Week Ahead: Highlights include US NFP, ISM, Tsy refunding; BoE, RBA, BCB, RBI; NZ jobs, Aus retail sales
- MON: Chinese Caixin Manufacturing PMI Final (Jul); German Retail Sales (Jun); EZ, UK and US Manufacturing PMI Final (Jul); US ISM Manufacturing PMI (Jul); Canadian Civic Holiday
- TUE: RBA Policy Decision; EZ PPI (Jun); US Durable Goods R (Jun); New Zealand HLFS Jobs Report (Q2)
- WED: BCB Policy Decision; Australian Retail Sales (Jul); Chinese Caixin Services and Composite PMI Final (Jul); EZ, UK and US Services and Composite PMI Final (Jul); EZ Retail Sales (Jun); US ADP National Employment (Jul); US ISM Services PMI (Jul)
- THU: BoE Policy Decision; CNB Policy Decision; Australian Trade Balance (Jun);
- FRI: RBI Policy Decision; US Labor Market Report (Jul); Canadian Labor Market Report (Jul); RBA SOMP
NOTE: Previews are listed in day-order
US ISM MANUFACTURING PMI (MON): Analysts are expecting an unchanged print for July, with the consensus pencilling in 60.5 from a previous 60.6. Other gauges augur well, however, with the Markit manufacturing PMI rising to a series high in July, and its output sub-index hitting a two-month high; Markit also said manufacturing had reported a sharp upturn in new orders. Foreign demand was also said to be firm. "Short-term capacity issues remain a concern, constraining output in many manufacturing and service sector companies while simultaneously pushing prices higher as demand exceeds supply," Markit wrote, "however, we’re already seeing signs of inflationary pressures peaking, with both input cost and selling price gauges falling for a second month in July, albeit remaining elevated." Analysts were also noting that the regional Fed surveys were encouraging in the month.
RBA POLICY DECISION (TUE): There have been growing calls for the RBA to postpone its taper plan telegraphed in August – whereby the bank announced a decrease in weekly purchases to AUD 4bln from AUD 5bln, effective September and up for a review later in the year. The Cash Rate is expected to be maintained at 0.25%. The increasing noise surrounding a back-track on the planned tapering comes amid the deteriorating COVID situation in the country, with the largest city Sydney extending what was initially intended to be a “snap” stay-at-home order by four weeks – in turn sparking a number of GDP forecast downgrades. COVID will likely take precedence at this upcoming meeting, as opposed to the largely constructive/resilient backwards-looking economic data. 13 out of 18 surveyed economists expect the RBA to defer its planned tapering. Westpac goes a step further and calls for the RBA to up weekly purchases by AUD 1bln to AUD 6bln, with a review in November. Given the lockdown in Sydney, Westpac now expects a 2.2% contraction in Q3 GDP, with activity in New South Wales declining 7.8% - likely to shed around 200k jobs in the quarter. “If, as we expect, the Board is advised of a sharp deterioration in the economic outlook, why not use its newly acquired flexible policy instrument to respond immediately?”, the Aussie bank questions, whilst adding that lifting the pace of purchase would send the right message about flexible policy responding at a time of need.
NEW ZEALAND HLFS JOBS REPORT (TUE): The Q2 Unemployment Rate is expected to fall to 4.5% from 4.7%, while the Participation Rate and Employment Change are seen ticking higher to 70.6% (from 70.4%) and +0.7% (prev. +0.6%) respectively. The Labour Cost indices meanwhile are both forecast to increase, with the YY at 2.0% vs prev. 1.6%, and the QQ at 0.7% vs prev. 0.6%. Desks have noted that the monthly indicators point towards a notable pickup in jobs, whilst hiring sped up. In line with this sentiment, analysts at Westpac expect the unemployment rate to fall to 4.4%. “Things now look quite different. Job ads have surged to new highs, employment growth has accelerated, benefit numbers are falling sharply, and there are increasing anecdotes of big pay offers and poaching by employers, even in industries that weren’t greatly reliant on overseas workers in the first place. All of these are markers of strong demand, on top of the supply-side constraints arising from the border closure”, the Aussie bank said.
US TREASURY QUARTERLY REFUNDING (WED): The quarterly refunding announcement will likely see Q3 auction sizes for 3yr, 10yr, and 30yr issues kept steady at USD 58bln, 41bln, and 27bln, respectively. However, after the May announcement saw the Treasury Borrowing Advisory Committee (TBAC) note that the "Treasury may want to reduce nominal coupon sizes beginning late this year or early next year", it will be of note to see if any more details are given on that timeline. TD Securities' analysts "expect Treasury to begin decreasing auction sizes in November and look for USD 3bln/month auction cuts to the 2-7y auctions and USD 2bln cuts to 10-30yr new issues and reopenings," where the bank adds that "TIPS auction sizes should remain unchanged." Thus, traders will be balancing the expected future decline of Treasury supply at a time when the Fed's QE tapering should be getting underway – that's also not giving much thought to any potential blockbuster infrastructure deal and the implications for Treasury issuance. Meanwhile, STIR traders will be keeping an eye on the reinstatement of the debt ceiling as the temporary suspension expires, which is expected to keep net T-Bill supply constrained. TD says, "We would expect Treasury to keep cutting bill supply by about USD 150bln/month until the debt ceiling is raised or suspended. Once suspended, Treasury will likely return the cash balance to more normal levels by quickly issuing about USD 200-300bln of additional bills."
BCB POLICY DECISION (WED): The consensus looks for the Brazilian central bank to lift rates by 100bps, taking the Selic to 5.25%. HSBC notes that following a higher-than-expected inflation print for H1 in July, expectations tilted towards a larger rate hike, however it is only expecting a 75bps move to 5.00%, arguing that a more benign inflation path in the second part of this year, as well as risks posed by the Delta variant are not supportive of a higher move. The bank does however expect a hawkish tone from the BCB, and expects that the BCB's strategy will be to take the Selic to a neutral level, which HSBC judges is around the 7.00% mark, by the end of this year. It also sees policymakers maintaining forward guidance, which it sees as having been proven to be successful in providing clarity on monetary policy.
AUSTRALIAN RETAIL SALES (WED): Q2 Retail Sales QQ are forecast to tick higher to 0.9% from -0.5% in Q1. Desks note that retailers had a volatile Q1 amid a string of targeted lockdown and reopening rebounds, later met with flooding in eastern Australia. Analysts also caution to take the retail sales release with a pinch of salt as July saw tighter restrictions measures in the most populous state of New South Wales, whilst the retail sales also omit more COVID-impacted sectors such as travel, fuel, hotels and leisure.
BOE POLICY DECISION (THU): At the BoE’s upcoming policy announcement, the MPC is expected to stand pat on rates at 0.1% via a unanimous decision and maintain its APF at GBP 895bln (GBP 875bln Gilts and GBP 20bln corporates). The latter decision was previously subject to dissent from Chief Economist Haldane who opted for a GBP 50bln reduction in the remit. Haldane has since left the Bank (leaving just eight members on the MPC), however, given recent hawkish remarks from external member Saunders, Haldane’s dissent could be replaced at the upcoming meeting. The MPC’s decision will take place against the backdrop of the UK having carried out the final stage of its reopening plan following the delay in June. PMI survey data for the month of July remained firmly in positive territory, however, staged a pullback from the levels seen in June as increasing COVID infection numbers in the UK hampered consumer demand, whilst supply chain disruptions and staff shortages clouded the outlook of survey respondents. On the inflation front, Y/Y CPI rose to 2.5% from 2.1% and core to 2.3% from 2.0%. Inflation has been a key focus of recent speeches from policymakers with Saunders and Ramsden taking a more hawkish perspective as the latter noted that “it may become appropriate fairly soon to withdraw some of the current monetary stimulus in order to return inflation to the 2% target on a sustained basis”. Deputy Governor Broadbent stated he is not quite there with Saunders on the duration of goods price inflation, but acknowledged that the extent of the increase in inflation “is a bit surprising”. On the more dovish end of the spectrum external member Vlieghe and his replacement Mann (will join MPC on 1st September) continue to view price developments as “transitory”. Overall, despite some hawkish impulses from the MPC, consensus will continue to lean in favour of the current policy trajectory with APF purchases set to run until the end of the year. Elsewhere, the upcoming meeting could see the MPC unveil the findings of its tightening guidance review. As it stands, guidance states that the Bank will not begin shrinking its balance sheet until the base rate is around 1.5%. UBS suggests that rates will likely remain the Bank’s marginal tool for tightening, however, the 1.5% threshold will likely be lowered. Finally, for accompanying projections in the MPR, UBS expects the Q2 inflation outturn to prompt an upgrade to the 2021 projection to in excess of 3% with the medium-term forecast to remain around the 2% target. On the growth front, the 2021 GDP forecast of 7.25% is set to be revised higher whilst 2022 and 2023 projections are set to remain at 5.75% and 1.25% respectively.
AUSTRALIAN TRADE BALANCE (THU): June trade balance is forecast at a larger surplus of AUD 10.45bln, up from May’s AUD 9.68bln. Export strength is expected to push the surplus to a record high in June as export earnings benefitted from the elevated commodity prices. Import data is also expected to have resumed its uptrend in order to meet domestic demand, with customs data pointing to strength in fuel and vehicles.
RBI POLICY DECISION (FRI): Consensus is for the central bank to keep rates unchanged with the Repurchase Rate and Reverse Repo Rate likely to be maintained at 4.00% and 3.35% respectively, while the Cash Reserve Ratio is expected to be held at 4.00% after the central bank had already conducted a two-phase normalisation in March and May totalling 100bps to return the CRR to its pre-pandemic level. The RBI has kept the Repurchase Rate and Reverse Repo Rate unchanged since it last cut in May 2020 as above tolerance inflation put a halt to the central bank’s rate cut cycle which had resulted in a total of 250bps of cuts since Governor Das took the helm at the apex bank. Therefore, given that the latest inflation data has returned to above the RBI’s 2%-6% tolerance band at 6.30% in May and 6.26% in June, the central bank is unlikely to make any downward adjustments to rates and some desks even expect potential for policy normalisation in the short-term with ICICI Prudential Life suggesting the RBI could provide signals at the upcoming meeting citing a pick up in inflation and risks from higher oil prices, while Morgan Stanley’s Chief Asia Economist sees either the October or December meeting as for when the central bank may provide some indication that it may have to start thinking about lifting rates if growth continues to improve and if inflation remains elevated. Nonetheless, the consensus for the upcoming meeting is for the central bank to keep rates unchanged to continue support for the economy that was battered by the 2nd wave of the virus outbreak, as well as maintain an accommodative stance which it stated that it will continue with for as long as necessary. Furthermore, the decision by the RBI to boost liquidity measures at the last meeting adds to the case for a pause, given that the central bank had already announced another GSAP 1.0 operation of INR 400bln for June and GSAP 2.0 in Q2 of fiscal 2021/22 valued at INR 1.2tln, while it also unveiled a INR 150bln on tap liquidity window for contact intensive sectors and INR 160bln special liquidity facility to assist MSMEs.
US LABOR MARKET REPORT (FRI): As we go to publication, the consensus looks for +926k nonfarm payrolls to be added to the US economy in July (this will be refined ahead of the release as analysts submit forecasts), with the pace picking up from the +850k added in June. Private payrolls are likely to do much of the heavy lifting (expected to add +750k jobs). The street expects the jobless rate to fall to 5.7% from 5.9%, although analysts will be focusing on the participation rate (no forecasts, last 61.6% vs the 63.2% seen pre-pandemic in Feb'2020) as well as the U6 measure of 'underemployment' (no forecasts, last 9.8% vs 7.0% seen pre-pandemic in Feb'2020). Additionally, some Fed officials have been watching the employment-population ratio to assess how much of the slack has been eroded (no forecasts, last at 58% vs 61.1% in Feb'2020). On the labour market, Fed Chair Powell this week reinforced the message that substantial further progress has still not been made, repeating that the labour market still has a "ways to go"; he did acknowledge that pandemic factors appear to be weighing on employment growth, but these should wane in the "coming months". Powell also said there was still "some ground to cover" on substantial further progress, and was is hopeful that the Fed can make progress towards full employment over the next couple of years (note: this is consistent with the Fed's recent forecasts which pencil in an unemployment rate of 3.5% in 2023), but added that it should not take long to reach a strong labour market. Accordingly, labour market metrics (and inflation) are 'live' in terms of helping to refine expectations of how monetary policy will unfold ahead.
CANADIAN LABOR MARKET REPORT (FRI): As yet, Refinitiv does not a consensus expectation for the July labour market data, although Canadian bank RBC is looking for another hefty gain of +150k, following the +231k jobs added in June. June's data was supported by the economy reopening, and didn't quite pare back the decline of 275k over the April and May reports. Accordingly, RBC expects the hardest-hit sectors to drive much of the improvement in the labour market in July, while it also expects some of the weakness seen in the goods side to unwind somewhat. It sees full-time jobs leading the July increase after a disappointing composition in June, where full-time jobs declined -33K, and part-time jobs gained +264K. RBC highlights that "the BoC is focused on broad-based improvement in the labour market, including hard-hit sectors, demographic groups, and a reduction in stubbornly high long-term unemployment (1y+ at >300K in April–June)."