- Sun: Spanish
Elections. - Mon: EZ/UK/US
Flash PMIs (Jul). - Tue: German Ifo
Survey (Jul), NBH Announcement, Richmond Fed (Jul). - Wed: FOMC
Announcement, Australian CPI (Jun). - Thu: ECB
Announcement, US GDP Advance/PCE (Q2). - Fri: BoJ
Announcement & Outlook Report, French Flash CPI (Jun), Spanish Flash CPI
(Jun), EZ Business Confidence Survey (Jul), US PCE (Jun).
NOTE: Previews are listed in day order
Spain Elections (Sun):
Spain goes to the polls on July 23rd with all
350 Congress of Deputies seats and 208/265 Senate seats up for grabs. Elections
were called early after incumbent PM Sanchez’s PSOE party suffered heavy losses
in the May local elections. Currently, polls have People’s Party (PP) on around
35% or 135 seats and the incumbent Socialist Workers’ Party (PSOE) on 29% or
106 seats. Given that no party is on course for an outright majority, a number
of options present themselves. Feijoo’s PP looks like it will be closest to the
176 majority hurdle, and thus may decide to attempt to proceed with a minority
government; though, this would only be viable if PP was close to the 176 mark.
Alternatively, a minority government propped up by some of the smaller parties
or a coalition with right-wing Vox are the next viable options; though Feijoo
has pushed back on the latter. On the flip side, Incumbent PM Sanchez’s PSOE
and Sumar could end up working together to prevent a rightwing coalition from
entering power, however as things stand this would necessitate the support of
numerous smaller parties either as a formal coalition or via external backing.
Crucially for markets, the election occurs during the typical fiscal planning
period for the next FY. Therefore, the market reaction may well be more evident
in the weeks/months post-election and be dependent on how the planning process
goes and its eventual results with particular interest around the deficit.
Eurozone PMI (Mon):
Expectations are for the manufacturing PMI in
July to tick marginally lower to 43.3 from 43.4, services to slip to 51.4 from
52.0, and pushing the composite down to 49.6 vs. prev. 49.9. The prior report
saw a drop off for both the manufacturing and services components with the
release noting “the eurozone economy ground to a halt at the end of the second
quarter, ending a robust sequence of services-led growth seen since the
beginning of the year”. This time around, analysts at Oxford Economics note
“based on the declines recorded in earlier sentiment data released this month
such as the Sentix and the ZEW indices, we expect the eurozone composite PMI to
fall further below the 50-point threshold that separates expansion from
contraction”. The consultancy adds that “taken at face value, this suggests
there’s a considerable risk that eurozone GDP will contract in Q3 2023”. From a
policy perspective, the release will likely have little impact on Thursday’s
ECB rate decision (see below for details) which is nailed on to deliver a 25bps
hike to the deposit rate.
UK PMI (Mon):
Expectations are for the services PMI in July
to slip to 53.0 from 53.7, with the manufacturing component expected to fall to
45.9 from 46.5 and composite metric seen at 52.2 vs. prev. 52.8. The prior
report saw declines in both the manufacturing and services components with the
release noting “the service sector showed renewed signs of fragility in June as
rising interest rates and concerns about the UK economic outlook took their
toll on customer demand”. This time around, analysts at Investec suggest that
the increasingly hawkish interest rate bets seen at the start of the month
could have “reduced corporate confidence in the economic outlook over the next
twelve-months”. The desk notes that despite downticks for all three metrics, it
expects the services component to remain in expansionary territory and
“continued to be supported by the relatively low level of unemployment in the
economy and the still sizeable pool of excess savings that households (in the
aggregate) have accumulated over the course of the pandemic”. From a policy
perspective, following the recent sub-forecast inflation print, odds now lay in
favour of a 25bps hike (70%) vs. a 50bps adjustment (30%); a
stronger-than-expected outturn could swing things back towards a more 50/50 outcome
on the basis that the UK economy is proving more resilient than expected in the
face of rising rates.
FOMC Policy Announcement (Wed):
The Fed is expected to lift rates by 25bps to
5.25-5.50% at its July confab, with traders looking for clues as to whether
this is the central bank’s last rate rise of the cycle, or whether it is likely
to fire an additional hike at a future meeting, in line with its own
projections. SGH Macro’s Fedwatcher Tim Duy explains that “market participants
are caught in the grips of a Goldilocks narrative as recession fears are once
again pushed into the future while inflation suddenly looks vanquished.” Ahead,
Duy says that if growth firms in Q3, as incoming data suggest, then another
hike will remain on the table, adding that even a temporary period of inflation
could sideline the Fed, especially if growth slows to something clearly below
potential, which he says is around 1.8%. “The Fed will, however, lean towards
pulling off that second rate hike – we should not dismiss that possibility too
easily,” Duy writes, “we can easily envision that second hike if growth remains
firm, but what we can’t see yet is the data to support an increase in the SEP
projected terminal rate in September, although a rebound of inflation could
also easily make that happen.”
Australia CPI (Wed):
Australia will release its latest inflation
data next week, including various CPI metrics for Q2 and the monthly CPI for
June which officials will be hoping to see a further slowdown in price growth.
As a reminder, the previous reading for Q1 was mixed as headline inflation
topped forecasts with CPI QQ at 1.4% vs. Exp. 1.3% and CPI YY at 7.0% vs. Exp.
6.9%, but the headline annual pace slowed from its highest reading since 1990
of 7.8% in the December quarter, while the RBA’s preferred Trimmed Mean CPI QQ
and YY, as well as the Weighted Median CPI QQ and YY figures were all softer
than expected. The Y/Y pace of inflation during Q1 was spearheaded by a 9.8%
climb in the cost of Housing, an 8.6% increase in Recreation and culture, as
well as an 8.0% rise in prices for Food and non-alcoholic beverages, while in
terms of the monthly CPI, the prior reading for May was softer than forecast at
5.60% vs. Exp. 6.10% (Prev. 6.80%). Nonetheless, this remains firmly above the
RBA’s 2-3% target band which will likely keep policymakers on their toes with
any pickup in pace to add to calls for the central bank to resume its hiking
cycle.
ECB Policy Announcement (Thu):
As judged by market pricing and surveyed
analysts, the ECB is once again expected to deliver a 25bps hike which would
take the deposit rate to 3.75%. The decision to move on rates again will be
based on the GC’s view that inflation “is projected to remain too high for too
long”, which prompted President Lagarde to declare at the June meeting that
there was still “more ground to cover” and the ECB is “not done” on rate hikes.
Since the prior meeting, headline inflation has cooled to 5.5% from 6.1%,
however, the super-core metric ticked higher to 5.5% from 5.3%. With this in
mind and officials from the Bank widely flagging a 25bps hike, the actual rate
decision itself will likely pass with little fanfare. Instead, focus for the
release will be on any accompanying guidance or hints about what tightening (if
any) will be delivered from September onwards. On which, reporting from
Bloomberg has suggested that the toughest challenge policymakers are set to
face will be how to keep the September meeting an open one by avoiding “strong
signals of either another hike or a pause”. As a guide, the policy statement
currently includes the line “interest rates will be brought to levels
sufficiently restrictive to achieve a timely return of inflation to the 2%
medium-term target and will be kept at those levels for as long as necessary”. Market
pricing for September puts the chance of another 25bps move at around 50/50 in
the wake of comments from hawkish GC member Knot (and partly as a result of
global rate pricing on the back of soft UK inflation data) who refrained from
putting a September hike on the table by suggesting that rate increases beyond
July are “possible” but “not a certainty”. President Lagarde’s best course of
action will likely be to stress the Bank’s data-dependence given that come
September the Bank will have seen the release of July and August inflation
reports and will be armed with their latest macro projections.
US GDP (Thu):
The first look at GDP in Q2 is expected to
show growth of 1.8% Q/Q annualised, cooling a little from the 2.0% rate seen in
Q1. Credit Suisse notes that consumer spending growth slowed in Q2 to around
1.1% vs Q1’s 4.2%, likely due to higher borrowing costs. Demand for durable
goods also fell slightly, despite inflation pressures easing. The bank also
expects net exports to have had a negative impact in Q2. On the other hand, the
upside case is supported by business investment likely having had a
contribution in the quarter. And while residential investment is expected to
have very little contribution, the rate of decline eased, though high mortgage rates
continue to be a hindrance.
BoJ Policy Announcement (Fri):
The Bank of Japan will conduct its latest
2-day policy meeting next week and will likely keep policy settings unchanged,
with rates to be kept at -0.1% and YCC maintained to flexibly target 10yr
yields at 0% within a +/- 50bps target band. The central bank will also release
its latest Outlook Report which contains Board members’ median forecasts for
Real GDP and Core CPI, while press reports have noted expectations that the BoJ
could raise the inflation forecast above the 2% target level at the upcoming
meeting, which if confirmed, could be seen to pave the way for further policy
normalisation. There was also some speculation about a potential tweak in
policy with former BoJ Director Hayakawa expecting an adjustment to yield curve
control this month by potentially raising the 10yr ceiling to 1.0%. Reuters
sources on Friday suggested the Central Bank is leaning towards maintaining its
yield control policy at the next meeting. Many policymakers see no immediate
need for action as the 10-year yield is trading stably within the 0.50% cap.
Despite this, there is consensus that the yield curve control needs to end at
some point, though the timing is not yet decided. Sources added that the BoJ is
expected to revise up core inflation forecasts for FY23, albeit FY24 & FY25
forecasts are expected to be largely in-line with current projections. Rhetoric
from the central bank continues to suggest a lack of urgency to tweak policy as
Governor Ueda recently stated there is still some distance to go before
sustainably achieving the 2% inflation target and the Bank has been patiently
maintaining easy policy, while he added that unless the assumption on the need
to sustainably achieve the 2% target changes, the narrative on monetary policy
will not change. Ueda previously stated that responding to an inflation
undershoot after a premature rate hike is more difficult than responding to an
overshoot and that they have not changed policy because Japan’s inflation is not
considered sustainable now. Other officials have also suggested a preference to
keep policy steady with Deputy Governor Himino stating that they must guide
policy flexibly and the best approach is to maintain ultra-easy monetary
policy, while Deputy Governor Uchida also said they will maintain YCC from a
perspective of sustaining easy monetary conditions and there’s still a long way
to go before deciding to hike rates. The recent data releases have been mixed
which favours a patient approach as Household Spending and Machinery Orders
have contracted, while the latest BoJ quarterly Tankan survey mostly topped
estimates and showed Japanese large manufacturers’ sentiment improving for the
first time in seven quarters. Furthermore, latest inflation data showed a
slight acceleration and remained above the 2% price target, but is not expected
to trigger a shift in policy given the central bank’s view that inflation will
slow in the middle of the current fiscal year.
US PCE (Fri):
The Fed’s preferred gauge of core PCE prices
is expected to have risen 0.2% M/M in June, easing a little from the 0.3%
increase seen in May. Hopes for cooling inflation have been supported by the
June CPI data which, while differing slightly in methodology, posted a muted
rise, adding to the argument that the downtrend in core inflation will
accelerate, according to Capital Economics. Its analysts note that used vehicle
prices posted a decent decline, as well as widespread falls in the prices of
other core goods. And there were also signs that gains in core services
ex-housing were slowing. “Although that was largely due to a plunge in
airfares, which mainly reflects lower jet fuel prices rather than labour market
conditions, it is nevertheless the sector Fed officials are watching most closely
as they look for evidence the slowdown in core inflation will continue,” they
write.
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