Dollar Soft at the Start of Key Week

August 02, 2021
  • Markets are still trading off Powell’s dovish press conference rather than the hawkish insertion of tapering in the official statement; ISM July manufacturing PMI will be today’s highlight; the U.S. economy should continue to post strong growth in Q3
  • Eurozone reported firm data; ECB asset purchases for the week ending July 30 will be reported
  • Japan reported mixed data overnight; Caixin reported weak July manufacturing PMI

The dollar is under pressure again as a key week begins. After recouping some of its recent losses Friday, DXY is modestly softer and trading back below 92. However, the euro is still struggling to break above $1.19 while sterling remains stuck below $1.39. USD/JPY remains a bit heavy and has been unable to break back above 110. 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. Perhaps this week’s data will help on that front.

AMERICAS

Markets are still trading off Powell’s dovish press conference rather than the hawkish insertion of tapering in the official statement. After last week’s decision, Kashkari and Brainard both came out on the dovish side in an effort to underscore Powell’s message. Of course, it will all depend on how the economic data come in over the next several weeks but all signs point to continued strength in H2. This week brings more key July data (see below).

ISM July manufacturing PMI will be today’s highlight. It is expected at 60.9 vs. 60.6 in June. Keep an eye on the employment component, which is expected at 51.4 vs. 49.9 in June. Services will be reported Wednesday and is expected at 60.5 vs. 60.1 in June. Markit preliminary July PMI readings were reported last week, with manufacturing coming in at 63.1 vs.62.1 in June and services coming in at 59.8 vs. 64.6 in June. On the other hand, Chicago PMI surged to 73.4 vs. 66.1 in June and was just short of the record 75,2 in May. All of these PMI readings remain at historically high levels, signifying continued strength in the economy. Sustained readings above 60 are rare for all these PMIs, while 70 is basically unheard of. June construction spending (0.5% m/m expected) will also be reported today.

Despite the mildly disappointing read for Q2 growth, the U.S. economy should continue to post strong growth in Q3. Atlanta Fed GDPNow model just started estimating Q3 growth last Friday and clocks in at 6.1% SAAR. That's down slightly from the 6.5% reported for Q2 last week but is still well above the NY Fed's Nowcast reading of 4.19% SAAR for Q3. 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.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported firm data. Final July manufacturing PMI rose to 62.8 vs. 62.6 preliminary. Looking at the country breakdown, Germany improved three ticks from the preliminary to 65.9, while France fell a tick to 58.0. Italy and Spain were reported for the first time and fell sharply from June to 60.3 and 59.0, respectively. Final eurozone July services and composite PMIs will be reported Wednesday. Germany reported strong June retail sales, up 4.2% vs. 2.0% expected and a revised 4.6% (was 4.2%) in May.

ECB asset purchases for the week ending July 30 will be reported. Net purchases were reported at EUR22.8 bln for the week ending July 23 vs. EUR22.1 bln in each of the weeks ending July 16 and July 9. The ECB has been aiming for net weekly purchases of around EUR20 bln since the accelerated pace began in March, but there have been a couple of outliers on both sides. That said, the large net purchases the past few weeks underscore our belief that the ECB will not risk making any premature moves that could endanger the recovery. Indeed, we expect purchases to remain a bit above average in the coming weeks in order to give the ECB’s recent policy changes even more heft. The bank is expected to discuss changes to its asset purchases at the next meeting September 9 but a consensus may not be reached until the December meeting.

ASIA

Japan reported mixed data overnight. Final July manufacturing PMI came in at 53.0 vs. 52.2 preliminary. However, July vehicle sales slowed to 3.3% y/y from 9.2% in June while July consumer confidence rose a tick to 37.5 vs. 36.9 expected. With lockdowns extending into August, it appears Q3 will be another lost quarter. While the BOJ is on hold for now, we continue to expect a fiscal package in the coming weeks.

Caixin reported weak July manufacturing PMI. It fell sharply to 50.3 vs. 51.0 expected and 51.3 in June. Caixin then reports services and composite PMIs Wednesday, with services expected at 50.5 vs. 50.3 in June. Over the weekend, official PMI readings were reported. Manufacturing came in at 50.4 vs. 50.8 expected and 50.9 in June while services came in as expected at 53.3 vs. 53.5 in June, which dragged the composite PMI down half a point to 52.4. With the economy softening, reports have emerged that policymakers are likely to take more steps to boost growth in H2, including increased fiscal support to go along with the recent RRR cut.

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