Drivers for the Week of July 9, 2023

July 09, 2023
Here's a look at the main drivers in Developed Markets this week.

The dollar saw broad-based weakness against the majors last week. JPY, NZD, and NOK outperformed while CAD, SEK, and AUD underperformed. Despite the slightly softer than expected jobs report, Fed tightening expectations are likely to remain elevated this week. CPI and PPI data will likely determine the dollar’s near-term direction and we would fade this bout of weakness. Indeed, we view current levels as a gift for dollar bulls to get long again.


Markets are still digesting last week’s jobs report. While the headline NFP reading of 209k was lower than expected and the previous two months were revised down by a cumulative -110k, we believe the details were firm. Average hourly earnings came in higher than expected at 4.4% y/y, as did the average workweek at 34.4 hours. The unemployment rate fell to 3.6% and is hovering near the cycle low of 3.4% from January. Taken in conjunction with other indicators, the labor market remains relatively tight and underscores the need for further tightening. We believe a 25 bp hike this week is a done deal. Fed tightening expectations remain elevated. WIRP suggests a 25 bp hike this month is largely priced in, while the odds of a second 25 bp hike this year are still over 40%. Furthermore, the first rate cut has been pushed out to next July.

June inflation data take center stage this week. CPI will be reported Wednesday, with headline expected at 3.1% y/y vs. 4.0% in May and core expected at 5.0% y/y vs. 5.3% in May. In m/m terms, headline is expected at 0.3% vs. 0.1% in May and core is expected at 0.3% vs. 0.4% in May. Of note, the Cleveland Fed’s Nowcast sees headline up 0.42% m/m and 3.22% y/y and core up 0.43% m/m and 5.11% y/y, both slightly higher than consensus. Looking ahead, it sees both y/y rates accelerating in July to 3.61% and 5.22%, respectively. PPI will be reported Thursday, with headline expected at 0.4% y/y vs. 1.1% in May and core expected at 2.7% y/y vs. 2.8% in May.

The Fed releases its Beige Book report for the July 25-26 FOMC meeting Wednesday. Here is our take on economic conditions since the May 31 Beige Book for the June 13-14 FOMC meeting. On overall economic activity: Economic activity has shown some pockets of weakness, though the housing sector has proven surprisingly resilient. On labor markets: Employment growth has slowed modestly even as initial claims have crept higher. Overall, the labor market remains fairly strong and JOLTS job openings near 10 mln suggest firms are still having difficulty finding workers. On prices: Headline readings continue to fall due mainly to energy prices while core readings remain more elevated due to services. Bottom line: the Beige Book report should set the table for a 25 bp hike this month. There are plenty of Fed speakers this week. Barr, Daly, Mester, and Bostic speak Monday. Barkin, Kashkari, Bostic, and Mester speak Wednesday. Waller speaks Thursday. At midnight Friday, the media blackout goes into effect and there will be no Fed speakers until Chair Powell’s post-decision press conference July 26.

Preliminary July University of Michigan consumer sentiment will be reported Friday. Headline is expected at 65.5 vs. 64.4 in June. 1-year inflation expectations are expected at 3.1% vs. 3.3% in June, while 5 to 10-year expectations are seen steady at 3.0%.

A lot of minor data will be reported this week. May consumer credit and wholesale inventories and trade sales will be reported Monday. Weekly jobless claims and June budget statement will be reported Thursday. June import/export prices will be reported Friday. Bottom line: the U.S. economy remains fairly robust as we move into H2. Yes, there are some pockets of softness but the economy continues grow near trend at a time when the Fed is seeking below trend growth. The Atlanta Fed’s GDPNow model is currently tracking 2.1% SAAR in Q2. The next model update comes this Monday.

Bank of Canada meets Wednesday and is expected to hike rates 25 bp to 5.0%. However, a third of the analysts polled by Bloomberg see steady rates and WIRP suggests 65% odds of a hike. After Friday’s strong jobs report, we believe a hike will be seen. At the last meeting June 7, it delivered a hawkish surprise and hiked rates 25 bp to 4.75% and noted “Overall, excess demand in the economy looks to be more persistent than anticipated.” It added that “Monetary policy was not sufficiently restrictive to bring supply and demand into balance and return inflation sustainably to the 2% target,” citing what it called an “accumulation of evidence.” Lastly, the bank stressed “Concerns have increased that CPI inflation could get stuck materially above the 2% target.” Looking ahead, WIRP suggests a hike is fully priced in for September 6, while odds of another 25 bp hike after that have risen to 65% in Q4. Updated macro forecasts will be released at this week’s meeting. May building permits will be reported Monday. May manufacturing sales and June existing home sales will be reported Friday.


The ECB publishes the account of its June 15 meeting Thursday. At that meeting, it hiked rates 25 bp and confirmed that all APP reinvestments would end that month. The ECB said it would ensure that rates reach sufficiently restrictive levels and will be kept there as long as necessary to get inflation back down to the 2% target. It said it would continue to follow a data-dependent approach and that future decisions will ensure that rates remain sufficiently restrictive. Updated macro forecasts were released. The growth outlook was revised down modestly but the core inflation outlook was revised up significantly. President Lagarde said the ECB was very likely to continue hiking rates in July, adding that there is still ground to cover and that the ECB is not yet at its destination. It remains puzzling to us how central bankers can say future decisions are data dependent and then go ahead and pre-commit in the same breath. Lastly, Madame Lagarde said the ECB was not thinking about pausing. However, the fact that she mentioned it suggests that the ECB is probably “thinking about thinking about” pausing. She would not comment on a terminal rate but said the ECB will know it when it gets there.

ECB tightening expectations remain steady. WIRP suggests a 25 bp hike is nearly priced in July 27. Odds of another 25 bp hike stand near 60% September 14, rise to nearly 90% October 26, and is fully priced in December 14. This is noteworthy as it appears the market believes the doves even though core inflation remains uncomfortably high. Herodotou speaks Monday. Villeroy speaks Tuesday. Vujcic and Lane speak Wednesday.

Eurozone has a quiet data week. Italy reports May IP Tuesday and is expected at 0.6% m/m vs. -1.9% in April. Eurozone reports May IP Thursday and is expected at 0.3% m/m vs. 1.0% in April. May eurozone trade data will be reported Friday.

German highlight is July ZEW survey Tuesday. Expectations is expected at -10.5 vs. -8.5 in June while current situation is expected at -62.0 vs. -56.5 in June. If so, it would continue the recent deterioration in German sentiment even as the economy slips into recession. Germany reports May current account data Thursday.

U.K. Chancellor Hunt will give his annual Mansion House speech Monday. Reports suggest he will propose several changes that are meant to boost the attractiveness of U.K. financial services. Hunt is also expected to announce several pension reforms, with the most noteworthy being a push for firms to invest 5% of their defined contribution funds into areas such as life sciences and technology by 2030. Hunt said last week that “These commonsense changes are grasping our newfound Brexit freedoms to simplify the rulebook, making it easier than ever for firms to research, raise funds, and float their business.”

The monthly U.K. data dump begins. Labor market data will be reported Tuesday. Unemployment is expected to remain steady at 3.8% in the three months through May, while average weekly earnings are expected at 6.8% y/y vs. 6.5% through April. If so, wage growth would be a new high for this cycle and the most since August 2021. The Bank of England will be concerned about a wage-price spiral, though it’s clear that real wages have fallen as inflation has been outpacing nominal wage growth since late 2021.

Real sector data are likely to worsen. May GDP, IP, services, construction output, and trade will all be reported Thursday. GDP is expected at -0.3% m/m vs. 0.2% in April, IP is expected at -0.4% m/m vs. -0.3% in April, services is expected at -0.4% m/m vs. 0.3% in April, and construction is expected at -0.3% m/m vs. -0.6% in April. With the Bank of England still tightening aggressively, there is no doubt that the U.K. is heading into recession.

BOE tightening expectations continue to rise. WIRP suggests another 50 bp hike is largely priced August 3, followed by another 50 bp hike September 21. After that, 25 bp hikes are priced in for Q4 and Q1 that would see the bank rate peak near 6.5% vs. 6.25% at the start of last week. This would represent the most aggressive tightening cycle in the majors so far in terms of absolute magnitude and yet the benefits to sterling of a higher BOE rate path are starting to wane. That’s because a recession is now back on the table after some earlier optimism that one might be avoided. Updated macro forecasts will come at the August meeting and will have to acknowledge the worsening backdrop. Bailey speaks Monday. The BOE releases its financial stability report Wednesday. Bailey speaks again Wednesday.

Norway reports June CPI Monday. Headline is expected at 6.4% y/y vs. 6.7% in May, while underlying is expected at 6.6% y/y vs. 6.7% in May. If so, headline would still be well above the 2% target. At the last meeting June 22, Norges Bank delivered a hawkish surprise and hiked rates 50 bp to 3.75% vs. 25 bp expected and said rate will “most likely be raised further in August.” Updated macro forecasts were released and the expected rate path was shifted higher to a peak of 4.25% this year. Next meeting is August 17 and a 25 bp hike is expected then. The swaps market is pricing in another 25 bp hike after that would see the policy rate peak near 4.25% over the next six months.

Riksbank releases its minutes from the June 28 meeting Monday. At that meeting, it hiked rates 25 bp to 3.75% and said rates would be hiked at least one more time this year, noting that the weak krona is contributing to high inflation. It also announced that it would accelerate QT to SEK5 bln per month vs. SEK3.5 bln previously and noted “This may contribute to a stronger krona and improve the Riksbank’s capacity to reduce inflation. It is still uncertain how much monetary policy tightening will be required for inflation to fall back and stabilize close to the target of 2%. But the Riksbank will do what is needed.” The swaps market sees around 75% odds of a 25 bp hike at the next meeting September 21 but fully priced in for November 23. Looking ahead, the market sees around 50% odds of another 25 bp hike in H1 2024 and we expect those odds to rise if inflation remains stubbornly high. Sweden reports June CPI Friday. Headline is expected at 9.0% y/y vs. 9.7% in May, CPIF is expected at 6.1% y/y vs. 6.7% in May, and CPIF ex-energy is expected at 7.9% y/y vs. 8.2% in May. If so, CPIF would be the lowest since March 2022 but still well above the 2% target.


Japan reports key orders data. June machine tool orders will be reported Tuesday. May core machine orders will be reported Wednesday and are expected at 0.1% y/y vs. -5.9% in April. Continued weakness in orders support our view that Japan has yet to see any significant impact from China reopening. June PPI will also be reported Wednesday and is expected at 4.4% y/y vs. 5.1% in May. With the economy softening and price pressures easing, market expectations for Bank of Japan liftoff have been pushed into 2024.

May current account data will be reported Monday. An adjusted surplus of JPY1.87 trln is expected vs. JPY1.9 trln in April. However, the investment flows will be of more interest. The April data showed that Japan investors turned net sellers of U.S. bonds (JPY2.0 trln) after three straight months of net buying. Japan investors remained net buyers (JPY310 bln) of Australian bonds for the second straight month after eight straight months of net selling, and also remained net sellers of Canadian bonds (-JPY5 bln) for the fourth straight month and for fourteen of the past fifteen months. Investors remained net buyers of Italian bonds (JPY36 bln). Overall, Japan investors were total net sellers of foreign bonds (-JPY1.1trln) in April after three straight months of net buying. With signs growing that the BOJ is on hold for now, we expect investors to resume chasing higher yields abroad and that’s negative for the yen.

RBA Governor Lowe speaks Tuesday. At last week’s meeting, the bank kept rates steady but it was a hawkish hold as it noted “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 how the economy and inflation evolve. The decision to hold interest rates steady this month provides the Board with more time to assess the state of the economy and the economic outlook and associated risks.” RBA tightening expectations have been pushed out slightly. WIRP suggests 55% odds of a 25 bp hike at the next meeting August 1 and is fully priced in September 5. Looking ahead, another 25 bp hike is nearly priced in for November 7 and there are 25% odds of a third hike December 5. Updated macro forecasts will be released at the August 1 meeting. July Westpac consumer confidence and June NAB business confidence will be reported Tuesday.

Reserve Bank of New Zealand meets Wednesday and is expected to keep rates steady at 5.5%. At the last meeting May 24, the bank hiked rates 25 bp but signaled that it was the end of the tightening cycle and not a pause, as Governor Orr noted “All of the committee were comfortable with the forward path that had interest rates holding around 5.5%.” It remains to be seen whether the RBNZ is eventually forced to restart the tightening cycle but for now, WIRP suggests only 10% odds of a hike this week, rising to over 25% August 16 and 55% October 4 and then mostly priced in November 29.

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