Goldman's Themistoklis Fiotakis summarizes the main events in the upcoming week, which will likely see a very short term bout of buying frenzy on the debt ceiling deal, following by the realization that America can kiss fiscal stimulus goodbye and that real GDP is set to contract over the next quarter to a negative print as the last benefits from QE2 vanish and are replaced by nothing. Also, with the upcoming weekly earning focusing on financial companies as announced yesterday, there will be little help from the only bright spot in the so-called economy, especially with the flashing red sign of the July Nonfarm Payroll Print (consensus +95K, Goldman +50K, even LaSagna +50K) due on Friday. The half life of Europe's second bailout was under 5 days. We give America about the same.
Three key themes dominated price action last week: First, the US debt ceiling debate emerged at the forefront of market attention as the Senate and the House of Representatives were not able to reach a solution to raise the US debt ceiling and commit to a credible plan for budget cuts. Uncertainty remains in place as we approach August 2nd, a date that has been suggested as the deadline by which US legislators need to reach a compromise. That said, there may be some room for negotiations to continue for a few more days after that.
Second, rising Italian yields reinforced underlying market nervousness over peripheral European bond market trends. 10y BTP yields rose by 52bp last week on the back of market talk about the risk of a change in the leadership of the Ministry of Finance and the market realization that the EFSF would not be in place to intervene in bond markets until the amendments on its functions are voted for in local parliaments. Risk appetite will be the most important driver of Italian yields in the days ahead, though it would be interesting to watch the Italian GDP release later this week.
Third, US data came in on balance on the soft side with US GDP, the Chicago PMI, and Durable Goods Orders all surprising to the downside. Bright spots were the ongoing strength in German retail spending and labour markets, as well as a positive surprise in initial claims. The coming week will be key for our overall view that part of the soft patch in US data may improve in the weeks ahead; we will be watching the ISM release on Monday closely and Friday’s payrolls print as well.
Asset markets have been caught in the cross-currents, with bonds being clear beneficiaries of risk aversion flows. US 10y treasury yields declined by more than 10bp last week and we were stopped out of our short recommendation in 5-year USTs. With yields at very low levels, important data releases ahead, and the US debt ceiling debate becoming even more central, this week will likely see volatile moves there.
The dollar has traded generally weak across the board with brief moments of respite due to risk aversion flows. EUR, however, has not gained much ground, also held back by ongoing Eurozone woes. Dollar reaction to the debt ceiling debate will be crucial to watch: the possibility of unexpected dollar strength due to risk aversion should not be excluded.
Equities have been the clear loser from the current trend, with the SPX declining by more than 55 points on the week. Under the surface of the index, cyclical stocks were hit and we were stopped out of our recommended long Wavefronts Growth basket positions with a loss.
Finally, last week saw the intensification of TRY pressures and the response of the central bank with the cancellation of dollar purchases and the reduction in reserve requirements for US dollars. After reaching highs of 2.4993, EURTRY pressures eased and we were trading close to 2.4108 late on Friday. We continue to recommend long EURTRY positions until we see a meaningful turn of the CBRT more firmly towards a hawkish bias. We have, however, recommended raising our stops to 2.36, above our initial target of 2.35. Inflation data this week will be the next key number to watch as will the market reaction to the news of senior army resignations over the weekend.
Monday 1 August
- Global Business Surveys
- China PMI: We expect the official PMI to test the 50 threshold, while consensus expects 50.2 after 50.9 in June.
US ISM (Jun): We expect 54 after 55.3 in June, while consensus expects 55.
- Also interesting: Thailand, Indonesia June CPI, Korea July CPI
Tuesday 2 August
- RBA Meeting: We expect the cash target to remain at 4.75%, in line with consensus.
- US “Deadline” for Debt Ceiling Increase
- US Personal Income (Jun): We expect 0.4% mom, above consensus of 0.2% after 0.3% in May.
- Also interesting: Swiss PMI, Brazil IP
Wednesday 3 August
- US Factory Orders (Jun): Consensus expects a decline of 0.6% mom after 0.8% in May.
- Turkey CPI (Jul): Consensus expects a decline of 0.1% mom after -1.4% in June.
Thursday 4 August
- ECB Meeting: We expect no change from 1.5%, in line with consensus.
- Germany Manufacturing Orders (Jun): Consensus expects -0.2% mom after 1.8% in May.
- BOE Meeting: We expect no change from 0.5%, in line with consensus.
- US Initial Jobless Claims
- Czech Republic Central Bank meeting: We expect no change from 0.75%, in line with consensus.
- Also Interesting: Russia July CPI, Spanish debt auction
Friday 5 August
- Germany IP (Jun): Consensus expects 0.1% mom after 1.2% in May.
- US Nonfarm Payrolls (Jul): We expect +50k vs. consensus of 95k after 18k in June.
- Also Interesting: Italy Q2 GDP, BOJ Meeting, Philippines CPI Taiwan/ Brazil July CPI, Hungary June IP, Indonesia Q2 GDP.