- Markets are still digesting Friday’s jobs report; we expect the Fed hawks to be emboldened; July inflation data will take center stage; U.S. Treasury quarterly refunding takes place this week; Senate did not pass the $550 bln infrastructure bill over the weekend; the debt ceiling is likely to start coming into focus
- Eurozone has a fairly light data week; ECB asset purchases for the week ending August 6 will be reported Monday; U.K. has its monthly data dump Thursday; no wonder the BOE delivered a dovish hold last week
- Japan has a quiet week; Japan reports June current account data Tuesday
The dollar remains firm in the wake of the strong jobs data. DXY is trading at the highest level since July 26 near 92.92 and in on track to test the July 21 high near 93.191. The euro is leading this move and is already testing the July 21 low near $1.1750. A clean break below sets up a test of the March 31 low near $1.1705. Sterling has held up slightly better after the BOE decision and is still trading just below $1.39. As such, the EUR/GBP cross broke below the April low near .8470 to trade at new lows near .8461. USD/JPY is trading at the highest level since July 27 near 110.35 and is nearing the July 23 high near 110.60. Break above that would set up a test of the July 2 high near 111.65. We remain positive on the dollar, as stronger U.S. data and hawkish Fed comments are clearly taking hold.
Markets are still digesting Friday’s jobs report. The 943k jobs added is the largest gain in NFP since August 2020. For those keeping score at home, NFP now stands 5.7 mln below pre-pandemic levels. What we don't know is how many of those folks have simply left the labor force. Pre-pandemic unemployment was around 3.5% so we are still a couple of percentage points above that. The 4.0% y/y rise in average hourly earnings is above the pre-pandemic range of 3.0-3.5% and certainly bears watching. As far as rate hikes go, they are still a 2022 or 2023 story but if we had to pick the bigger risk, it's that a hike comes sooner than markets expect, not later. JOLTS job openings data Monday will provide further insight into the U.S. labor market, followed by weekly jobless claims Thursday.
We know that the Dot Plots are an imperfect indicator of actual Fed policy. However, it's worth noting that in the June Dot Plots, 7 FOMC members saw the first hike coming in 2022 while the median was 2023. If 3 members move forward their timing from 2023 to 2022, then the median becomes 2022. New Dot Plots will come at the September 21-22 meeting and we think it's very possible that we see another hawkish shift there that will underscore that Fed tightening risks are rising.
We expect the Fed hawks to be emboldened. Kaplan capped off last week with a call to start tapering soon. This week, Bostic and Barkin speak Monday, followed by Mester Tuesday. Logan, Bostic, and George speak Wednesday. Of course, all eyes are now on the Jackson Hole Symposium to be held August 26-28. We believe there is a very good chance that a more explicit tapering timeline will be set for then. If not, then the September FOMC meeting comes into focus. There has been so much tapering talk that the Fed probably won’t wait long between the announcement and implementation and so we continue to look for tapering before year-end.
July inflation data will take center stage. CPI will be reported Wednesday, with headline expected to fall a tick to 5.3% y/y and core expected to fall two ticks to 4.3% y/y. PPI will be reported Thursday, with headline expected to fall two ticks to 7.1% y/y and core expected to remain steady at 5.6% y/y. Of note, the Fed’s preferred measure of core PCE won’t be reported until August 27. The US 10-year yield has traded as high as 1.30% but hasn't been above it since July 23. A break above 1.31% would set up a test of the July 14 high near 1.42%, but we’ve got a long way to go before we can start talking about 1.50%.
The U.S. Treasury quarterly refunding takes place this week. It will sell a total of $126 bln of long-term securities, consisting of $58 bln of 3-year notes Tuesday, $41 bln of 10-year notes Wednesday, and $27 bln of 30-year bonds Thursday, all unchanged from May. The auctions will raise $67.4 bln in new cash, though Treasury noted that “Continuing current issuance sizes and patterns may provide more borrowing capacity than is needed to address borrowing needs over the intermediate-to-long term” and expects to announce a reduction in auction sizes as soon as November.
The Senate did not pass the $550 bln infrastructure bill over the weekend. On Sunday, 18 Republicans joined with all 50 Democrats to limit debate on the bill, an indication that it will be eventually passed with bipartisan support. Due to some last minute objections, the final vote will be held either late Monday or Tuesday. Several Republicans are opposing the bill because it will be followed by the Democrats’ plan to push through the $3.5 trln budget measure without Republican support.
The debt ceiling is likely to start coming into focus. The Treasury last week reiterated Treasury Secretary Yellen’s recent warning about the debt ceiling. It acknowledged that it faces “considerable uncertainty” about how long it can delay a default through special accounting measures after the federal debt ceiling was reinstated this past Sunday. Treasury said it couldn’t provide a “specific estimate of how long extraordinary measures will last.” Senate Minority Leader McConnell has pledged no Republican support to raise the ceiling, but this is clearly a negotiating tactic to extract concessions from the Democrats. Stay tuned.
Other than that, U.S. data releases are mostly minor. Q2 nonfarm productivity and unit labor costs will be reported Tuesday. July budget statement will released Wednesday. Import/export prices will be reported Thursday. University of Michigan preliminary August consumer sentiment will be reported Friday.
Eurozone has a fairly light data week. Germany reports June trade and current account data Monday. Exports are expected to rise 0.3% m/m and imports by 0.4% m/m, both the same as May. August ZEW survey will be reported Tuesday. Current situation is expected at 30.5 vs. 21.9 in July, while expectations is expected at 55.0 vs. 63.3 in July. Eurozone reports June IP Thursday. It is expected at -0.1% m/m vs. -1.0% in May. However, given unexpected weakness in the country data last week, this suggests downside risks to the headline eurozone reading. Eurozone trade data will be reported Friday.
ECB asset purchases for the week ending August 6 will be reported. Net purchases were reported at only EUR10.7 bln for the week ending July 30 vs. EUR22.8 bln for the week ending July 23 and 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. 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.
U.K. has its monthly data dump Thursday. Q2 GDP is expected to grow 4.8% q/q vs. -1.6% in Q1. Looking at the monthly data, GDP is expected to rise 0.8% m/m, same as May. IP is expected to rise 0.3% m/m vs. 0.8% in May, while construction output is expected to rise 1.0% m/m vs. -0.8% in May. Services are expected to rise 0.9% m/m, same as May, while the trade surplus is expected at GBP400 mln vs. GBP884 mln in May. Of course, markets are more concerned with the Q3 outlook after reopening and so the July data will be much more important. High frequency data so far suggest that the boost to the economy since Freedom Day has been underwhelming.
No wonder the Bank of England delivered a dovish hold last week. Forward guidance was changed but there was less than meets the eye. It said a hike was likely before the forecast period ends in 2023 but this was not exactly earth-shattering since the short sterling strip already has had the first hike priced in for H1 2022 for months now. Still, the modification to the forward guidance was welcome, especially given the bank’s explicit roadmap for exiting QE. Otherwise, we think the bank pretty much delivered what was expected. Now, it simply has to wait for the data to come in.
Japan has a quiet week. July machine tool orders will be reported Wednesday. July PPI will be reported Thursday and is expected to remain steady at 5.0% y/y. For now, the Bank of Japan is expected to remain on hold even as markets anticipate another round of fiscal stimulus to shore up the economy. Now that the Tokyo Olympics are over, we expect the Suga government to announce a fiscal package before the summer ends.
Japan reports June current account data Tuesday. The adjusted surplus is expected at JPY1.7 trln vs. JPY1.866 trln in May. The investment flows will be of most interest. In May, Japanese investors sold foreign bonds after massive purchases in April to kick off the new fiscal year. MOF data show net sales of JPY496 bln of U.S. sovereign bonds in May vs. JPY1.7 trln of purchases in April. It appears that some sort of rotation trade was under way, as Japanese investors bought a net JPY293.9 bln of U.S. equities in May after selling JPY1.63 trln April, the most ever in data going back to 2005. Japanese investors also net sold Canadian and Australian sovereign debt in the amounts of JPY18.5 bln and JPY61.5 bln, respectively. Italian bonds were also sold to the tune of JPY44.2 bln.