Weekly Market Outlook (22-26 July)

UPCOMING EVENTS:

• Monday: PBoC
  LPR.
• Wednesday: Japan/Australia/Eurozone/UK/US
  Flash PMIs, BoC Policy Decision.
• Thursday: US
  Durable Goods Orders, US Jobless Claims, US Q2 Advance GDP.
• Friday: Tokyo
  CPI, US PCE.

Monday

The PBoC is expected to keep the LPR rates
unchanged at 3.45% for the 1-year and 3.95% for the 5-year. The central bank
left the MLF rate unchanged at 2.50% last week and it’s generally a leading
indicator for the LPR decision.

As a reminder, the PBoC recently introduced
a new cash management mechanism and Governor Pan Gongsheng said that the
seven-day reverse repo rate “basically fulfils the function” of the
main policy rate. ING published a nice article on the new policy framework
reform here.

Wednesday

Wednesday will be the Flash PMIs Day for
many major economies with the Eurozone, UK and US PMIs being the main
highlights:

• Eurozone Manufacturing
  PMI: 46.3 expected vs. 45.8 prior.
• Eurozone Services PMI:
  53.0 expected vs. 52.8 prior.
• UK Manufacturing PMI: 51.1
  expected vs. 50.9 prior.
• UK Services PMI: 52.5
  expected vs. 52.1 prior.
• US Manufacturing PMI: 51.5
  expected vs. 51.6 prior.
• US Services PMI: 55.0
  expected vs. 55.3 prior.

The BoC is expected to cut interest rates
by 25 bps and bring the policy rate to 4.50%. Such expectations have been
influenced by another soft labour
market report and strengthened after the
last Canadian
CPI data where the underlying inflation
measures eased further. Including the July cut, the market expects 62 bps of
easing by year-end.

Thursday

The US Jobless Claims
continue to be one of the most important releases to follow every week as it’s
a timelier indicator on the state of the labour market.

Initial Claims remain
pretty much stable around cycle lows and inside the 200K-260K range created
since 2022. Continuing Claims, on the other hand, have been on a sustained rise
recently with the data printing new cycle highs every week.

This shows that layoffs are
not accelerating and remain at low levels while hiring is more subdued. This is
something to keep an eye on. This week Initial Claims are expected at 238K vs.
243K prior, while there’s no consensus for Continuing Claims at the time of
writing although the prior reading saw an increase from 1847K to 1867K.

Friday

The Tokyo Core CPI Y/Y is
expected at 2.2% vs. 2.1% prior. Inflation in Japan is basically at target and
there are no strong signals that point to a reacceleration. It’s hard to see a
rate hike given that Japan strived to achieve inflation for decades and it
might ruin this accomplishment by tightening policy too much.

Nonetheless, besides the
expectations of BoJ trimming its bond purchases by a “substantial” amount, the
market is also assigning a 60% probability of a 10 bps hike at the upcoming
meeting.

The US PCE Y/Y is expected
at 2.4% vs. 2.6% prior, while the M/M measure is seen at 0.1% vs. 0.0% prior.
The Core PCE Y/Y is expected at 2.5% vs. 2.6% prior, while the M/M reading is
seen at 0.1% vs. 0.1% prior. Forecasters can reliably estimate the PCE once the
CPI and PPI are out, so the market already knows what to expect.

This report won’t
change anything for the Fed as the central bank remains in a “wait and see” mode. The market has
already fully priced in a rate cut in September and one in December with some
chances of a back-to back cut in November. The Fed is expected to be more
dovish at the upcoming meeting but won’t deliver a rate cut nor pre-commit to
one.

The next CPI release will
be key (barring quick deterioration in the labour market) as another benign
report will likely see the Fed Chair Powell pre-committing to a rate cut in
September at the Jackson Hole Symposium.