Weekly Outlook: July 20 — July 24: PMIs Take Center Stage
According to the economic calendar, this week appears much lighter than the previous one, with no central bank meetings on the agenda. The most important releases may be the preliminary PMIs for July, due out on Friday. Canada’s retail sales and CPIs may also attract attention from CAD-traders as they try to figure out the BoC’s future policy plans.
Monday is a relatively light day, with no major events on the agenda. The only releases worth mentioning, though they are still not major market movers, are Germany’s PPI for June and Eurozone’s current account balance for May. The German PPI rate is anticipated to have increased to -1.6% yoy form -2.2%, while no forecast is available for Eurozone’s current account balance.
On Tuesday, during the Asian morning, Japan’s National CPIs for June are coming out. No forecast is available for the headline rate, while the core one is anticipated to have ticked up to -0.1% yoy from -0.2%. At its latest meeting, the BoJ kept its monetary policy unchanged, with officials noting that they remain ready to take additional easing steps without hesitation if deemed necessary. However, they also added that the domestic economy is likely to start improving gradually in the second half of the year. Subdued inflation is likely to keep the door for further easing wide open, but the fact that they expect the economy to improve in H2, makes us believe that they may wait for a while before deciding to add more stimulus. After all, it seems that there is not much space to do so, and they have to be extra careful choosing the timing of when they should push the easing button. For now, we stick to our guns that the yen is likely to stay mostly linked to developments concerning the broader investor morale.
The minutes from the latest RBA meeting are also due to be released. At that gathering, the Bank kept its policy unchanged, with the statement language being more or less a reiteration of the previous one. Thus, we don’t expect the minutes to result in any fireworks. We believe that they will highlight officials’ readiness to scale-up bond purchases if needed, and that the outlook remains uncertain, with the recovery expected to be bumpy and dependent upon containment of the coronavirus. With officials not appearing worried over the strengthening of the Aussie, we expect the risk-linked currency to continue being driven by headlines and developments surrounding the overall market sentiment.
Later in the day, Canada’s retail sales for May are coming out. Both the headline and core sales are forecast to have rebounded 20.0% mom and 12.5% mom after sliding 26.4% and 22.0% respectively. At last week’s gathering, the BoC kept its policy unchanged, and although officials noted that interest rates will stay untouched until the 2% inflation target is sustainably achieved, they added that they stand ready to adjust their programs if market conditions change. In our view, a rebound in retail sales, combined with a potential rebound in the CPI rates on Wednesday, may allow BoC policymakers to stay sidelined for another gathering.
On Wednesday, the only release worth mentioning is Canada’s CPIs for June. The headline rate is forecast to have returned to the positive territory, to +0.2% yoy from -0.4%, while no forecast is available for the core rate. As we already noted, a small improvement after a decent rebound in retail sales may allow the BoC to sit comfortably on the sidelines at its upcoming meeting.
On Thursday, as every Thursday, we get the US initial jobless claims for last week. The forecast suggests that another 1.3mn people signed for unemployment benefits, the same number as the week before. With the slowdown in claims showing signs of a halt, this may raise concerns over the pace of the economic recovery in the US. That said, this week, the main focus in the US may be the debate in the Congress over a new coronavirus-aid bill, something that could prove an important driver of market sentiment amid fears over another economic downturn, due to the virus keep spreading fast.
Friday is a PMI day. During the European morning, we get the preliminary prints for July from several Eurozone members, as well as from the bloc as a whole. The Euro-area manufacturing index is anticipated to have risen to the equilibrium level of 50.0 from 47.4, while the services one is expected to reveal expansion for the first time since February. Specifically, it is expected to have increased to 51.0 from 48.3. The composite index is forecast to have inched up to 51.1 from 48.5.
At last week’s gathering, the ECB did not alter its monetary policy, but stayed ready to adjust all its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner. At the press conference following the decision, President Lagarde urged EU governments to take action in battling the coronavirus pandemic as soon as possible. However, EU leaders are yet to find common ground at the special summit, which started on Friday, although latest headlines suggest that there is progress. Thus, if there is no solution until Friday, we doubt that the return of the PMIs back within expansionary territory will prove supportive enough for the euro, as its traders may start worrying that the economic recovery could stall again without any additional support. The opposite may be true if EU leaders eventually reach consensus.
The UK PMIs for July and the nation’s retail sales for June are also coming out. No forecast is currently available for the PMIs, while both headline and core sales are expected to have improved at a slower pace than May’s record prints. However, both rates are still anticipated to be at very strong levels (8.5% mom and 7.9% respectively). Following the better than expected CPIs for June and employment data for May, all due out last week, a decent set of PMIs, combined with another stellar improvement in retail sales, may diminish expectations with regards to the adoption of negative interest rates by the BoE.
We get the Markit preliminary PMIs for July from the US as well. The manufacturing index is expected to have risen to 51.5 from 49.8, while the services one is anticipated to have increased to 51.0 from 47.9. New home sales for June are also due to be released, with the forecast suggesting a slowdown to +3.6% mom from +16.6%.
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