U.S. yields remain depressed on recession fears; the U.S. yield curve continues to flatten; Fed tightening expectations have eased as recession fears have picked up; we get some more key U.S. economic data for June; ISM services PMI will be reported Wednesday; FOMC minutes Wednesday will be very important; BOE tightening expectations have eased a bit
ECB publishes the account of its June meeting Thursday; ECB tightening expectations have softened; Germany has a busy week; The U.K. is coming under criticism for its Brexit stance; BOE expectations have eased as the headwinds pile up
Japan highlight will be May labor cash earnings Tuesday; May current account data Friday will be of interest; RBA meets Tuesday and is expected to hike rates 50 bp to 1.35%

AMERICAS

U.S. yields remain depressed on recession fears. The 10-year yield traded as low as 2.79% Friday before ending the week near 2.88%. Given where inflation and the Fed are right now, we find it hard to justify a 10-year yield much below 3.0% but here we are. As long as recession fears dominate, this move lower hasn't run its course yet. And it's a global phenomenon, as 10-year yields everywhere are also down significantly in recent days. Elsewhere, the U.S. 2-year yield traded as low as 2.73% Friday but ended the week near 2.83%. Yet we continue to feel that the U.S. economy is best-positioned as we enter this new phase of uncertainty for global investors. As such, we believe the dollar uptrend remains intact.

The U.S. yield curve continues to flatten. Some portions of the curve have inverted but faithful readers will know that we favor the 3-month to 10-year curve as the best recession signal. At 124 bp, it is the flattest since early September 2021 but still far from inverting. This suggests very low odds of recession over the next 12 months but make no mistake, these odds have been rising of late.

Fed tightening expectations have eased as recession fears have picked up. WIRP suggests a 75 bp hike at the next meeting July 27 is 75% priced in, steady from last week, while a 50 bp hike September 21 is largely priced in. However, expectations for 50 bp hikes at the subsequent meetings November 2 and December 14 are moving towards 25 bp. Of note, WIRP shows the beginning of an easing cycle by Q1 23. This is a much earlier timeframe for easing and one that we think is very, very premature since it would imply a recession hitting near the end of this year or early next year. The swaps market is now pricing in 175 bp of tightening over the next 6 months that would see the policy rate peak between 3.25-3.50%.

We get some more key economic data for June. Highlight is jobs data Friday, where consensus sees 273k jobs added vs. 390k in May and the unemployment rate steady at 3.6%. Average hourly earnings are expected to slow two ticks to 5.0% y/y. Ahead of that, ADP reports private sector jobs Thursday, where consensus sees 183k jobs added vs. 128k in May. May JOLTS job openings will be reported Wednesday and expected at 11 mln vs. 11.4 mln in April.

ISM services PMI will be reported Wednesday. Headline is expected at 54.0 vs. 55.9 in May. Keep an eye on employment and prices paid, which stood at 50.2 and 82.1 in May, respectively. Last week, ISM manufacturing came in at 53.0 vs. 54.5 expected and 56.1 in May. There, employment came in at 47.3 vs 50.0 expected and prices paid came in at 78.5 vs. 80.0 expected and 82.2 in May.

FOMC minutes Wednesday will be very important. At that June meeting, the Fed increased the pace of tightening to 75 bp. Another hike this month was flagged but Powell would not commit to another 75 bp move. The minutes may reveal what the Fed is looking for. Williams speaks Wednesday. Waller and Bullard speak Thursday. Williams speaks again Friday. All are expected to remain hawkish and supportive of a 75 bp hike this month.

Other minor data will be reported. May factory orders will be reported Tuesday and expected at 0.5% m/m vs. 0.3% in April. June Challenger job cuts, May trade data, and weekly jobless claims will be reported Thursday. May wholesale inventories and trade sales and consumer credit will be reported Friday.

Canada has a busy week. Highlight will be June jobs data Friday. Consensus sees 20k jobs vs. 39.8k in Mayr, while the unemployment rate is expected to remain steady at 5.1%. Ahead of that, June S&P Global manufacturing PMI and Bank of Canada Q2 business outlook survey will be reported Monday. May building permits will be reported Tuesday. May trade and June Ivey PMI will be reported Thursday. Recent data show the economy remains strong even as price pressures pick up.

Bank of Canada tightening expectations have eased a bit. WIRP suggests a 75 bp hike to 2.25% is nearly fully priced in. Looking ahead, the swaps market is pricing in 175 bp of tightening over the next 12 months that would see the policy rate peak near 3.25%, down from the peak near 4% in mid-June.

EUROPE/MIDDLE EAST/AFRICA

ECB publishes the account of its June meeting Thursday. At that meeting, the bank affirmed the end of PEPP but had no backup plan to address fragmentation. As a result, the bank was forced to call an emergency meeting days later, only to announce that work on its crisis tool was ongoing and likely to be announced at the July 21 meeting. There are many ECB speakers this week. Nagel and Guindos speak Monday. Rehn speaks Wednesday. Lane, Stournaras, Centeno, and Herodotou speak Thursday. Lagarde and Villeroy speak Friday. Schnabel speaks Saturday.

ECB tightening expectations have softened. WIRP suggests a 25 bp hike July 21 is fully priced in. Then, 50 bp hikes are no longer fully priced in for the subsequent three meetings on September 8, October 27, and December 15 and so the deposit rate is seen below 1.0% at year-end vs. 1.25% at the start of last week. Looking ahead, the swaps market is now pricing in 200 bp of tightening over the next 24 months that would see the deposit rate peak near 1.5% vs. 1.75-2.0% at the start of last week.

Germany has a busy week. It reports May trade data Monday. Exports are expected to rise 0.7% m/m vs. 4.5% in April, while imports are expected at 0.8% m/m vs. 3.6% in April. May factory orders will be reported Wednesday and are expected at -0.5% m/m vs. -2.7% in April. IP will be reported Thursday and is expected at 0.4% m/m vs. 7.7% in April. German data have been softening in recent months and that trend is set to continue. Elsewhere, France reports May IP Tuesday and is expected at 0.2% m/m vs. -0.1% in April. Italy reports May IP Friday and is expected at -1.1% m/m vs. 1.6% in April. Final eurozone June services and composite PMIs will also be reported Tuesday. May eurozone retail sales will be reported Wednesday.

The U.K. is coming under criticism for its Brexit stance. German Foreign Minister Baerbock and Irish Foreign Minister Coveney defended the existing Brexit deal in a letter published in the Observer this weekend. They stressed that it upholds the Good Friday peace agreement and maintains the “high standards” of the EU’s single market. They added that “Unfortunately, the British government chose not to engage in good faith with these proposalsInstead of the path of partnership and dialogue, it has chosen unilateralism.” They stressed that “There is no legal or political justification for unilaterally breaking an international agreement entered into only two years ago. The tabling of legislation will not fix the challenges around the protocol. Instead, it will create a new set of uncertainties and make it more challenging to find durable solutions.” We fully expect retaliatory action from the EU.

Bank of England expectations have eased as the headwinds pile up. WIRP suggests a 50 bp hike move at the August 4 meeting is nearly 65% priced in vs. 75% at the start of last week, and no longer fully priced in for the subsequent meetings September 15, November 3, and December 15. Looking ahead, the swaps market is now pricing in 175 bp of tightening over the next 12 months that would see the policy rate peak near 3.0%, down from 3.25% at the start of last week. The only major U.K. data release is final June services and composite PMIs Tuesday.

ASIA

Japan highlight will be May labor cash earnings Tuesday. Nominal earnings are expected at 1.5% y/y vs. 1.3% in April, while real earnings are expected at -1.6% y/y vs. -1.7% in April. The Bank of Japan has made it clear that wage pressures need to be seen before it considers tightening policy. Low wage pressures, soft real sector data, and stabilizing inflation readings should lead the bank to reaffirm its dovish stance at the next policy meeting July 20-21. May household spending Friday will also be of interest, which is expected at 2.1% y/y vs. -1.7% in April. Final June services and composite PMIs will also be reported Tuesday.

May current account data Friday will be of interest. An adjusted surplus of JPY155 bln Is expected vs. JPY512 bln in April. However, the investment flows will be of most interest. April data showed that Japan investors were net sellers of U.S. bonds for the sixth straight month and the -JPY2.4 trln sold nearly matched the -JPY3.1 trln sold in February, which was the most since April 2020. Japan investors were net buyers (JPY186 bln) of Australian bonds for the third straight month in April but were net sellers of Canadian bonds (-JPY172 bln) for the third straight month. They were small net buyers of Italian bonds (JPY13bln) in April after a month of net selling. Of note, April was the first month of FY22 and it will be interesting to see if these trends will be maintained throughout the fiscal year.

Reserve Bank of Australia meets Tuesday and is expected to hike rates 50 bp to 1.35%. Updated macro forecasts won’t come until the August 2 meeting. With the economy still robust, the RBA is likely to remain in tightening mode. Looking ahead, the swaps market is pricing in 265 bp of tightening over the next 12 months that would see the policy rate peak near 3.5%, down from over 4.0% at the start of last week. Final June services and composite PMIs will also be reported Tuesday. May trade data will be reported Thursday.