Weekly Market Outlook (15-19 July)

Upcoming Events:

• Monday:New Zealand Services PMI, People’s Bank of China MLF, China Industrial Production and Retail Sales, Eurozone Industrial Production, Bank of Canada Business Expectations Survey, Fed Chair Powell.
• Tuesday:Eurozone ZEW index, Canadian CPI, US retail sales, US NAHB housing market index.
• Wednesday:New Zealand Q2 CPI, UK CPI, US housing starts and building permits, US industrial production and capacity utilization, Wall Street, Federal Reserve Beige Book.
• Thursday:Australia Labor Market Report, UK Labor Market Report, ECB Policy Decision, US Jobless Claims.
• Friday:Japan CPI, UK Retail Sales, Canada Retail Sales.

Monday

The People’s Bank of China is expected to keep its key interest rate unchanged at 2.50%. Reuters Reported
Market participants believe that the importance of the long-term lending rate will gradually diminish as the People’s Bank of China tries to improve the effectiveness of the interest rate corridor. The People’s Bank of China introduced a new cash management mechanism last week, and Governor Pan Gongsheng recently said that the seven-day reverse repo rate “basically fulfills the function” of the key interest rate.

Tuesday

The Canadian CPI is forecast to average 2.8% YoY versus 2.9% previously, while the CPI is forecast to average 2.7% YoY versus 2.8% previously. The Bank of Canada will likely need benign data to cut interest rates in July, given that wage growth jumped to 5.6% in the latest labour market report. The market is pricing in a 78% chance of a rate cut in July, and a positive surprise in the data could drop that chance to around 50%.

US retail sales are forecast to come in at 0.0% m/m vs. 0.1% previously, while auto sales are forecast at 0.1% m/m vs. -0.1% previously. Consumer spending has been broadly stable, which is expected given positive real wage growth and a resilient labor market. We also saw some weakness in the University of Michigan Consumer Sentiment Index, which could suggest that consumer spending is likely to ease off a bit.

Wednesday

New Zealand’s Q2 CPI is forecast at 3.5% y/y vs. 4.0% previously, while the Q/Q measure is forecast at 0.6% vs. 0.6% previously. As a reminder, the Reserve Bank of New Zealand left the official cash rate unchanged at 5.5% in July but softened its tone slightly, prompting the market to increase expectations of a rate cut by the end of the year. The first rate cut is expected in October.

UK CPI is expected to come in at 2.0% YoY versus 2.0% previously, while the monthly measure is expected at 0.1% versus 0.3% previously. Core CPI is expected at 3.4% YoY versus 3.5% previously. The market had been expecting a 60% chance of a rate cut in August, but that has fallen to 50% after some hawkish comments from the Bank of England.

The central bank’s chief economist said the open question was whether now was the right time to cut rates, adding that more data would come before the next policy decision, but they had to be realistic about how much one or two pieces of data could add to their assessment.

This suggests there is little appetite for a first cut in August unless inflation data comes out very well or jobs data shows a very ugly picture.

Thursday

The Australian labour market report is expected to show 20,000 jobs added in June, up from 39.7k in May, and the unemployment rate unchanged at 4.0%. The data should not change anything in terms of policy expectations as everyone awaits the Australian Q2 CPI report on July 31.^street.

The UK labour market report is expected to show 45,000 jobs added in June versus -140,000 in May and the unemployment rate unchanged at 4.4%. The focus will be on wage growth with average earnings including bonuses expected to rise to 5.7% versus 5.9% previously and average earnings excluding bonuses to rise to 5.7% versus 6.0% previously.

The data should not affect expectations for the BoE’s August decision much, but a slowdown in wage growth or ugly jobs numbers would increase expectations of further easing with the market pricing in around 49 basis points of cuts by the end of the year.

The ECB is expected to keep interest rates unchanged at 3.75%. The central bank’s spokesmen have said countless times that they won’t do anything in July because they want to wait for more data. So this won’t be a big deal and the next open meeting will be in September. The market is pricing in an additional 46 basis points of easing by the end of the year.

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 (although we did see a dip last 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 235k vs. 222k previously, while there is no consensus on continuing claims at the time of writing although the previous reading saw a decline from 1,856k to 1,852k.

Friday

Japan’s core CPI is expected to come in at 2.7% y/y versus 2.5% previously. Japan’s inflation is nearing target and there are no strong signs of it accelerating again. It is hard to see interest rate hikes since Japan has been striving to achieve inflation for decades and could ruin that achievement by tightening monetary policy.

The data shouldn’t change much for the Bank of Japan, which is expected to reduce its bond purchases by a “significant” amount at its next policy meeting, with the market also pricing in a 58% chance of a rate hike.