Weekly Market Outlook (24-28 July)

UPCOMING EVENTS:

Monday:
EZ-UK-US PMIs.

Tuesday:
US Consumer Confidence.

Wednesday:
Australia CPI, FOMC Policy Decision.

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

Friday:
BoJ Policy Decision, US PCE, US ECI.

Monday:
The Eurozone Manufacturing PMI is expected to tick lower to 43.3 vs. 43.4
prior, while the Services PMI is seen at 51.4 vs. 52.0 prior. Eurozone
economic data started to consistently surprise to the downside lately which
signals a possible recession hitting the economy in H2 2023 and the ECB ending
its rate hike cycle.

The UK Manufacturing PMI is expected at
45.9 vs. 46.5 prior, while the Services PMI is seen at 53.0 vs. 53.7 prior. This
pattern of contractionary Manufacturing Sector and expansionary Services Sector
has been the theme of this tightening cycle and what is probably delaying the
recession as the Services Sector is less sensitive to rate hikes.

The US Manufacturing PMI is expected a
touch higher at 46.4 vs. 46.3 prior, while the Services PMI is seen a touch
lower at 54.0 vs. 54.4 prior. A downside surprise should weigh on the USD as
the lower US inflation readings are still fresh in the market’s mind and may
cause another dovish repricing in interest rates expectations. On the flip
side, an upside surprise should give the USD some support as the market may start
to price in another rate hike.

Tuesday:
The US Consumer Confidence is expected at 113.0 vs. 109.7 prior. The last
month, we saw a huge upside surprise in
the report jumping from 104.0 to 109.7. The US Consumer may feel more upbeat
due to a strong labour market, lower inflation (energy deflation increased
disposable income) and higher stock market. In fact, the present situation
index in the Consumer Confidence report is seen as a leading
indicator for the labour market and it jumped
from 146.8 to 155.3 the last month. The higher stock market prices, on the
other hand, have a positive wealth
effect that keeps the labour market strong
and consumer spending healthy.

Wednesday:
The Australia CPI Y/Y is expected at 5.4% vs. 5.6% prior, while the CPI Q/Q is
seen at 1.0% vs. 1.4% prior. The RBA’s preferred measures of inflation, the
Trimmed Mean and the Weighted Mean, are seen all lower. The Trimmed Mean
Y/Y is expected at 5.9% vs. 6.6% prior, while the Q/Q figure is seen at 1.0%
vs. 1.2% prior. The Weighted Mean Y/Y is expected at 5.4% vs. 5.8% prior, while
the Q/Q reading is seen at 1.0% vs. 1.2% prior. The Australian
Jobs report last week beat
expectations across the board, and it tipped the expectations in favour for
another rate hike, but a miss in the inflation report may give the RBA an
excuse to keep the cash rate steady. As a reminder, the RBA’s inflation
target is 2-3% per annum.

The Fed is expected to hike by 25 bps and
bring the FFR to 5.25-5.50%. The market has already baked in this rate hike,
so it won’t be a surprise at all. In fact, the market will focus more on
hints for the next move as at the moment the Fed is seen as done with this July
increase. In my opinion, it’s unlikely that the Fed will pre-commit to anything
at this meeting as they remain data dependent and the recent lower Core
inflation reading should increase their hopes for a soft landing. They will
also see two more NFP and CPI reports before the September meeting, so I
think this meeting is likely to be the most boring one of the year.

Thursday:
The ECB is expected to hike by 25 bps and bring the deposit rate to 3.75%. This
rate hike was pencilled in already at the last
ECB rate decision as President Lagarde
said that “inflation is projected to remain too high for too long” and that
there was still “more ground to cover”. In fact, all the ECB speakers have been
repeating week after week that they will hike at the July meeting and that the
stronger debate will centre on the September decision, which will be much
more data dependent. In fact, we are unlikely to see any pre-commitment at
this meeting as the ECB is likely to just stress their data dependency and
resoluteness to bring inflation back to target.

The US Jobless Claims report keeps on
being one of the most market-moving events as the labour market continues to be
at the top of the market’s focus. Last
week, we saw another big beat in Initial
Claims that sent the US Dollar higher across the board, while Continuing Claims
ticked higher, although they lagged by one week the Initial Claims. As a
reminder, the last week Initial Claims data coincided with the NFP survey week.
This week Initial Claims are expected at 233K vs. 228K prior, and the
Continuing Claims are seen at 1742K vs. 1754K prior.

Friday:
The BoJ is expected to keep its monetary policy unchanged with rates at -0.10%
and YCC to flexibly target 10yr yields within -/+ 0.50% target band. The BoJ
will also release its Outlook Report where the central bank is expected to revise
higher its inflation forecasts. There were some expectations coming into this
meeting that the BoJ could tweak its YCC policy, but those were trumped first
by dovish Governor Ueda’s comments and eventually by a Reuters
report last Friday saying that the BoJ was
leaning towards keeping yield control policy at the upcoming meeting.

The US Core PCE M/M is expected at 0.2%
vs. 0.3% prior while there’s no expectation for the Y/Y figure at the moment,
although the Cleveland Fed Inflation Nowcast points to a 4.2% reading vs. 4.6%
prior. The market is likely to focus more on the US Employment Cost Index (ECI)
though which is expected at 1.1% vs. 1.2% prior.