Drivers for the Week of July 4, 2021

Here's a look at the main drivers in Developed Markets this week.
  • Markets are still digesting Friday’s jobs report; FOMC minutes will be released Wednesday; it’s a pretty quiet week for the U.S. in terms of data; Canada has a busy week
  • The eurozone has a fairly busy week; the ECB will reportedly hold a special meeting in Frankfurt this week to help wrap up its strategy review; the ECB releases its account of the June 10 meeting Thursday; details of ECB asset purchases for the week ending July 2 will be reported Monday; U.K. has its monthly data dump Friday
  • Japan has a busy week; May current account data will be reported Thursday; RBA meets Tuesday; minutes from the June 1 meeting set out several possible scenarios

We believe that the post-data softness in the dollar was mostly profit-taking ahead of the long holiday weekend. As such, DXY remains on track to test the March 31 high near 93.437. Likewise, the euro remains on track to test the March 31 low near $1.1705 and sterling remains on track to test the April 12 low near $1.3670. Lastly, USD/JPY remains on track to break above the March 2020 high near 111.70,which would set up a test of the February 2020 high near 112.25 and then the April 2019 high near 112.40.

AMERICAS

Markets are still digesting Friday’s jobs report. The U.S. added 850k jobs vs. 720k expected, while revisions added 15k over the previous two months. However, the unemployment rate rose to 5.9% vs. 5.6% expected and 5.8% in May. Of note, the unemployment rate is determined by the household survey, which reported -18k jobs vs. +444k in May. The household and establishment surveys differ and diverge in many ways but we think that this drop is an outlier.

For those keeping score at home, NFPs are still down 6.764 mln from the pre-pandemic high in February 2020. But how many of those folks have retired or left the work force? Bullard believe the labor market is much tighter than what traditional metrics are telling us. We think it's too early to say but we tend to agree with him, as millions of those workers may never come back. Wages will thus have to rise to entice some workers back. The 3.6% y/y jump in average hourly earnings is of course due in large part to low base effects. However, it's more than just that. The 3-month annualized gain is 5.7% in June, up from 4.0% in May and 3.3% in April. Wage growth is picking up momentum and bears watching. Stay tuned.

We've seen some commentary along the lines that the jobs data wasn't as strong as it looks, implying the Fed may slow its tapering talk. We respectfully disagree. Yes, there were some aspects to the report that warrant caution but I don't think it did anything to make the Fed pause. What might make the Fed pause is significantly slower jobs growth in July and August, but we won't know that for weeks still. For now, we fully expect taper talk at the Fed to advance.

FOMC minutes will be released Wednesday. We already know that the tapering discussions official began at this meeting. However, the minutes may shed some light on what the likely timetable will be. Of note, there was no language in the official statement about tapering. Regarding tapering, Powell said this was a “talking about talking about” meeting, which means that the debate seems to be intensifying. We would not be surprised to see tapering mentioned in the statement at the next meeting July 27-28 if the data remain firm. On the other hand, Powell noted that the Fed will continue to assess progress towards its dual mandate in coming meetings but that it’s “still a ways off.” If his outlook is to be believe, that time is not as far off as the market thought. Bostic on Wednesday is the only speaker scheduled this week.

It’s a pretty quiet week for the U.S. in terms of data. ISM services PMI Tuesday will be the data highlight and is expected to fall to 63.5 from 64.0 in May. While softer, a reading above 60 is still quite strong by historical standards. Other minor data should show ongoing strength in the U.S. economy. May JOLTS job openings will be reported Wednesday and are expected to rise to 9.313 mln from 9.286 mln in April. May consumer credit will be reported Thursday, while wholesale trade sales and inventories will be reported Friday. Jobless claims Thursday are expected to show improvement, with initial claims seen falling to 350k from 364k the previous week and continuing claims seen falling to 3.325 mln from 3.469 mln the previous week.

Canada has a busy week. Bank of Canada releases the results of its Q2 business outlook survey Monday. June Ivey PMI will be reported Wednesday. June jobs data will be reported Friday, with consensus at 195k vs. -68k in May. Since the April taper, the labor market has posted two straight months of job losses and so there really was no need for the bank to change anything at the most recent meeting June 9. That said, the bank said that it will adjust the QE program based on its “ongoing assessment of the strength and durability of the recovery.” That suggests further tapering is in the cards as the recovery continues. There will be updated macro forecasts released at the next meeting July 14. If the outlook continues to improve and jobs growth resumes in June, then the next round of tapering at that meeting is very possible.

EUROPE/MIDDLE EAST/AFRICA

The eurozone has a fairly busy week. Final services and composite PMI readings will be reported Monday. Germany reports May factory orders (1.1% m/m expected) and July ZEW survey Tuesday. Eurozone reports May retail sales Tuesday and are expected to rise 4.2% m/m vs. -3.1% in April, Germany reports May IP Wednesday and is expected to rise 0.7% m/m vs. -1.0% in April. Trade and current account data will be reported Thursday. France and Italy report May IP Friday and will be the final clues for eurozone IP due out July 14.

The European Central Bank will reportedly hold a special meeting in Frankfurt this week to help wrap up its strategy review. The meeting is expected to start with a Governing Council dinner on Tuesday and could continue through Thursday, with sources saying an announcement could be made afterward if an agreement can be reached. The review has been ongoing since early 2020 and covers a wide range of topics, including inflation, employment, climate change and fiscal policy. There’s reportedly broad consensus that the current inflation target of “below, but close to, 2%” should be changed but there is still disagreement on what should replace it. Some favor an exact goal of 2% with flexibility to reach it, while other want an explicit pledge to tolerate higher rates after shortfalls. Bundesbank President Weidmann said last week that he supports “an explicitly symmetric formulation of our policy goal on an inflation rate of 2% over the medium term” but added that he’s not convinced by average inflation targeting.

The ECB releases its account of the June 10 meeting Thursday. Rates were kept steady then and the bank promised to maintain a “significantly higher” pace of purchases that was first announced at the March meeting. Growth and inflation forecasts were upgraded. Of note, the ECB forecasts 2021 inflation at 1.9% vs. 1.5% in March, 2022 inflation at 1.5% vs. 1.2% in March, and 2023 inflation at 1.4% vs. 1.4% in March. As Madame Lagarde pointed out, inflation is seen below target for the entire forecast horizon, which of course implies no rate hikes before 2024. The account should help markets assess how strong the resistance was to extend the higher pace of purchases. For now, the doves have the upper hand.

Details of ECB asset purchases for the week ending July 2 will be reported Monday. Net purchases were EUR24.3 bln for the week ending June 25 vs. EUR19.4 bln for the week ending June 18. 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 last week underscore our believe that the ECB will not risk making any premature moves that could endanger the recovery. The ECB is likely to be happy with the recent slump in eurozone yields, but they will maintain their aggressive asset purchases to ensure loose monetary conditions persist in H2.

The U.K. has its monthly data dump Friday. May GDP, IP, construction output, services, and trade will all be reported. GDP is expected to rise 1.5% m/m vs. 2.3% in April, IP is expected to rise 1.4% m/m vs. -1.3% in April, construction is expected to rise 1.0% m/m vs. -0.3% in April, and services are expected to rise 1.6% m/m vs. 3.4% in April. Ahead of that, final services and composite PMI readings will be reported Monday. For now, the economy is recovering but the current wave of infections poses risks to the economy as we enter H2. BOE Governor Bailey sounded very cautious last week. Next BOE meeting is August 5. While further tapering is expected in H2, this meeting may be too soon given the rising uncertainties.

ASIA

Japan has a busy week. Final services and composite PMI readings will be reported Monday. May real cash earnings will be reported Tuesday and are expected to rise 2.4% y/y vs. 1.9% in April. If so, this would be the strongest growth since July 2010 and would help underpin consumption. May leading index will be reported Wednesday.

May current account data will be reported Thursday. The investment flows will be of most interest. In April, Japanese investors came back with a vengeance in April buying JPY1.7 trln of U.S. sovereign bonds, the most since November. Japanese investors also bought the most Canadian and Australian sovereign debt since October at JPY231.5 bln and JPY341.8 bln, respectively. It appears that some sort of rotation trade may have been in effect, as Japanese investors sold JPY1.6 trln of U.S. equities in April, the most in data going back to 2005, and comes after selling JPY1.2 trln in March.

Reserve Bank of Australia meets Tuesday. At the last meeting June 1, RBA repeated existing forward guidance that rate hikes won’t be seen until 2024 “at the earliest.” Governor Lowe said that “Despite the strong recovery in the economy and jobs, inflation and wage pressures are subdued. The board is committed to maintaining highly supportive monetary conditions to support a return to full employment in Australia and inflation consistent with the target.” Lowe added that “An important ongoing source of uncertainty is the possibility of significant outbreaks of the virus, although this should diminish as more of the population is vaccinated. The board continues to place a high priority on a return to full employment.” The RBA said a decision on QE would be made at this meeting.

The minutes from the June 1 meeting set out several possible scenarios: 1) cease QE in September, 2) extend QE by another AUD100 bln for another six months; 3) scale back or spread QE over a longer period of time, and 4) review the size and pace of QE more frequently based on the data and the economic outlook. The RBA stressed that the key factors in the decision would be progress towards its goals for employment and inflation as well as the likely impact on “overall financial conditions.” With rising virus numbers leading to renewed lockdowns for about half the population, it makes sense to use for the RBA to go with option 4. Maintain and extend QE at the current settings but review it more frequently to allow for tapering as needed in H2.

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