Goldman's Thomas Stolper, who is about to finally tell his clients to close out of a stop lossed AUDJPY trade, summarizes what happened in the past week (nothing good) and what is happening next week (nothing good either).
Week in Review: Fiscal issues remain at the top of the agenda
European sovereign issues remained front and center of the market’s attention through last week. The price action being particularly tense last Tuesday when EUR/USD reached an intra-day low of 1.3840, EUR/CHF reached yet new lows just below 1.15 and peripheral spreads continued to widen. However, both Moody’s and S&P put the US AAA rating on negative credit watch last week, serving as a reminder that the US is also grappling with its own fiscal tensions. The week was capped with the European bank stress tests, the results of which showed that only five Spanish savings banks, two Greek banks and one Austrian Bank did not pass the test. The results are broadly in line with expectations, and the host of data provided by the EBA will allow market participants to better appraise risks.
The data front was mixed. On the positive side of the ledger, the Chinese activity data for June was stronger than expected, Japanese IP was revised up and the Japanese PMI was better than expected, finally the US unemployment claims data was better than expected. However, the rest of the US data was disappointing. Core retail sales, IP, the Empire survey and consumer confidence were all weaker than expected, indeed the latter fell to levels last seen in March 2009. In addition core CPI rose by more than expected. In light of the ongoing weakness in the US data, which has continued to fall substantially short of our expectations, we have downgraded our US GDP forecasts for Q2 and Q3 to 1.5 and 2.5% from 2% and 3.25% respectively. The details are provided in the latest US Economics Analyst.
Week Ahead: Euroland Summit and Business Surveys in Focus
Next week is light on data, thus developments in the European and US fiscal tensions are likely to remain high on the agenda. The Eurogroup heads of state will meet on Thursday to discuss European financial stability and further aid for Greece. Expectations are for an increase in the Greek financial rescue package, alongside some form of voluntary ‘bail in’ for holders of Greek debt. More comprehensive solutions to stem contagion risk, such as secondary market purchases of EMU government bonds by the EFSF, are said to be also on the cards, but uncertainty is very large. Ahead of the statement resulting from the summit, the market may remain caught in the headlights of headline risk. Discussions over raising the debt ceiling in the US will continue.
On the data front, the business surveys will be key to watch. Towards the end of the week the HSBC flash PMI for China, the Euroland flash PMIs and the Philadelphia Fed Survey will all be published. The Euroland surveys are expected to decline slightly, but the Philadelphia Fed survey is expected to rise although our forecast is for a notably smaller rise than that of the consensus.
Monday 18th July
US TIC flows (May): The data will provide a barometer of foreign demand for US assets. In past months there has been little evidence of foreign buying of US assets, thus the US external balance remains weak. This remains one of the key pillars of our weak Dollar view. Consensus expects a net long-term inflow of USD40bn, up from USD30.6bn.
Also of interest: Riksbank minutes.
Tuesday 19th July
Australia RBA Minutes: The statement accompanying the last meeting kept the RBA’s base case unchanged – namely firm domestic and global growth and a gradual pick up of inflation over time. However, the statement did note the downside risks to growth from the recent slowing of the global economy. We will inspect the minutes for more details on the risks around the RBA’s central projections.
Wednesday 20th July
Taiwan Export Orders (Jun): Export orders, which typically lead customs exports data by one to two months, increased more than expected by 11.5%yoy in May on the back of strong orders demand for product launches in smart phones and tablet PCs. Notably, Taiwan’s exports to the US have been surprisingly strong so far, but the latest manufacturing data out of the US had been mixed. The June export orders data allows us to better gauge whether these trends are stainable.
Malaysia CPI (Jun): We expect June CPI inflation to come in at 3.8%yoy above the consensus expectation of 3.6%yoy and the previous reading of 3.3%yoy. The electricity tariff hike in June will add to the headline rise, alongside the output gap turning increasingly positive through the second half of this year underpinning underlying inflationary pressures.
US Housing Starts (Jun): We expect a flat reading, equivalent to May, however consensus expects a 2.7%mom rise.
UK BoE Minutes (Jul): Concerns over external risks and the durability of the domestic recovery were the proximate causes for the dovish shift in the MPC’s stance in June; with the escalation of the sovereign debt crisis in the Euro-zone and the softening of monthly indicators of output in the UK, neither concern is likely to have diminished. We expect no change in votes.
Brazil Monetary Policy Meeting: Consensus expects a hike of 25bps to 12.5%.
Thursday 21st July
Japan Trade balance (Jun): Supply-chain constraints on exports have eased significantly and we expect the trade deficit to shrink to ¥125.0 billion, from ¥855.8 billion in May. Our focus from here is the trajectory of Japanese export growth as the global manufacturing cycle loses momentum.
China HSBC Flash PMI (Jul): The last reading fell from 51.6 to 50.6.
Eurozone Summit: The European Council meets. The agenda includes the additional support package for Greece and new ways to safeguard the financial stability of the Eurozone. A preparatory Eurogroup (Ministers of Finance of the Euroarea) meeting will take place on Wednesday.
Euroland Flash PMIs (Jul): Consensus expects the manufacturing PMI to soften to 51.5 from 52 and for the service PMI to soften to 53.2 from 53.7.
UK retail sales (Jun): We expect sequential month-on-month growth in volumes to just turn positive in June, after the 1.6%mom contraction registered in May. Consensus expects a rise of 0.8%mom.
US claims: The last reading showed an improvement, so we will watch to see if this continues.
US Philadelphia Fed Survey (Jul): Consensus expects a rise to 4.5 from -7.7. We are less optimistic and expect only a slight rise to -6.0, similar to the marginal and disappointing improvement in last week’s Empire survey.
Also of interest: Hong Kong CPI (Jun), Spanish bond auction.
Friday 22nd July
Germany IFO (Jul): Consensus expects a slight softening to 113.8 from 114.5.
Canada CPI (Jun): Consensus expects a fall of 0.2%mom from 0.7%.