC is likely to continue slowly but surely to remove accommodation. According to Bloomberg WIRP, the first rate hike is fully priced in by mid-2022.
The Bank of England delivered a dovish hold. All policy settings were unchanged, though the vote to main QE was 7-1 with Saunders dissenting in favor of reducing QE from GBP875 bln to GBP830 bln. Some were looking for two dissents. The bank warned that inflation could reach as much as 4% but would then return close to the 2% target. It added that some modest tightening over the forecast period will likely become necessary. New inflation forecasts are 4.0% (2.5% in May) in 2021, 2.5% (2.0%) in 2022, and 2.0% (2.0%) in 2023, while the new GDP growth forecasts are 7.25% (7.25%) in 2021, 6.0% (5.75%) in 2022, and 1.5% (1.25%) in 2023. The inflation forecasts suggest no hurry to hike and no need to hike aggressively.
Forward guidance was changed but there is less than meets the eye. The forecast period ends in 2023 and so a hike before that is not exactly earth-shattering since the short sterling strip already has had the first hike priced in for H1 2022 for months now. To provide clarity, the bank set forth the process for paring back QE. It said that it intends to unwind QE when the policy rate is at 0.5%, presumably by allowing maturing securities to roll off. The bank said it would then consider actively selling bonds when the policy rate is at least 1.0%. The modification to the forward guidance is welcome, especially given its pretty explicit roadmap for exiting QE. Otherwise, we think the bank pretty much delivered what was expected.
Eurozone countries reported weak IP data. Germany came in at -1.3% m/m vs. 0.5% expected and a revised -0.8% (was -0.3%) in May, Spain came in at -1.0% m/m vs. 0.5% expected and a revised 1.5% (was 4.3%) in May, and Italy came in at 1.0% vs. 1.1% expected and a revised -1.6% (was -1.5%) in May. The weakness was especially surprising as other hard data and survey data were firm that month. The headline eurozone reading will be reported August 12 and there are clear downside risks to the consensus 0.2% m/m.
South Africa Finance Minister Mboweni will step down. While ostensibly part of a wider cabinet shuffle, his exit comes at a perilous time for the nation. Mboweni was a former SARB Governor and very well-respected by the markets. He was brought on back in 2018 when his predecessor Nene resigned, and Mboweni said his appointment was always considered temporary. His replacement Enoch Godongwana is a bit of an unknown to the markets, certainly not as battle-tested as Mboweni was. He is seen as a Ramaphosa loyalist and has some experience in policymaking, but nothing of the scale that will be required of him in the coming months. The shuffle is seen in large part as a response to the recent social unrest related to former President Zuma’s arrest. However, much of that unrest was triggered by deep structural problems in the country and so Godongwana will have his hands full.
Japan reported weak June real cash earnings and household spending. Earnings were expected to rise 1.2% y/y vs. 2.0% in May, but instead fell -0.4%. This helped lead spending lower, which collapsed -5.1% y/y vs. 0.2% expected and 11.6% in May. Obviously, a big part the story is the impact of the lockdowns. The economy is likely to remain weak in Q3 as the state of emergency were extended and widened. Yet the Bank of Japan is on hold even as markets await another fiscal package in the coming weeks.
Reserve Bank of Australia released its Statement on Monetary Policy. Updated forecasts for inflation are 2.5% (1.75% in May) in 2021, 1.75% (1.5%) in 2022, and 2.25% (just added) in 2023, while GDP growth forecasts are 4.0% (4.75% in May) in 2021, 4.25% (3.5%) in 2022, and 2.5% (just added) in 2023. More importantly, unemployment is forecast at 5.0% (5.0% in May) in 2021, 4.25% (4.5%) in 2022, and 4.0% (just added) in 2023. In the past, the RBA has said that unemployment in the low 4s is when wage pressures are likely to pick up. As such, the forecasts suggest potential tightening in 2022.
Governor Lowe remained upbeat in his testimony before parliament. He said the economy is likely to bounce back quickly once the current round of lockdowns end. He stressed that policymakers “are prepared to act in response to further bad news on the health front that affects the outlook for the economy over the year ahead,” but noted that “Fiscal policy is the more appropriate instrument for providing support in response to a temporary and localized hit to income, and the board welcomes the substantial fiscal response by governments in Australia.” When asked about the exchange rate, Lowe said the RBA is constantly watching what other central banks are doing and noted that if Australia had not implemented QE, AUD would have been much more prone to appreciation.
Reserve Bank of India kept rates steady at 4.0%, as expected. The vote was 5-1, with the dissent in favor of hiking rates. The number of dissents is likely to rise if inflation continues to run above the 6% target as it has for the past two months. Still, Governor Das said the bank is focused on supporting the economy as it recovers from the pandemic. He noted “The supply-side drivers could be transitory while demand-pull pressures remain inert, given the slack in the economy. A pre-emptive monetary policy response at this stage may kill the nascent and hesitant recovery that is trying to secure a foothold in extremely difficult conditions.” The RBI raised its inflation forecast to 5.7% for FY21/22 from 5.1% previously and maintained its growth forecast at 9.5%. Rates have been kept steady since the last 40 bp cut back in May 2020, but the bank has done several rounds of QE. Bloomberg consensus sees steady rates through year-end, with a 25 bp hike seen in H1 2022 and another one in H2 2022 that would take the policy rate to 4.5% by end-2022.