A busy week, with a bevy of significant data releases, starting with the already reported PMIs out of China and Europe (as well as unemployment and inflation numbers from the Old World), the US Manufacturing and Services PMI, another Bill Dudley speech on Tuesday, US factory orders, statements by the ECB and BOE, where Goldman's new head Mark Carney will preside over his first meeting, and much more in a holiday shortened US week.
Monday, 01 July
- US ISM Survey: Consensus expects a print of 50.5 up from last month's print of 49.
- Euro-area and UK Manufacturing PMIs
- Euro area CPI: the print came at 1.6% yoy up from 1.4% yoy last month.
- China PMI: Consensus expects a print of 48.3 for the HSBC/Markit PMI, down from 49.2 previously. The final number was 48.2
- Russia Monetary Policy Meeting: no change expected
- Also interesting: BOJ Tankan, US construction spending, Korea CPI and Trade Balance, UK mortgage approvals, Indonesia CPI and trade balance,
- Euro area May unemployment, Brazil trade balance, Russia Current Account
Tuesday, 02 July
- US NY Fed's Dudley speaks on economy
- Australia Monetary Policy Meeting: A cut in July is more likely. Consensus leans towards unchanged policy.
- Also interesting: US factory orders, Hungary trade balance, UK PMI construction, Brazil IP
Wednesday, 03 July
- US Trade Balance: Consensus expected a reduction in the trade deficit to -$40.1 billion, from $40.3bn previously
- US Initial Jobless Claims
- US ISM Non-Manufacturing Survey: Non-manufacturing ISM has likely improved to 54 from 53.7 last month - consensus expects 54.1.
- US ADP Employment Report: Consensus expects a pick-up in job growth from 135k last month to 158k jobs.
- China Services PMI
- Sweden Monetary Policy Meeting: No change in monetary policy is expected in line with consensus.
- Euro-area Services PMIs
- Poland Monetary Policy Meeting: A 25bps cut to 2.5% is expected, in line with consensus.
- Also interesting: Australia trade balance, US MBA Mortgage applications, Brazil IC-Br Commodity Price Index, Turkey CPI, Euro Area Retail Sales
Thursday, 04 July
- US Holiday
- UK Monetary Policy Meeting: No immediate QE from the BOE but the just joined Marc Carney will inevitably lead to more monetization.
- Euro Area ECB Meeting: We expect dovish forward-looking language from the ECB to contain the upward drift in money market rates.
- Also interesting: Russia CPI
Friday, 05 July
- US unemployment rate: The rate is expected to decline to 7.5% from 7.6% previously.
- US non-farm payrolls: Consensus expects a drop to 165k from 175K last month.
- Fed deadline for US bank stress test results
- ECB announces 3-year LTRO repayment
- Also interesting: Switzerland CPI, Germany Factory Orders, Chile economic activity (IMACEC), Spain (May) Industrial Output, Switzerland Foreign Exchange Reserves, Canada Unemployment Rate
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The Key Issues for the coming week:
WELCOME MR CARNEY
The fanfare will be great, but we expect the next BoE Governor, Mark Carney, will want to familiarise himself will his new environment before taking any bold steps. A discussion of the merits of forward guidance is due ahead of the August inflation report. Persuading the other MPC members will be no easy task, but one argument that could be put forward is the ability of forward guidance to tame some of the volatility and yield spill-over from the US.
MARKET ISSUES: Any dovish rhetoric will be reassuring to bond markets and bearish Sterling.
A MORE DOVISH MR DRAGHI
There is no shortage of topics for question at this week’s ECB meeting ranging from banking union to the derivatives used by the Italian Treasury, and no doubt the usual question on OMT. Overall, we expect Governor Draghi to adopt a more dovish tone. While this week’s PMI data should see slightly higher readings, the overall numbers remain below the 50-level. Moreover, unemployment is expected to remain at an unacceptably high level of 12.2% in May.
MARKET ISSUES: We believe recent market movements to be overdone relative to the economic reality that indicates no tightening in any
foreseeable future. Quite the contrary, we expect to see an additional rate cut around year-end.
JOBS TO CONFIRM BEN’S TAPER PLAN
An expected reading of 51.5 on the June ISM manufacturing report on Monday will set the tone for the June employment report out Friday. We look for a 175K gain in nonfarm payrolls and an unemployment rate at 7.4%; numbers that will confirm that Ben Bernanke’s taper plans remain intact.
MARKET ISSUES: The US curve is implicitly expressing concern for earlier rate hikes and we believe these concerns are overdone.
CHINA AND JAPAN ON DIVERGENT PATHS
Asia’s two largest economies are set to continue on divergent economic paths with the Japanese Tankan survey to paint a picture of continued recovery, while the Chinese official PMI data is set to remain lacklustre. We expect the policy stance in these two major economies to remain very different, indicating continued divergence of economic trends with Japan gaining momentum on an effort to engineer a credit boost and China slowing on the back of an engineered credit squeeze. As highlighted on several occasions, we do not see China’s slowdown as a question of if, but only when and how fast. The aim from China’s policymakers is to engineer a gradual burst; something we still believe possible, but clearly this hinges on the government’s ability to liberalise the real economic sectors in a timely manner to secure new growth avenues (cf. Beijing's tough love to kick start China's credit burst).
MARKET ISSUES: The Yuan remains one of the stronger currencies in the emerging currency universe. For now, however, there seems to be little appetite for any sharp change in China’s FX policy.
DEBATING BUDGET CUTS & REFORM IN FRANCE
The initial budget discussion is due to be held in the National Assembly on 2 July, but already this weekend the French newspaper Le Monde reported that the government would pursue austerity in 2014 with €14bn of savings measures and a continued freeze on public sector wages. This is in line with the recommendations from the Cour de Comptes (national court of auditors), which on 27 June announced that savings worth €13bn in 2014 and €15bn in 2015 are required to reach the goal of bringing the deficit to 3% of GDP by 2015. The 2014 savings will be spread across ministries with belt tightening thus set to be implemented across a broad range of areas. To reach the goal of reducing the structural budget deficit by 1% of GDP in 2014, the government will furthermore raise an additional €6bn of receipts. One point of interest at Tuesday’s debate is that it seems likely that the government will have to revise down its growth forecast of 1.2% in 2014 (Consensus: 0.7%, SG: 0.4%). This week will also see meetings between the social partners and the government on pension reform on 4-5 July. This will give some initial hints on the mood for reform, but do not expect any decisions to be taken this week. As indicated at the Social Conference, we expect pension reform to come in the form of a mix of higher contributions, extended contribution period and lower pensions (notably for higher income earners with the reduction of indexation). It seems very unlikely that the “special regimes” will be included in this round of reform.
MARKET ISSUES: With austerity on-going, this will remain a headwind to the French economy and we expect to see further downgrades to the growth outlook. The pension reform will be a key test of the government’s willingness and ability to reform.
Source: Goldman and SocGen