Weekly Market Outlook (24-28 July)

Upcoming events:

MondayPurchasing Managers’ Indexes: EZ-UK-US.

Tuesday: US Consumer Confidence.

Wednesday: Australia CPI, FOMC Policy Decision.

Thursday: ECB Policy Decision, US Unemployment Claims, US Q2 GDP.

Friday: Bank of Japan policy decision, US personal consumption expenditures, US ECI.

Monday:

The Eurozone Manufacturing PMI is expected to ease to 43.3 vs. 43.4 previously, while the Services PMI comes in at 51.4 vs. 52.0 previously. Economic data in the Eurozone has been trending consistently lower lately indicating a possible recession in the economy in the second half of 2023 and the end of the cycle of interest rate hikes by the European Central Bank..

UK Manufacturing PMI is expected at 45.9 vs. 46.5 prior, while Services PMI is expected at 53.0 vs. 53.7 prior. This pattern of a contractionary manufacturing sector and an expansionary services sector has been the subject of this tightening cycle and what may delay the recession because the services sector is less sensitive to higher interest rates.

The US Manufacturing PMI is expected to rise to 46.4 vs. 46.3 previously, while the Services PMI is expected to rise to 54.0 vs. 54.4 previously. A downside surprise should weigh on the US dollar, as lower US inflation readings are still fresh in the market’s mind and could cause a more pessimistic repricing of the interest rate outlook. On the flip side, a bullish surprise should give the US dollar some support as the market may start raising interest rates again.

Tuesday:

US Consumer Confidence is expected at 113.0 vs. 109.7 previously. Last month, we saw a big surprise in the report jumping from 104.0 to 109.7. The American consumer may feel more optimistic due to a strong job market, low inflation (the energy downturn has increased disposable income) and a rising stock market.. In fact, the current situation indicator in the Consumer Confidence report is seen as a leading indicator As for the labor market, it jumped from 146.8 to 155.3 last month. On the other hand, the rise in stock market prices has a positive effect Wealth effect That keeps the labor market strong and consumer spending healthy.

Wednesday:

Australian CPI is expected YoY at 5.4% vs. 5.6% prior, while Q/Q CPI will be 1.0% vs. 1.4% prior. the The RBA’s preferred measures of inflation are the trimmed average and the weighted average, all the less. The yoy cut average is expected to come in at 5.9% vs. 6.6% prior, while the Q/Q number will be 1.0% vs. 1.2% prior. The YoY weighted average is expected to come in at 5.4% vs. 5.8% previously, while Q1/Q1 reading will be 1.0% vs. 1.2% previously. Last week’s Australian jobs report beat expectations across the board, tipping expectations in favor of another rate hike, but the lack of an inflation report may give the RBA an excuse to keep the cash rate steady. As a reminder, the The RBA’s inflation target is 2-3% per annum.

The Fed is expected to rise by 25 basis points and the FFR to rise to 5.25-5.50%. The market has already gone through a rally at this rate, so it wouldn’t be surprising at all. In fact, the market will focus more on hints of the next move as at the moment the Fed is seen to be done with the July hike. In my opinion, the Fed is unlikely to pre-commit to anything at this meeting as it remains dependent on the data and the recent lower core inflation reading should increase their hopes of a soft landing. They will also see two more Nonfarm Payrolls and CPI reports before the September meetingSo I think this meeting is likely to be the most boring of the year.

Thursday:

The ECB is expected to raise 25 basis points and raise the deposit rate to 3.75%. A rate hike was already set in the ECB’s latest interest rate decision as Chair Lagarde said that “inflation is expected to remain very high for a very long time” and that there was still “more ground to cover”. In fact, all the ECB speakers have repeated week after week that they will raise at the July meeting and that the strongest discussion will center around September decision, which will be more data-driven. Indeed, we are unlikely to see any pre-commitment at this meeting as the ECB is likely to reaffirm its reliance on data and its intent to bring inflation back on target.

The US Unemployment Claims report continues to be one of the most market-moving events as the job market continues to be a top market concern. Last week we saw another big win in initial claims that sent the US dollar higher overall, while continuing claims were higher, although they lagged initial claims by one week. As a reminder, last week’s preliminary claims data coincided with the nonfarm payrolls survey week. This week, Initial Claims are expected at 233K vs. 228K prior, while Continuing Claims is expected at 1,742K vs. 1,754K prior.

Friday:

The BoJ is expected to keep monetary policy unchanged with interest rates at -0.10% and YCC to flexibly target 10yr yields within the target range of -/+0.50%. The Bank of Japan will also release its outlook report as the central bank is expected to revise its higher inflation forecast. There was some speculation coming into this meeting that the BoJ might adjust its policy in the GCC, but that was first eclipsed by Governor Ueda’s dovish comments, and finally a Reuters report last Friday that said the BoJ was leaning towards maintaining its yield control policy at the next meeting.

US core M/M PCE is expected at 0.2% vs. 0.3% prior while there is no forecast for the Y/Y number at the moment, although Nowcast Cleveland Fed Inflation indicates 4.2% vs. 4.6% prior. The market is likely to focus more on the US Employment Cost Index (ECI) though it is expected at 1.1% vs. 1.2% previously.