Drivers for the Week of July 25, 2021

Here's a look at the main drivers in Developed Markets this week.
  • It’s a quiet week for the U.S.; the central bank divergence story remains in play and that continues to favor the dollar; weekly initial jobless claims Thursday will be closely watched; Canada also has a quiet week
  • ECB decision Thursday could bring hints of further easing; U.K. reports some important data; U.K. policymakers are struggling to present a coherent message on the economy
  • Japan reports some key data this week; RBA minutes will be released Tuesday; Australia also reports some important data

 

The dollar remains firm as the new week begins in risk off mode. DXY is up for the third straight day but continues to trade just below the July 7 peak near 92.845. Further gains are expected and a break above that high would set up a test of the March 31 high near 93.437. The euro remains heavy ahead of the ECB decision Thursday (see below) and a break below $1.18 would set up a test of the March 31 low near $1.1705. Sterling is also trading heavy as the government’s pandemic response comes under renewed scrutiny. Cable is about to test the July 8 low near $1.3740 and after that is the April 12 low near $1.3670. USD/JPY remains under pressure as risk off sentiment takes hold, though support is seen around the July 8 low just above 109.50.

 

AMERICAS


It’s a quiet week for the U.S. The Fed media embargo for the FOMC meeting is now in place until Chair Powell’s post-decision press conference the afternoon of July 28. Last week’s U.S. data were much stronger than expected, yet Chair Powell’s testimony before Congress last week leaned dovish. That said, that has been Powell’s stance all along. However, other FOMC members are openly calling for tapering sooner rather than later.
The central bank divergence story remains in play and that continues to favor the dollar. This week, the ECB is likely to deliver a dovish hold while the BOJ last week issued updated forecasts that still imply no hikes until FY24 at the earliest. Contrast this with the Fed, which is widely expected to continue taper talks at the July 27-28 meeting, with an eye towards an official announcement either at the late August Jackson Hole Symposium or the September 21-22 FOMC meeting.


Weekly initial jobless claims Thursday will be closely watched. That’s because the readings are for the BLS survey week containing the 12th of the month. Consensus sees 350k vs. 360k the previous week. Continuing claims are reported with a one-week lag and are expected at 3.05 mln vs. 3.241mln the previous week. If so, both readings would be new cycle lows and would underscore continued improvement in the labor market.
U.S. data releases are limited to minor ones. June building permits and housing starts will be reported Tuesday. Weekly mortgage applications will be reported Wednesday. June Chicago Fed National Activity Index, leading index, and existing home sales will be reported Thursday. Markit preliminary July PMI readings will be reported Friday. Manufacturing is expected at 62.0 vs. 62.1 in June, while service is expected at 64.5 vs. 64.6 in June.


Canada also has a quiet week. The only major data release is May retail sales data Friday, which are expected to fall -3.0% m/m vs. -5.7% in April. Last week, the Bank of Canada delivered another round of tapering. However, it stressed that future tapering will depend on the bank’s assessment of the “strength and durability” of the economic recovery. The bank also updated its inflation forecasts to 3.0% (2.3% previously) for 2021, 2.4% (1.9% previously) for 2022, and 2.2% (2.3% previously) for 2023.

 

EUROPE/MIDDLE EAST/AFRICA


The ECB decision Thursday could bring hints of further easing. ECB President Lagarde last week said that this ECB meeting will now have “some interesting variations and changes.” She added that “It’s going to be an important meeting. Given the persistence that we need to demonstrate to deliver on our commitment, forward guidance will certainly be revisited.” Lagarde also said that she expects the current EUR1.85 trln PEPP to run “at least” until March 2022 but that it could then be followed by a “transition into a new format” without elaborating further. Lastly, she said “We need to be very flexible and not start creating the anticipation that the exit is in the next few weeks, months.” We will be writing a preview later this week but bottom line is that the ECB is likely to deliver a very dovish hold. Eurozone preliminary July PMI readings will be reported Friday. Headline manufacturing is expected at 62.5 vs. 63.4 in June, services is expected at 59.3 vs. 58.3 in June, and composite is expected at 60.0 vs. 59.5 in June. 

 
The U.K. reports some important data. June retail sales Friday are key. Headline sales are expected to fall -0.1% m/m vs. -1.4% in May, while sales ex-auto fuel are expected flat m/m vs. -2.1% in May. Ahead of that, the U.K. reports June public sector net borrowing data Wednesday. CBI releases the results of its July industrial trends survey Thursday, with readings expected to ease slightly from June. Preliminary July PMI readings will be reported Friday. Headline manufacturing is expected at 62.3 vs. 63.9 in June, services is expected at 62.0 vs. 62.4 in June, and composite is expected at 61.5 vs. 62.2 in June.

U.K. policymakers are struggling to present a coherent message on the economy. Last week’s CPI data came in higher than expected, but officials continue to frame this as a transitory spike. Yet virus numbers continue to rise even as the economy is set to fully reopen Monday. Prime Minister Johnson and his government are under fire for the botched handling of potential exposure to Home Minister Javid, who tested positive last week despite being fully vaccinated. Next BOE meeting is August 5 and a dovish hold is expected.

 

ASIA


Japan reports some key data this week. National CPI will be reported Tuesday. Headline inflation is expected at 0.2% y/y vs. -0.1% in May, while core is expected at 0.2% y/y vs. 0.1% in May. The BOJ delivered a dovish hold last week, as expected. Updated forecasts were released and the bank sees targeted core inflation at 0.6% (0.1% previously) for FY2021, 0.9% (0.8% previously) for FY2022, and steady at 1.0% for FY23. The bottom line is that even with these forecast tweaks, inflation is likely to remain below the 2% target through FY23. As such, the BOJ continues to signal that it intends to keep policy accommodative until FY24 at least. Growth is forecast at 3.8% (4.0% previously) for FY2021, 2.7% (2.4% previously) for FY2022, and steady at 1.3% for FY23. June trade and supermarket sales data will be reported Wednesday. Exports are expected to rise 46.2% y/y vs. 49.6% in May, while imports are expected to rise 28.2% y/y vs. 27.9% in May. Preliminary July PMI readings will be reported Friday. 

 
RBA minutes will be released Tuesday. At the July 6 meeting, the RBA delivered a hawkish hold. Contrary to our expectations, the bank did not extend its YCC policy beyond April 2024 and announced it would taper its weekly AUD5 bln purchases to AUD4 bln in September followed by a mid-November review of its policies. Governor Lowe said that the decision not to roll over the three-year yield target bond to November 2024 reflected a wider range of cash rate scenarios because of the economy’s improvement. However, he repeated existing forward guidance that inflation is unlikely to return sustainably to the central bank’s 2-3% target for some time, and that “we do not expect the cash rate to be increased until 2024 at the earliest.” That said, we suspect the RBA may accelerate its timeline in the coming months. With the RBNZ hiking this year, it’s hard to believe that the RBA will wait until 2024 to follow suit.


Australia also reports some important data. Preliminary June retail sales will be reported Wednesday and are expected to fall -0.7% m/m vs. 0.4% in May. Preliminary June trade data and Q2 NAB business confidence will be reported Thursday. Preliminary July PMI readings will be reported Friday. For now, the economy remains in good shape but policymakers will be watching to see how the recent lockdowns impact growth in Q3.
 

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