Outlook for the week by OnEquity

[OnEquity]

Outlook for the week of July 29 – August 02

Key points to watch out for:

• The Bank of Japan, the Federal Reserve, and the Bank of England are set to take a trio of measures
• One could hike, the other stand still, and the other cut rates
• The ECB will also be in the spotlight as it releases preliminary GDP and CPI data for the eurozone
• The week concludes with the US employment report

The Bank of Japan Is Expected to Reduce Its Stimulus, Will It Also Raise Rates?

The Bank of Japan has been frequently in the news recently. Whether it’s the speculation surrounding rate hikes, continued hints of bond tapering, or rumors of intervention into the currency markets, Governor Ueda has made his direction clear since taking office.

This week’s meeting on Tuesday, July 30, and Wednesday, July 31, is likely to give the bank even greater prominence, as policymakers have indicated that a decision on tapering bond purchases will be made. According to Reuters, the current monthly purchases of six trillion yen could be halved over the next few years, as reported by various sources.

However, the likelihood of a rate hike is less clear, as policymakers have not decided on the precise timing, though most agree that further hikes will be needed by 2024. Investors have increased their bets on a July hike, with the probability of a 10 basis point hike now standing at around two-thirds. Consequently, there is still significant potential for disappointment if the bank keeps rates on hold.

The sluggish economy and concerns about weak consumer demand could justify the need for caution, especially since inflation, although above target, is far from being under control. Additionally, the yen’s considerable rebound in July may give policymakers some breathing space regarding the urgency of raising rates.

Even if there are no major surprises on Wednesday and the only announcement is the long-awaited decision on tapering bond purchases, it is unlikely that policymakers will make risky or dovish decisions, as this could derail the yen’s recovery. The Bank’s most recent estimates may provide additional signals about the future course of monetary policy in such a scenario. Given the magnitude of the yen’s rally, a hawkish stance could generate some profit-taking in yen crosses.

Fed Will Not Cut Rates in July

The Federal Reserve will report its decision a few hours after the Bank of Japan on Wednesday, July 31. Of the three central banks, the Fed is the least likely to announce any changes in monetary policy. If there was a remote chance of an unexpected cut, it was further reduced after the stronger-than-expected second-quarter GDP reading.

The US economy shows only slight signs of slowing, similar to the labor market. This environment has made it difficult for Fed policymakers to assert that inflation is on a sustained path toward 2%. However, their recent comments indicate growing confidence that the target is within reach and that the monetary policy stance may change to reflect this, indicating a cautious bias.

July NFP Will Keep Powell on His Toes

Jerome Powell may not comment on a specific timetable for the start of the Fed’s easing cycle, limiting downside risks to the US dollar from the meeting. With the release of the July non-farm payrolls scheduled for Friday, August 2, the Fed Chairman may not want to risk pre-committing to a rate cut if the data does not surprise the upside.

After adding 206,000 jobs, the US labor market is expected to have added another 185,000 jobs in June. The unemployment rate is expected to remain unchanged at 4.1%, and average hourly earnings growth is expected to sustain a similar month-on-month pace as in May.

Poorer-than-expected employment numbers could boost confidence on Wall Street but hurt the dollar by reinforcing aggressive rate-cutting bets, while strong data could exacerbate the current sell-off in the equity market.

Investors will have the opportunity to review several other data releases this week, including the consumer confidence index and JOLTS job openings on Tuesday, July 30; the ADP employment report, Chicago PMI, and pending home sales on Wednesday, July 31; and the ISM manufacturing PMI on Thursday, August 1.

Will the BoE Be Encouraged to Cut?

The Bank of England will conclude central bank decisions this week, and although the uncertainty of the UK election is behind us, it is not entirely clear what the outcome will be on Thursday, August 1, as a tight vote is looming. After some setbacks, inflation in the UK has fallen considerably, reaching the bank’s 2% target over the past two months. However, BoE policy makers remain concerned about high services inflation and the slow decline in wage growth.

Recent comments indicate no unanimity in the Monetary Policy Committee on whether to cut rates in August, and market sentiment is also split 50-50. Policymakers have hinted that rates don’t need to remain as high as 5.25% to continue tightening, so the odds are tilted toward a reduction of around 25 basis points.

Ultimately, the bank’s current quarterly estimates may change the minds of the Monetary Policy Committee. If they decide to begin easing policy, it is likely to be a close call and will be reported as a hard-line cut amid continued upside risks to inflation. Therefore, although a cut is not entirely ruled out, the pound should not necessarily lose much value on the news.

Eurozone CPI on the Expectation of a Weaker Economic Rebound

In the Eurozone, the economic recovery seems to have stalled. Figures to be released on Tuesday, July 30, are expected to show that in the three months to June, the NFP rose by about 0.3% quarter-on-quarter, pushing the annual growth rate up to 0.6%.

For the European Central Bank, the most recent PMI surveys, which were poor again in July, are likely to take precedence, especially for those who support a further rate cut in September. Therefore, the CPI estimates on Wednesday, July 31, will be key for investors.

June’s report provided some respite as headline inflation fell back to 2.5% year-on-year, and there could be more cheer for July. The harmonized index of consumer prices is expected to fall to 2.3% year-on-year in July, bringing it closer to the ECB’s 2% target. The impact of this fall will be smaller if there is no similar decline in core measures of inflation. For the euro to experience significant pressure against the dollar, there will need to be a rise in core inflation.

Australian CPI Could Pave the Way for an RBA Rate Hike

This week will be particularly busy for Australian data, with releases ranging from retail sales to trade. The highlight will be Wednesday’s quarterly CPI. Inflation in Australia has continued its upward trend throughout the year, reaching 4.0% year-on-year in May. The Reserve Bank of Australia has held firm on raising interest rates again, and the more complete and reliable quarterly data may convince policymakers to continue tightening monetary policy. With the next meeting on August 6, the timing could not be better.

The latest bout of risk aversion in the markets has been devastating for the Australian dollar, so better-than-expected CPI figures could provide a much-needed boost. Also on the radar for Australian traders will be the Chinese manufacturing PMIs due for release on Wednesday, July 31, and Thursday, August 1, amid continued pessimism about the Chinese economy.

[OnEquity]

Outlook for the Week of August 05-09

Key points to watch out for:

• Reserve Bank of India sets monetary policy as bullish bets disappear
• BoJ’s summary of views awaited as it looks for more signs of hikes
• After the Fed, the dollar eyes ISM non-manufacturing PMI data
• New Zealand and Canadian employment data are also on tap for the week

Will the Reserve Bank of Australia Turn to a Dovish Course?

After the decisions of the Bank of Japan, the Federal Reserve, and the Bank of England last week, the central bank torch will be passed to the Reserve Bank of Australia, which will announce its decision on Tuesday, August 6.

At its last meeting, the RBA kept its benchmark rate unchanged at 4.35%, although it debated whether to raise it by another 25 basis points due to inflation softening much slower than estimated.

Following the meeting, the monthly year-on-year CPI for May registered an increase to 4.00% from 3.60%, raising estimates for another quarter-point rise by the end of the year, while the employment report pointed to a much stronger-than-expected increase in employment in June.

However, inflation data for the aggregate relative to the second quarter showed that, although headline inflation rose from 3.6% to 3.8% y-o-y, the more closely watched underlying indicators eased. This, together with growing concerns about the evolution of the economy in China, has caused investors to remove their bullish bets and begin to estimate reductions. Currently, a 25 basis point reduction in December appears to be fully discounted.

Given all of the above, even if the RBA is much more dovish at this week’s meeting, it is unlikely that they will do a U-turn and start to communicate a rate cut. They may opt for a more neutral stance and indicate that they want more evidence that inflation has returned to the downward path. This could disappoint market participants who are expecting more signals related to a possible rate cut, which would give the Australian dollar a chance to regain some of the ground it has lost recently.

Could the BoJ’s Summary Add More Fuel to the Yen’s Engines?

On Thursday, August 8, the Bank of Japan will release the summary of views from last week’s meeting, at which policymakers decided to raise interest rates by 15 basis points when market participants gave a slightly less than 50% probability of a 10 basis point hike. Officials also concluded to gradually reduce the pace of their monthly bond purchases by about 3 trillion yen by April 2026.

This served to prolong the yen’s latest rally, possibly triggered by a wave of risk aversion and the unwinding of profitable carry trades. Should the summary of views show that policymakers are poised to continue raising interest rates before the end of the year, the yen could remain at the forefront, even though the rally already appears to be overstretched.

ISM Non-Manufacturing PMI in Focus as Traders Point to a Fed Rate Cut

In the US, the Federal Reserve was the only bank to leave interest rates unchanged last week, with Chairman Jerome Powell indicating that a rate “cut could be on the cards for the September meeting.” Officials also highlighted the progress of inflation towards its target, prompting participants to add a few extra basis points to rates by the end of the year. Although a September rate cut was already taken for granted before the decision, investors are now expecting three quarter-point rate cuts by December.

On Monday, August 5, dollar traders will pay close attention to the July ISM Non-Manufacturing PMI for more signals on the performance of the world’s largest economy. The prices charged sub-index could attract specific attention, as it could serve as an early indication of whether inflation continued its downward trajectory. The employment index could also be particularly closely watched in the wake of the latest softening of the labor market.

Employment Data from New Zealand and Canada Also on the Agenda This Week

Employment data from New Zealand and Canada are also on this week’s agenda. New Zealand’s data is scheduled for Wednesday, August 7, and Canada’s for Friday, August 9.

To start with New Zealand, the RBNZ made a U-turn in its July decision after keeping the door open for a rate hike in May, by mentioning that it expects headline inflation to return to within its target range of 1% to 3% in the second half of 2024.

A few days later, second-quarter inflation data showed headline CPI declining to 3.3% y-o-y from 4.0%, corroborating the view that the Bank could begin lowering interest rates almost immediately. Money markets indicate that investors expect more than two quarter-point rate cuts this year, with the first one in August likely to be around 35%. If employment data shows that the unemployment rate increased for the fifth quarter in a row, that possibility could increase even further, putting more pressure on the already battered New Zealand dollar.

Now focusing on Canada, the BoC has been one of the most pessimistic of the major central banks, having cut interest rates twice and indicated that a third consecutive 25 basis point cut could be forthcoming. An unflattering employment report could finalize the deal.

In addition to domestic data, both the Australian dollar and the New Zealand dollar could be directly affected by the Chinese trade and July CPI data on Thursday, August 8, and Friday, August 9, respectively. Any data that increases concerns about developments in the world’s second-largest economy could weigh on both of these highly risk-linked currencies.

On the earnings front, Disney will announce its results on Wednesday, August 7, before the market opening.

[OnEquity]

Outlook for the Week of August 12-16

Key points to watch out for:

• Market turmoil has abated, however, will the US CPI be altered again?
• Decisive week for sterling: UK CPI, GDP, and retail sales.
• RBNZ moves closer to a rate cut, but will it happen this week?
• Japanese GDP, Aussie employment, and Chinese data are also in focus.

Concerns About the U.S. Economy Are in the Spotlight

Panic over the U.S. economy being on the brink of a recession has mostly subsided, although markets remain uneasy. Investors see a real risk that the Fed’s delay will inevitably lead to a recession. Stubborn inflation is the main reason the Fed has remained so cautious, although inflation pressures finally appear to be easing in a more sustainable way.

This week’s CPI report is likely to highlight this trend, and in the absence of significant news, the data may not be sufficient to allay slowdown fears, as attention has shifted to economic growth. If the inflation numbers surprise, whether up or down, the ripple effect will likely be felt in the market.

The CPI Will Most Likely Maintain a Downward Trajectory

Headline CPI is expected to come in at 2.9% y-o-y in July, down slightly from 3.0% previously. However, the month-on-month figure is expected to accelerate from -0.1% to 0.2%. Core CPI is also expected to remain steady on a yearly basis at 3.3% but to increase from 0.1% to 0.2% month-on-month.

A significant upside surprise would be the worst outcome for the markets, as it would mean the Fed might not have the option to cut rates quickly, even if the economy shows signs of weakening.

On the other hand, a much lower-than-expected outcome would increase forecasts for the Fed to cut rates by 50 basis points in September, which would motivate investors.

A Busy Agenda in the United States

CPI figures will be released on Wednesday, August 14, preceded by producer prices on Tuesday, August 13, while on Thursday, August 15, the focus will shift to retail sales. After flat growth in June, retail sales are expected to have increased by 0.3% m-o-m in July, which could help calm fears of recession.

Notable on Friday, August 16, will be the University of Michigan’s survey of consumer sentiment, particularly inflation estimates for the next five years. On Thursday, August 15, manufacturing indicators from the New York and Philadelphia Federal Reserve will be released, as will July industrial production, while on Friday, August 16, building permits and housing starts are expected to draw attention.

If the upcoming data gives the green light for an aggressive rate cut, the US dollar could come under pressure again, as it has only marginally recovered from the previous week’s losses.

Pound Retreats in Expectation of UK Data

Sterling has lost nearly all the ground it gained in July, and this month it has performed worse than all other currencies except the dollar. While this weakness is partly due to the Bank of England’s rate cut, the unrest in British cities has also weighed on the pound, as it coincided with a time when investors had dismissed political risks for the UK.

This week’s focus, however, is on the economy, starting with the labor market report on Tuesday, August 13. A cooler labor market has helped wage growth moderate to 5.7% y/y, but policymakers at the Bank of England ideally want to see a further decline before considering additional rate cuts.

July CPI figures will be released on Wednesday, August 14, and could be crucial in shaping expectations for a rate cut at the BoE’s September meeting, as the chances of a second 25 basis point reduction currently stand around 30%. Headline inflation remained unchanged at 2.0% in June, right on target set by the bank. Although it probably rose in July to 2.3% y/y, supporting the rationale behind the aggressive cut at the August meeting.

Investors will keep an eye on services CPI, which, like wages, remains elevated. On Thursday, August 15, the UK will release preliminary Q2 GDP figures. The economy is estimated to have grown by 0.7% quarter-on-quarter in the second quarter, the same pace that was seen in the first quarter. On Friday, August 16, retail sales for July will be released.

While the likelihood of another rate cut in September is low, a weak set of data could nevertheless increase market expectations, which would be a further setback for sterling.

Will the RBNZ Join the Rate Cut Club?

The Reserve Bank of New Zealand meets on Wednesday, August 14, to make its latest monetary policy decision. Economists do not expect any surprises, although there is growing agreement among traders that the RBNZ will add a 25 basis point interest rate cut. The easing outlook began to gain traction after last week’s meeting, where policymakers were optimistic about inflation returning to the target range of 1% to 3% in the second half of 2024, later supported by the Q3 CPI report, which indicated a drop in inflation to around 3.3%.

The RBNZ’s survey of inflation expectations, which pointed to the lowest estimates in more than three years, helped bolster the case for a more accommodative policy.

Subsequently, investors have increased their bets in favor of an August cut to nearly 80%, so if the RBNZ decides to proceed with one, the New Zealand dollar is unlikely to face significant losses unless policymakers signal that more cuts are on the way.

Can the Australian Dollar Extend Its Recovery?

As the RBNZ looks poised to start cutting rates later this year, possibly as early as the August meeting, the RBA is increasingly becoming the exception. Governor Michelle Bullock has rejected market expectations of a rate cut in the near term, although investors continue to see a reasonable chance of a cut before December.

However, the RBA’s hard-line stance is helping the Aussie dollar’s attempt to recover against the U.S. dollar, but this week’s data releases pose a downside risk. On Tuesday, August 13, the wage price index for the second quarter will be released, and on Thursday, August 15, the July employment report will be released. In addition to domestic indicators, Australian traders will also be watching the latest monthly data from China. On Thursday, August 15, July data will be released for industrial production, retail sales, and fixed asset investment. Any disappointment, particularly in retail sales, would heighten concerns that China’s economy may be stuck in the slow lane, which could negatively impact the Australian dollar.

Yen Bulls Set Their Sights on Second Quarter GDP

Japan’s second-quarter GDP figures will be released on Thursday, August 15. The data will be crucial for the Bank of Japan, where there is ongoing debate about whether the economy is strong enough to support higher interest rates. Corporate goods prices will be released on Tuesday, August 13, and machinery orders on Friday, August 16. The Japanese yen’s rise appears to be taking a breather after last month’s impressive gains. However, a figure higher than the expected 0.5% quarter-on-quarter could reignite bullish sentiment.

[OnEquity]

Outlook for the Week of August 19-23

Key points to watch out for:

• Recession fears subside as investors focus on Jackson Hole
• Eurozone and UK PMIs to influence ECB and BoE forecasts
• Canadian inflation could support BoC’s third straight rate cut
• Japan’s national CPI is also on the calendar

Jackson Hole Will Test the Fed’s Most Pessimistic Bets

After the unwarranted panic caused by the weaker-than-expected July NFP report, investors have taken a calmer stance, re-analyzing their aggressive Fed rate cut bets as incoming data indicate that the U.S. economy is not performing as poorly as initially thought.

Two weeks ago, investors were expecting rate cuts of up to 125 basis points by the end of the year, though they have since slightly revised this estimate. They now expect rates to fall by about 100 basis points, which remains a considerably pessimistic outlook, implying a reduction at each of the remaining decisions in 2024, including a 50 basis point cut.

The possibility of a double cut at the next meeting in September currently stands at around 25%, and this action is almost completely discounted for December. With this in mind, investors are looking ahead to the Fed’s Jackson Hole Economic Symposium, to be held from August 22-24.

The theme will be the reassessment of the effectiveness and transmission of monetary policy, suggesting that investors will hear extensive commentary, not only from Fed Chairman Jerome Powell and his colleagues but also from other leading central bankers.

With inflation hovering around 3%, it will be interesting to see if Powell and other Fed members remain confident in the downward trajectory of price pressures. If they do, how they plan to move forward will be crucial. Even if Powell indicates that a September rate cut remains possible, it is unlikely to satisfy those anticipating hints of a double rate cut, meaning Treasury yields and the U.S. dollar could continue to rise.

Equity traders may be particularly eager to hear Powell’s views on the U.S. economy, especially after the recent turmoil. Further assurances that recession risks are high could push Wall Street higher, even if expectations for lower borrowing costs are scaled back.

The minutes of the latest Fed meeting will be released on Wednesday, August 21, but investors are likely to focus more closely on the Jackson Hole symposium for more current information and signals. Preliminary August S&P Global PMIs will be released on Thursday, August 22, and may also attract attention as investors remain anxious about the state of the world’s largest economy.

PMIs Are Also at the Forefront of Investors’ Attention

On Thursday, August 22, preliminary PMI indices for both the Eurozone and the UK will also be released. Regarding the Eurozone, the ECB decided to keep interest rates unchanged at its last meeting. Although President Lagarde did not commit to any cuts in September, she expressed pessimism about the growth outlook in the region.

This led investors to almost fully price in another 25 basis point cut in September, and a series of downbeat PMIs could confirm this outlook. Market participants are also likely to be keenly interested in the minutes of the latest ECB decision, which will be released later in the day, to find clues on how policymakers plan to proceed.

In the UK, the Bank of England cut interest rates on August 1, though it indicated it will be cautious about further rate cuts. Data last week showed the unemployment rate fell to 4.2% from 4.4%, and headline inflation picked up to 2.2% year-on-year from 2.0%, despite the core rate falling to 3.3% from 3.5%.

The data confirmed the Bank of England’s view, though there remains about a 30% chance that policymakers will opt for another rate cut on September 19. For this likelihood to increase, the PMIs may need to show a significant deterioration in business activity.

Will CPI Data Halt the Canadian Dollar’s Recovery?

Canada’s CPI figures will be released on Tuesday, August 20, followed by retail sales data on Friday, August 23. The Bank of Canada has cut interest rates by 25 basis points at each of its most recent decisions, leaving the door open for further action.

Investors expect the Bank to continue cutting rates in each of the remaining decisions this year, and a further slowdown in inflation could lend additional credibility to that expectation, potentially weighing on the Canadian dollar.

Currently, the oil-linked currency is primarily supported by the rebound in oil prices, driven by supply concerns due to rising tensions in the Middle East and the easing of demand-side concerns as fears of an economic recession subside. Consequently, since a moderate trend is already priced in by the Bank of Canada, it is unlikely that a further slowdown in inflation will significantly alter current expectations.

Japan’s CPI Inflation Also in Focus

Finally, on Friday, August 23, during the Asian session, Japan will release its July CPI figures. According to Tokyo data, it is highly likely that headline inflation slowed, while underlying prices continued to accelerate. If this trend is reflected in the figures, the likelihood of the Bank of Japan raising rates again in the final months of the year could increase.

However, even if this leads to a stronger yen, the recent easing of investor appetite makes it unlikely that the Japanese currency will experience a similar rally to that seen in recent weeks.

Interest rates in Japan remain very low relative to other major central banks, providing some market participants with the opportunity to use the yen as a funding currency while increasing their exposure to risk.