Weekly Market Outlook (03-07 July)

Upcoming events:

• Monday: Early Close for US Holidays, Swiss CPI and US ISM Manufacturing PMI.
• Tuesday: US Independence Day, RBA policy decision.
• Wednesday: China services PMIs, FOMC meeting minutes.
• Thursday: EZ Retail Sales, US ADP, US Unemployment Claims, US Employment Opportunities, US ISM Services PMI.
• Friday: Nonfarm payrolls in the United StatesCanada jobs report.

Monday: US markets will close early as the US celebrates Independence Day on Tuesday. Unfortunately, we have the ISM Manufacturing PMI in the US today, which is expected to rise to 47.2 vs. 46.9 previously. The manufacturing sector has been in contraction around the world for some time as tightening monetary conditions and sluggish demand weigh on activity. If the S&P Global Manufacturing PMI is used as a proxy, sentiment could skew to the negative side of the ISM report.

Tuesday: Markets expect the RBA to keep interest rates unchanged at this meeting. Minutes of the last meeting revealed that the RBA considered the rate hike and no cash rate change because the arguments were “nicely balanced”. Given the error in the recent monthly CPI report, we can expect the RBA to keep the cash rate unchanged, although the central bank is not afraid to surprise the markets.

Wednesday: The FOMC kept interest rates unchanged at 5.00-5.25% at the last meeting but delivered a hawkish surprise via Dot Plot showing two more rate hikes this year. This was seen as a disjointed move as they decided to pause/skip at this meeting and probably didn’t want the markets to price in cuts. The Fed’s recent move to the hawkish side confirmed Fed Chairman Powell confirmed that most members expect two or more rate hikes this year. Economic data since the last FOMC meeting has been surprising to the upside and markets estimate an 86% chance of a 25 basis point rally at the July meeting. However, a lot will depend on the following NFP and CPI reports.

Thursday: US jobless claims exceeded expectations by a large margin last week causing a hawkish repricing in interest rate expectations as the labor market remains very tight. Initial claims for this week are expected at 245k vs. 239k prior while Continuing claims are expected at 1751k vs. 1742k prior.

US job openings surprised the upside last time, and although it’s a lagging indicator, given the May data, it could still move the market. Expectations indicate a decrease to 9.94 million compared to 10.10 million previously. The stock market generally drives the job opportunities available for “Wealth effect“.

The ISM US Services PMI is expected to rise to 50.5 vs. 50.3 previously. Markets will pay particular attention to the price sub-index as core inflation remains steady and elevated. The S&P Global Services PMI recently beat expectations with some worrisome comments on the wages side such as: “Service sector firms reported a faster rise in input prices at the end of the second quarter. The rate of cost inflation was the sharpest for five months as firms reported that Increasing wage bills in particular put more pressure on business expenses. Conversely, companies sought to remain competitive and drive sales which resulted in a slower increase in excise charges during the month of June.”

Friday: The US Non-Farm Payrolls report is expected to show 200K jobs added vs. 339K previously and the Unemployment Rate will remain unchanged at 3.7%. Average hourly earnings per month are seen at 0.3% vs. 0.3% previously, while no Y/Y reading is forecast for the time being. Average weekly hours are expected to remain unchanged at 34.3. The recent nonfarm payrolls report surprised the upside, but we did see the unemployment rate rise by 0.3%, the most since the start of the pandemic, average hourly earnings and average weekly hours. Average weekly hours worked is seen as a leading indicator as employers generally cut hours before downsizing.

This article was written by Giuseppe Dellamotta.