Volatility may pickup later in the week as the RBA makes its decision on an interest rate hike and the US releases FOMC Minutes, as well as NFP.
Central Bank heads were in the spotlight last week at the European Central Bank Forum. Fed Chairman Powell, ECB President Lagarde, and BOE Governor Bailey told the same message: We must get inflation lower at any cost, even if it causes a recession. Will the news and data due out this week continue to paint a picture of a world economy with high inflation and slower growth? The RBA meets on Tuesday and is expected to hike 50bps, though AUD/USD has fallen to its lowest level since June 2020. Will the decision help the ailing currency pair? On Wednesday, the US will release June’s FOMC meeting minutes. What was the discussion regarding the decision to hike 75bps? Also, on Friday, the US releases Non-Farm Payrolls. Will the jobs picture continue to point towards a strong labor market?
The RBA meets on Tuesday this week for its July Interest Rate decision meeting. Markets are expecting an increase of 50 bps, which would raise the key rate level from 0.85% to 1.35%. At the last meeting on June 7th, the board decided that due to inflationary pressures and a strong labor market, there would be further tightening to come. However, for those who may be hoping for an increase of 75bps at this week’s meeting (just as the FOMC), RBA Governor Lowe already shut that down, saying in late June that the decision at the upcoming meeting will be between 25bps and 50bps. Since the June meeting, the Employment data, PMI data, Retail Sales and Inflation Expectations all came in stronger than expected. However, global fears of a recession have also crept into the market, causing commodity currencies to move lower. AUD/USD made a low print of 0.6764, its lowest level in 2 years and holding the 50% retracement level from the pandemic lows in March 2020 to the highs of February 2021 at 0.6757. Will the RBA be hawkish enough to give the Aussie a bounce?
At the June FOMC meeting, the Committee hiked by 75bps. Markets were excepting a 50bps until just a few days before the meeting, when the Fed leaked the news to the Wall Street Journal that it would be hiking 75bps due to the higher than expected CPI and Michigan Inflation Expectations Index. Markets will be watching to see how much of a discussion took place to hike the 75bps vs 50bps. In addition, the Committee raised its rate forecast to 3.4% by the end of year. The current rate sits at 1.75%. Inflation forecasts were also increased. Powell noted in this press conference that the Fed is “highly attentive” to inflation risks and that the Committee continues to see risks for inflation to the upside. Was the entire discussion around lowering inflation? How much of the discussion surrounded the possibility that the Fed could hike rates “too high” and push the economy into a recession? The Minutes released on Wednesday will give us a better view of the FOMC’s thinking at the June meeting.
At the June FOMC meeting, Powell indicated that “our goal is to bring inflation down to 2%, while the labor market remains strong”. On Friday, the US will get a better sense as to if the jobs numbers are still strong. The expectation for the headline print is +265,000 vs May’s reading of +390,000. Last month’s print was higher than expectations, but the lowest reading since May 2020 after the pandemic struck. In addition, the Unemployment Rate is expected to remain at 3.6% while Average Hourly earnings is also expected to remain unchanged at 0.3% MoM. However, there is risk that the headline NFP print comes in weaker than expected as the four-week moving average for initial claims up ticked to 231,750, the highest since the middle of December 2021. If employment growth begins to slow, or even worse, turn negative, how hawkish will the Fed be when it comes to raising rates? This will be an important economic data point for the Fed to watch this week!
The beginning of the 3rd quarter brings with it a new round of earnings releases for Q2. However, earnings season doesn’t begin in earnest until next week. There are a few names releasing this week, including Sainsbury’s and Currys.
US Non-farm payrolls will be the main attraction in terms of economic data this week. However, there are some other data points which can cause volatility. On Tuesday, China will release its Caixin Services PMI and the US will release Factory Orders. The EU will release Retail Sales on Wednesday and on Thursday, the US will release the ADP Employment Change. In addition to the US NFP on Friday, Canada will also be releasing its Employment Change. Other important economic data due out this week is as follows:
- Australia: Building Permits (MAY)
- Australia: Home Loans (MAY)
- Germany: Trade Balance (MAY)
- EU: PPI (MAY)
- Canada: Manufacturing PMI Final (JUN)
- Global: Services PMI Final
- New Zealand: NZIER Business Confidence (Q2)
- Australia: Retail Sales Final (MAY)
- China: Caixin Services PMI (JUN)
- Australia: RBA Interest Rate Decision
- US: Factory Orders (MAY)
- Australia: RBA Chart Pack
- Germany: Factory Orders (MAY)
- EU: S&P Global Construction PMI (JUN)
- EU: Retail Sales (MAY)
- US: Global Services PMI Final (JUN)
- US: ISM Non-Manufacturing PMI (JUN)
- US: FOMC Minutes
- Crude Inventories
- Australia: Trade Balance (MAY)
- Germany: Industrial Production (MAY)
- UK: Halifax House Price Index (JUN)
- Mexico: CPI (JUN)
- US: ADP Employment Change (JUN)
- Canada: Trade Balance (MAY)
- US: Trade Balance (MAY)
- Canada: Ivey PMI s.a. (JUN)
- Canada: Employment Change (JUN)
- US: Non-Farm Payrolls (JUN)
Chart of the Week: Weekly US 10-year yields
Source: Tradingview, Stone X
US 10-Year yields moved back below 3% this week and fell to a low of 2.791%, closing the week down over 7%. Yields had been moving lower since early November 2018 when they were near 3.232%. At the beginning of the pandemic, 10-year yields made a low at 0.333% in March 2020, then slowly began moving higher in a symmetrical triangle formation. Yields finally broke above the top of the top of the triangle as they approached the apex during the 1st week of January 2022. The target for the breakout of a symmetrical triangle is the height of the triangle, added to the breakout point., which is near 3.30%. Bonds moved lower and yields continued to move higher during the first half of 2022, reaching the target within 6 months! During the week of June 13th, yields took out the highs November 2018 and formed a shooting star candlestick formation with the RSI in overbought territory, a signal that yields may pull back. The high for the move was 3.497%. Since then, yields have pulled back aggressively and are trading near 2.9%. First support is at the lows from the week of May 30th at 2.643. Below there, price can fall to the 38.2% Fibonacci retracement from the lows of March 2020 to the recent highs of June 13th near 2.288%, then horizontal support at 2.063%. First resistance is at last weeks high of 3.258%, then the highs from the week of June 13th at 3.497%. Above there, yields can move up to the highs of 2011 at 3.737%.
It’s the beginning of a new month and a new quarter, as well as the start of the second half of the year. With a US holiday on Monday, the week may start off slow. However, volatility may pickup later in the week as the RBA makes its decision on an interest rate hike and the US releases the FOMC Minutes, as well as NFP. Also, watch for new money flows to come into the market at the beginning of the week.
If you are celebrating the US holiday on Monday, enjoy.
Have a great weekend!