Weekly Market Outlook (22-26 July)

Upcoming Events:

• Monday:PBoC LPR.
• Wednesday:Spot PMIs for Japan/Australia/Eurozone/UK/US, Bank of Canada monetary policy decision.
• ThursdayUS durable goods orders, US jobless claims, US Q2 GDP advance.
• FridayTokyo Consumer Price Index, US Personal Spending Index.

Monday

The People’s Bank of China is expected to keep the benchmark mortgage rate unchanged at 3.45% for one-year terms and 3.95% for five-year terms. The central bank left the benchmark mortgage rate unchanged at 2.50% last week, a key indicator for mortgage rate decisions.

As a reminder, the People’s Bank of China recently introduced a new monetary management mechanism, with Governor Pan Gongsheng saying the seven-day reverse repo rate “basically fulfills the function” of the key interest rate. ING published a great article on the new policy framework reform here.

Wednesday

Wednesday will be the day of spot PMIs for several major economies, with Eurozone, UK and US PMIs being the highlights:

• Eurozone Manufacturing PMI: 46.3 expected vs. 45.8 previously.
• Eurozone Services PMI: 53.0 expected vs. 52.8 previously.
• UK Manufacturing PMI: 51.1 expected vs 50.9 previously.
• UK Services PMI: 52.5 expected vs 52.1 previously.
• US Manufacturing PMI: 51.5 expected vs. 51.6 previously.
• US Services PMI: 55.0 expected vs. 55.3 previously.

The Bank of Canada is expected to cut interest rates by 25 basis points to 4.50%. This expectation was influenced by another weak labour market report and was reinforced by the latest Canadian CPI data, where core inflation measures were further eased. Including the July cut, the market is expecting 62 basis points of easing by year-end.

Thursday

US unemployment claims remain one of the most important data to follow each week, as they are a more accurate indicator of the state of the labor market.

Initial claims remain largely stable around cycle lows and within the 200K to 260K range that has been established since 2022. Continuing claims, on the other hand, have been on a steady rise recently with the data printing new cycle highs each week.

This shows that layoffs are not accelerating and are remaining at low levels while hiring is more subdued. This is something to watch. Initial claims this week are expected to come in at 238k vs. 243k previously, while there is no consensus on continuing claims at the time of writing although the previous reading saw an increase from 1,847k to 1,867k.

Friday

Tokyo core CPI is expected to come in at 2.2% y/y versus 2.1% previously. Inflation in Japan is roughly at target and there are no strong signs of it accelerating again. It is hard to see interest rate hikes since Japan has sought to achieve inflation for decades and could ruin that achievement by tightening policy too much.

However, in addition to expectations that the Bank of Japan will reduce its bond purchases by a “significant” amount, the market is also pricing in a 60% chance of a 10 basis point rate hike at the next meeting.

The US PCE is expected to come in at 2.4% YoY vs. 2.6% previously, while the monthly measure is expected at 0.1% vs. 0.0% previously. The core PCE is expected at 2.5% YoY vs. 2.6% previously, while the monthly reading is expected at 0.1% vs. 0.1% previously. Forecasters can reliably estimate the PCE once the CPI and PPI are released, so the market already knows what to expect..

This report will not change anything for the Fed as the central bank remains in a “wait and see” mode. The market has already fully priced in rate cuts in September and December with some chance of a back-to-back cut in November. The Fed is expected to be more dovish at the next meeting but will not offer a rate cut or commit to a cut in advance.

The upcoming CPI release will be crucial (barring a rapid deterioration in the labor market), as we are likely to see another benign report that signals Fed Chairman Powell’s pre-commitment to a September rate cut at the Jackson Hole symposium.