Drivers for the Week of August 1, 2021

Here's a look at the main drivers in Developed Markets this week.
  • July jobs report Friday is the main event; ISM reports July PMIs this week; it’s infrastructure week; the U.S. economy should continue to post strong growth in Q3; Canada also reports July jobs data Friday
  • BOE decision is due Thursday; eurozone has a busy week; ECB asset purchases for the week ending July 30 will be reported Monday
  • Japan has a busy week; RBA meets Tuesday; Australia also has a busy data week

The dollar is getting some traction. After making a new low for the move Friday near 91.782, DXY rebounded and is trading back above 92. The euro could not sustain the move above $1.19 and is trading back near $1.1865. Sterling could not break resistance at the June 23 high near $1.40 and is trading back 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. This week, Bowman speaks Tuesday, followed by Clarida Wednesday and Waller Thursday. 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).

Yet we believe many on the FOMC are tilting more hawkish than Powell. Last Friday, Bullard said he wants to start tapering in the fall and wrap it up by March 2022. After serving as one of the uber-doves on the FOMC in recent years, Bullard has shifted to being one of the most hawkish. One could argue that tapering should start earlier to avoid year-end disruptions but the pace he is advocating is faster than most expect. Bloomberg poll shows tapering is expected to last 10-12 months. With 8 meetings a year, that would suggest a tapering pace of $10 bln for UST and $5 bln for MBS at each meeting. Bullard's 6-month time frame would double those amounts and we think it's too aggressive for the Fed to consider, at least right now. But make no mistake, Bullard is not the only one calling for tapering soon and we continue to think markets are underestimating the Fed's capacity to remove accommodation sooner than what’s expected.

July jobs report Friday is the main event. Consensus sees 900k jobs added vs. 850k in June, with the unemployment rate 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. Ahead of that, ADP reports private sector jobs data and is expected to show a 650k gain vs. 692k in June. Weekly jobless claims will be reported Thursday, with initial claims expected at 382k vs. 400k the previous week and continuing claims expected at 3.26 mln vs. 3.269 mln the previous week. Claims data have been erratic lately, increasing the risk of a big miss on jobs Friday.

ISM reports July PMIs this week. Keep an eye on the employment components. Manufacturing will be reported Monday and is expected at 60.9 vs. 60.6 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. 62.0 expected and 62.1 in June and services coming in at 59.8 vs. 64.5 expected 64.6 in June. On the other hand, Chicago PMI surged to 73.4 vs. 64.2 expected and 66.1 in June and 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.

It’s infrastructure week. Lawmakers were unable to finish the text of the bill last Friday but advanced the bill in a procedural vote that saw 16 Republicans join all 50 Democrats. Reports suggest the Senate is likely to pass the $550 bln package towards the end this week. The deal was struck in large part by avoiding any tax hikes. Instead, the costs will be funded by re-purposing $200 bin in unspent Covid-19 relief funds, sales from the Strategic Petroleum Reserve, higher customs fees, and more reporting requirements on cryptocurrency transactions. It also taps into some dubious budget gimmicks, such as counting revenue from future economic growth.

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.

Other data should show continued strength in the U.S. economy. June construction spending (0.5% m/m expected) will be reported Monday, followed by June factory orders (1.0% m/m expected) and July auto sales (15.3 mln annual rate expected) Tuesday. July Challenger job cuts will be reported Thursday, followed by July wholesale trade sales, inventories, and consumer credit ($22.5 bln expected) Friday.

Canada also reports July jobs data Friday. Consensus sees 170k 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 Friday. Earlier in the week, Markit manufacturing PMI will be reported Tuesday. June building permits will be reported Wednesday, followed by June trade data Friday. The Canadian economy continues to recover, allowing the Bank of Canada to continue tapering at its last meeting July 14.

EUROPE/MIDDLE EAST/AFRICA

Bank of England decision is due Thursday. At the last decision June 24, it delivered a dovish hold. While no one was expecting any policy changes after it announced the start of tapering at the previous decision May 5, the dovish tone took many by surprise. The bank warned against “premature tightening” due to its view that the spike in inflation is temporary, noting that “Financial market measures of inflation expectations suggest that the near-term strength in inflation is expected to be transitory.” The bank reiterated that it does not intend to hike rates until inflation has risen above the 2% target for a sustained period. Despite that dovish hold, the short sterling futures strip still suggests some odds of the first hike in Q4 2021, rising significantly in Q1 and fully priced in Q2 2022. Otherwise, it’s a quiet week for the U.K. In terms of major data, only final July manufacturing PMI will be reported Monday, followed by final July services and composite PMIs Wednesday.

Eurozone has a busy week. Final July manufacturing PMI will be reported Monday, followed by final July services and composite PMIs Wednesday. Germany reports June retail sales (2.0% m/m expected) Monday, while Italy (2.0% m/m expected) and eurozone (1.6% m/m expected) report Wednesday. Germany reports June factory orders (2.0% m/m expected) and France reports June IP (0.6% m/m expected) Thursday. Germany (0.6% m/m expected), Spain (0.5% m/m expected), and Italy (1.0% m/m expected) report IP Friday but the headline eurozone reading won’t come out until August 12.

ECB asset purchases for the week ending July 30 will be reported Monday. 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 has a busy week. Final July manufacturing PMI, July vehicle sales, and July consumer confidence will be reported Monday. July Tokyo CPI will be reported Tuesday, with both headline and core (ex-fresh food) expected to remain flat y/y . Final July services and composite PMI will be reported Wednesday. June real cash earnings and household spending will be reported Thursday. Earnings are expected to rise 1.2% y/y vs. 2.0% in May, while spending is expected to rise 0.2% y/y vs, 11.6% in May. The economy is likely to remain weak in Q2 and Q3 as the state of emergency extends and widens. Yet the Bank of Japan is on hold even as markets await another fiscal package in the coming weeks.

Reserve Bank of Australia meets Tuesday. At the July 6 meeting, the RBA delivered a hawkish hold by not extending its YCC policy beyond April 2024 and by tapering its weekly AUD5 bln purchases to AUD4 bln in September followed by a mid-November review of its policies. However, minutes show that “Given the high degree of uncertainty about the economic outlook, members agreed that there should be flexibility to increase or reduce weekly bond purchases in the future.” With lockdowns biting, market expectations for RBA tapering have shifted. A Bloomberg poll taken last week shows that most analysts look for the RBA to delay its planned tapering. Of the 18 analysts polled, 13 expect the bank to announce this at this week’s meeting, while 5 see tapering proceeding as planned in September. While one well-known RBA watcher calls for an increase in weekly QE to AUD6 bln from AUD5 bln currently, more than 80% of the poll respondents see no increase. The RBA will issue its Statement on Monetary Policy Friday.

Australia also has a busy data week. Final July manufacturing PMI will be reported Monday, followed by final July services and composite PMIs Wednesday. Final June retail sales will also be reported Wednesday. June trade will be reported Thursday. Elsewhere Down Under, New Zealand reports Q2 employment and earnings data.

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