we’ll see now a new weekly currency market perspective.
Global equities were little changed last week as concerns over tighter global monetary policy were offset by upbeat economic data releases and financial sector outperformance amid rising government bond yields
The minutes from the June Federal Open Market Committee (FOMC) meeting showed that “most participants” felt that the recent softness was driven by “idiosyncratic factors” and would therefore have “little bearing on inflation over the medium term”
The June employment report showed the monthly change in nonfarm payrolls accelerated to 222,000 during the month
In the coming week, highlights of the calendar are US Federal Reserve Chair (Fed) Janet Yellen’s semi-annual testimony before the House Financial Services Committee, along with US inflation and retail sales data releases
US and Canada
In the US, the NFIB Index of Small Business Optimism index for June is expected to be unchanged from May’s 104.5 reading. The sentiment gauge surged following the US elections last year and has remained at elevated levels as business owners saw an increased likelihood of tax and regulatory policy changes. Meanwhile, the preliminary July print of the University of Michigan Index of Consumer Sentiment should show stable (and elevated) consumer confidence, remaining at around the 95 level. Perhaps of greater interest in this release will be any shifts in consumer inflation expectations.
The June FOMC meeting minutes showed FOMC participants agreeing that it would be appropriate to start balance sheet normalisation this year but the committee is divided over when to start the process. Therefore at Fed Chair Janet Yellen may receive questions on the precise timing of the start of normalisation and how this interacts with the Fed hiking cycle at her semi-annual testimony before the House Financial Services Committee.
US CPI inflation is expected to slow to 1.7% yoy in June from 1.9% yoy in May, with declines in gasoline prices contributing to downward pressure on headline inflation. Core inflation (excluding food and energy) is expected to remain unchanged at its May value of 1.7%. There has been a decelerating trend since March owing to a number of factors such as falling cell phone plan prices, which the Fed has interpreted as transitory.
US nominal retail sales may have increased 0.1% mom in June, edging up from a decline of 0.3% mom in May. While sales figures disappointed expectations last month, previous months’ numbers were revised up and US consumer confidence levels continue to stay at elevated levels.
Meanwhile, the Bank of Canada will actively consider a 0.25% rate hike at its July meeting. While low oil prices continue to present a net drag to growth, recent economic data has shown rising business investment, a positive trend in consumer spending and an improving labour market. Slowing a robust housing sector may also be a consideration at this meeting. Bank officials have been communicating the hawkish change in tone and market participants have largely priced in the move.
Following a robust 0.5% mom gain in April, eurozone industrial production is expected to expand again in May (by 1.0% mom). This would push the annual growth rate up to 3.5% yoy, or around 2.0% on a 6-month moving average basis. Despite signs of a gathering momentum in the region’s industrial output, hard data continues to lag elevated sentiment indicators such as the eurozone manufacturing PMI (currently running at a 6-year high).
The UK ILO unemployment rate for the three months to May is expected to remain steady at 4.6% for the third consecutive month. Although this is the lowest rate since 1975, UK wage growth remains soft, hitting a one-year low in the last release, and expected to dip further (to 1.8% yoy) in the three months to May – well below the recent trend. Nevertheless, despite a lack of wage pressures, any further decline in the unemployment rate may embolden the hawks on the Bank of England Monetary Policy Committee (MPC), especially given that the Bank’s estimate of the equilibrium rate is 4.5%.
China’s CPI inflation for June is expected to edge up from 1.5% yoy in May to 1.6%, amid rising output prices in the manufacturing and non-manufacturing PMI surveys for June. However, inflationary pressures are likely to have been contained by weak food prices, a slowing of producer prices since February (suggesting a weakening in cost-push inflation), and lower crude oil prices. Meanwhile, external trade data for June is likely to come in little changed compared to the previous month, following the modest uptick in new export orders in both the official and Caixin PMI surveys. Imports are expected to slow down marginally (to 14.0% yoy) while exports are anticipated to gather pace (to 9.0%). Overall, the trade balance is expected to rise from USD40.8 billion to USD43.0 billion.
Equity markets little changed as concerns over tighter global monetary policy offset by upbeat economic data releases and financial sector outperformance
In the US, the S&P 500 Index was little changed over the week (+0.1%). Support came from upbeat macroeconomic data releases ‒including better-than-expected June ISM survey data and an upbeat nonfarm payrolls print – as well as a resurgent information technology sector. However, this was offset by concerns about tighter monetary policy. The financial sector was the notable gainer for the week, helped by rising yields.
European stocks gained moderately last week, despite investor concerns about tighter monetary policy following the release of the minutes from the ECB’s June meeting. At the sector level, financials outperformed as higher bond yields supported optimism on the earnings outlook for banks. Energy stocks underperformed on the pullback in crude oil prices. Overall, the Euro STOXX 50 Index ended the week 0.6% higher. All other major indices rose.
Asian stock markets mostly retreated last week amid the more hawkish ECB minutes and as falling commodity prices weighed on risk sentiment. At the country level, Hong Kong’s financial-heavy Hang Seng index led losses (-1.6%), and Australia’s S&P/ASX 200 erased early-week gains, after the Reserve Bank of Australia’s decision to leave monetary policy unchanged, to end the week 0.3% lower. More positively, India’s SENSEX 30 Index rose 1.4% as investors welcomed the official launch of the Goods and Services Tax, effective from 1 July.
European bonds sold off amid hawkish ECB minutes; Treasuries also dipped
US Treasuries fell (yields rose) for the second consecutive week as upbeat economic data and concerns about tighter monetary policy weighed on bond market sentiment. The yield curve bear-steepened, with 2-year yields closing up 2bp to 1.40% and 10-year yields rising 8bp to 2.39%.
Longer-dated European government bonds also sold off last week (yields rose), with most of the weakness occurring on Thursday after the latest ECB minutes showed easing concerns about the risk of deflation, which then prompted further speculation of an earlier than anticipated removal of policy stimulus. Benchmark German 10-year yields rose 11bp to 0.57%, the highest since early 2016. Sovereign curves bear-steepened in all other major European countries, including the UK.
Oil prices dipped on doubts over OPEC effectiveness; gold fell on US dollar recovery
Crude oil prices resumed their downward trend last week amid continuing doubts about the effectiveness of OPEC-led output cuts to stabilise the market after Russia said on Tuesday it will oppose deeper cuts. This came as the US Energy Information Administration (EIA) weekly report showed another pickup in US oil production the previous week. Overall, WTI and Brent fell 3.7% and 2.3% to USD44.4 per barrel and USD46.8 per barrel, respectively.
Meanwhile, gold prices also fell last week (-2.3% to USD1,213), with the bulk of losses coming on Monday amid a recovery in the US dollar. Higher bond yields over the week and a robust June nonfarm payrolls print also weighed on the non-yield-generating asset.