A Look At Events In The Week Ahead: Less Headline Risk, More ECB Rate Hikes

From Goldman Sachs

Last week was a good week for risk sentiment with almost all of the major hurdles taken successfully. The Greek Parliament voted in favour of the reform package as well as the implementation laws. The Eurozone has already approved the disbursement of the 5th tranche of the initial support package and the IMF is likely to follow with approval. On the activity side, the Chicago PMI and the Manufacturing ISM all came out much stronger than expected. Not every single news item was positive though. The composition of the ISM showed a big rise in the inventory component. Moreover, a number of regional business surveys from Europe, China, and the Japanese Tankan all failed to show the improvements visible in the US data. The Turkish trade deficit remained shockingly wide.

Still, against the backdrop of improving US data and the Greek votes, risky assets performed well across the board. In the middle of the week, we added more pro-cyclical risk via a long AUD/JPY recommendation, as well as short position in 5-year Treasuries and a long recommendation in our GS Wavefront Growth basket. Our FX recommendations generally performed well in this environment, with the Dollar TWI declining by about 1.5% in the second half of the week. As one of our core views we expect more USD weakness and we remain positioned via a number of Asian and European crosses (short USD versus CNY, PHP, MYR, EUR, NOK).

In the week ahead, we are waiting for the second batch of key activity data in the form of service sector and non-manufacturing surveys, as well as US payrolls. The Chinese non-manufacturing PMI has already been released over the weekend, showing a decline from 61.9 to 57.0.

After last week's key votes in Greece, headline risk should decline though we are now entering the phase where the final negotiations for the second support package take place. The updated funding strategy for Greece will likely be unveiled by Eurozone Finance Ministers on July 11.

There will be central bank meetings by the ECB (+25bp), BOE (on hold), in Malaysia (+25bp), Mexico (on hold), and Poland (on hold).

Monday 4 July

Turkey CPI (June): Given the huge imbalances in Turkey currently and strong demand growth, inflation will likely remain relatively high. Consensus expects +7.0% yoy after +7.2% in May.

UK Construction PMI (June): Last month's reading was 54.0. Consensus expects a basically stable reading at 53.8.

Also Interesting: Swiss retail sales.

Tuesday 5 July

Sweden Risksbank Meeting: In line with consensus, we expect a repo rate increase of 25bp to 2.0%. Since the April hike from 1.5% to 1.75%, developments have broadly been in line with the Riksbank’s expectations; however, the recent weakening in US data, and to some extent European business surveys (including the Swedish PMI), has probably been sharper than anticipated. However, this is likely to be insufficient for the Riksbank to hold off from the July hike pencilled in to its forecast rate path.

Eurozone Services PMIs (June): In line with other indicators and given the preliminary readings, we and consensus expect the final services PMI to decline to 54.2.

UK Services PMI (June): Last month's reading was 53.8. Consensus expects a basically stable reading at 53.5.

US Factory Orders (May): After an encouraging durable goods orders report, factory orders may add to the positive activity news. We expect +1.4% after -1.2% in April and compared to consensus at +1.0% mom.

Russia CPI (June): We and consensus expect a very gradual stabilisation in sequential inflation to +0.3% mom from +0.5% mom in the previous month. Annual inflation rates remain high at close to 10%.

Also Interesting: Philippines inflation.

Wednesday 6 July

US Non-manufacturing ISM (Jun): The Institute for Supply Management’s survey for the non-manufacturing sector should regain a bit more ground in June (GS: 54.0, consensus: 53.5, May: 54.6).

Poland Monetary Policy Meeting: We expect rates to remain unchanged at 4.50%.

Germany Manufacturing Orders (May): After the recent weakness in European business surveys, the order data will likely come out softer than in April (GS: -0.3% mom, April: +2.8%).

Also Interesting: Spain industrial production, UK labour market data.

Thursday 7 July

Japan Machinery Orders (May): Based on the latest monthly Tankan numbers, which showed improving demand, we expect May machinery order data to show a swing to +3.2% mom growth. In part, this would be a rebound from the 3.3% decline in April that was well below the market consensus of +2.2%.

Taiwan Trade Data (June): As one of the most timely indicators of global activity, we will have a close look at this data point. Last month, export growth ran at a rate of 9.5% yoy. Consensus expects a rebound to +19.1%.

Malaysia Central Bank Meeting (June): Consensus expects a hike by 25bp to 3.25% in response to rising inflationary pressures. We think additional FX appreciation will also be part of the policy mix.

Germany Industrial Production (May): Both the business surveys and our leading indicator of IP suggest that the pace of the industrial recovery across the Euro-zone slowed in late Q2. We expect this to be reflected in this week’s official data (GS: +0.2%, consensus: +0.7% mom).

ECB Meeting (July): We expect the ECB’s Governing Council to hike the refinancing rate from 1.25% to 1.50%. At the last meeting, a unanimous ECB hinted at an interest hike in July, and the rhetoric unambiguously signalled the resumption of ‘hiking cycle’ mode. Speaking to the European parliament last week, ECB President Trichet reiterated that the ECB was “in a state of strong vigilance.”

UK MPC Meeting (July): We expect no change. The MPC was split three ways in June (with new entrant Ben Broadbent voting for unchanged rates), and the minutes emphasised concerns over the Euro-zone sovereign debt crisis and the loss of momentum in global growth. Some of the six swing voters specified that further asset purchases may become warranted, and Paul Fisher in particular was reported as saying “QE is very much on the table.” We continue to expect a rate hike in November, though the risks are now skewed almost exclusively towards a later start to monetary policy tightening.

US ADP Employment Report (Jun): After last month's increase of +38k, consensus expects further growth in ADP payrolls of +70k.

US Weekly Unemployment Claims: Consensus expects a very small improvement to +420k from +428k last week. New Zealand Q1 GDP, Mexico CPI.

Also Interesting: Swiss CPI, industrial production in Norway, UK.

Friday 8 July

US Non-Farm Payrolls and Unemployment Rate (Jun): Employment growth should pick up somewhat after a very disappointing May. We expect 125,000 non-farm payroll jobs (consensus: +85k, May +54k) and a small drop in the unemployment rate to 9.0% (consensus: 9.1%, May: 9.1%).

Mexico Banxico Meeting: We expect rates to remain unchanged at 4.50%.

Also Interesting: Swiss unemployment rate, Industrial production in Italy, Sweden, Turkey


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