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Euro ended as the worst performer last week on increasing worries of a deeper and longer recession. Selloff in the common currency also dragged down Swiss Franc, which ended as the second worst.

Sterling was originally pressured by stabilized after UK Prime Minister Boris Johnson announced to step down after another scandal. But Yen was even weaker because of rebound in US benchmark yield. The tragic death of former Japanese Prime Minister Shinzo Abe was mourned, but hasn't affected the markets.

On the other hand, Dollar surged around the broad, with help from solid economic data. But Aussie was slightly stronger while Kiwi was not too far away. Canadian Dollar ended mixed.

Euro in broad based selloff, EUR/USD approaches parity

Euro's broad-based decline resumed last week and and marched towards parity against Dollar. The trigger was the renewed selloff was gas and energy crisis on the prolonged invasion of Russia to Ukraine. Europe is facing the risk of longer and deeper recession than other major economies.

The gloomy outlook is tieing up ECB's hand on monetary policy normalization to combat inflation. ECB is clear that it will hike by 25bps this month. But by the end of July, Fed should have delivered another 75bps, bringing interest rate to 2.25-2.50%, comparing to 0-0.25% at the start of the year. Other major central banks, even SNB and with the exception of BoJ, have already started their tightening cycle.

At the same time, Eurozone is facing risk of broadening fragmentation. Borrowing costs of more indebted Eurozone states could risk spiraling out of control, because of ECB's tightening. There is no detail regarding ECB's anti-fragmentation tools. Before these tools are proven effect, room for swift normalization of ECB policy would remain limited.

EUR/USD's long term down trend from 1.6039 (2008 high) finally resumed by breaking through 1.0339 (2017 low). Initial target of 61.8% projection of 1.3993 to 1.0339 from 1.2348 at 1.0090 was already met. There might be some support from this level to bring rebound. But, from a medium term point of view, firm break of 1.773 resistance is needed to be the first sign of bottoming. Otherwise, risk will stay heavily on the downside. Sustained trading below 1.0090 and parity could bring further downside acceleration towards 100% projection at 0.8694.

EUR/GBP's steep decline last week argues that rebound from 0.8201 has completed at 0.8720. The rejection by 38.2% retracement of 0.9499 to 0.8201 at 0.8697 maintains medium term bearishness. This is supported by the corrective structure of the price actions from 0.8201, and probably the rejection by 55 month EMA too. Risk will now stay on the downside as long as 0.8720 resistance holds. Firm break of 0.8201 will target 61.8% retracement of 0.6935 to 0.9499 at 0.7917, either as correction to rise from 0.6935 (2015 low), or as the third leg of the pattern from 0.9799 (2009 high).

Similar to EUR/GBP, EUR/AUD's corrective rebound from 1.4318 could have completed at 1.5396, after rejection by 1.5354 support turned resistance. Break of 1.4759 support will further affirm this bearish case. When that happens, EUR/AUD should be ready to resume the down trend from 1.9799 (2020 high), towards 61.8% projection of 1.9799 to 1.5250 from 1.6434 at 1.3623, which is close to 1.3624 long term support (2017 low).

Dollar index extends up trend, 108.43 may cap upside

Dollar index's up trend also resumed last week and hit as high as 107.78. It's now facing an important long term projection level, at 61.8% projection of 72.69 to 103.82 from 89.20 at 108.43. There might be some strong resistance from this level to limit upside at first attempt. But outlook will stay bullish as long as 101.29 support holds. To power through 108.43, Dollar would need extra help from rise in treasury yields and extended risk-off sentiment. That might not happen for the near term yet. Though, firm break of 108.43, which would be accompanied by sustained break of parity in EUR/USD, would set the stage for 100% projection at 120.33, which is close to 121.02 (2001 high).

10-year yield to extend sideway consolidation

As for 10-year yield, it rebounded strongly, after dipping to 2.746 last week. The first leg of the consolidation pattern from 3.483 should be completed and further rally is mildly in favor for the near term. But upside should be limited by 3.483 to bring another decline. Nevertheless, even in this case, downside should be contained by 2.709, which is close to 38.2% retracement of 1.343 to 3.483 at 2.665. Up trend resumption should happen at a later stage.

USD/CHF Weekly Outlook

USD/CHF's rebound from 0.9493 extended higher last week. The development argues that consolidation pattern from 1.0063 high has completed with three waves down to 0.9493 already. Initial bias stays on the upside this week for retesting 1.0063 first. Decisive break there will resume larger up trend. On the downside, break of 0.9670 minor support will dampen this bullish view and turn intraday bias neutral first.

In the bigger picture, medium term up trend from 0.8756 (2021 low) is still in progress. Next target is 1.0342 (2016 high). Sustained break there will resume long term up trend from 0.7065 (2011 low). This will remain the favored case as long as 0.9471 resistance turned support holds.

In the long term picture, current development argues that the correction from 1.0342 (2016 high) has completed at 0.8756 (2020 low) already. Rise from 0.7065 (2011 low) might be ready to resume. Firm break of 1.0342 will confirm and target 38.2% retracement of 1.8305 (2000 high) to 0.7065 at 1.1359.

Monday, Jul 11, 2022

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Tuesday, Jul 12, 2022

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Wednesday, Jul 13, 2022

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Thursday, Jul 14, 2022

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Friday, Jul 15, 2022

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Summary

United States: Payroll Growth Sizzles in June Despite Recession Fears

• June brought a strong 372K payroll gain, beating the consensus and calming recession concerns. The unemployment rate held at 3.6%. Total job openings remain highly elevated but fell by 427K to 11.3 million in May. The ISM services index edged down to 55.3 during June, marking a two-year low. The trade gap narrowed to $85.5 billion in May as exports rose at a slightly faster pace than imports.
• Next week: Consumer Price Index (Wed.), Retail Sales (Fri.), Industrial Production (Fri.)

International: Some Cracks in Canada's Economic Outlook

• The past week saw some underwhelming news from Canada. June employment unexpectedly fell by 43,200, and while the Bank of Canada's Business Outlook Survey reported solid sales over the past three months, it also signaled a slowing in sales going forward. We expect Canadian GDP growth of 3.9% in 2022, but growth of just 1.5% in 2023. In Scandinavia, Sweden's GDP rose in May, while Norway's mainland GDP fell. Finally, the Reserve Bank of Australia raised its policy rate 50 bps at this week's monetary policy meeting, as expected.
• Next week: U.K. GDP (Wed.), Bank of Canada Policy Announcement (Wed.), China GDP (Fri.)

Interest Rate Watch: Yield Curve Signals Recession on the Horizon

• The yield on the two-year Treasury note moved above the yield on the 10-year Treasury security this week. An inverted yield curve has historically been a reliable indicator of a looming recession.

Topic of the Week: Collapse Goes the Commodities

• The Commodity Research Bureau's All Commodities Index ended Thursday down 1.9% over the week, while Bloomberg's measure slid 1.6% over the same period. The slide has been broad-based, with major declines in products stretching from copper to soybean oil.

Full report here.

U.S. Highlights

• Recession calls increased this week, but the job market begged to differ. The U.S. added 372k jobs in June, keeping the unemployment rate at its historic low of 3.6% and amplifying fears about inflation.
• In contrast, leading business indicators slipped modestly in June, while remaining above the 50 threshold, which suggests that both manufacturing and services sectors continue to expand.
• The FOMC minutes from the June meeting showed significant worries about the possibility that high inflation is becoming entrenched in consumer expectations. The Fed is positioned for another supersized rate hike at the end of the month.

Canadian Highlights

• Canada’s housing market continued to cool in June, with home sales down in Calgary (-5% m/m), Vancouver (-10%), and Toronto (-4.7%).
• The labour market shed 43k jobs in June, primarily due to significant job losses in retail trade. Even so, the unemployment rate declined by 0.2 percentage points falling to a new low of 4.9%, while wage growth accelerated.
• The Bank of Canada’s Business Outlook Survey and the Survey of Consumer Expectations released this week showed that inflation expectations continued to trend higher in Q2 among both businesses and consumers.

U.S. - Job Gains Defy Recession Calls

Recession became a much more popular word on the street this week. Revisions to first quarter GDP data and a weak spending report for May which came out at the end of last week revealed much softer consumer momentum in the first half of the year. This led many forecasters to downgrade their outlooks, with some calling for recession. TD Economics is not calling for a recession, but we acknowledge the downside risks have risen. As such, we have formulated an alternate economic profile on how a U.S. recession might unfold.

The Atlanta Fed’s GDP Nowcast is pointing to a second quarter of contraction in GDP in Q2 (Chart 1). However, two quarters of contraction in GDP is not enough to qualify as a recession according to NBER criteria – the economic body that defines recessions. In addition to economic output, it places a heavy importance on payrolls employment and real personal incomes less transfers. The income measure has certainly softened with high inflation in recent months but remains in expansionary territory. And the impressive June payrolls report confirmed that employment remained strong (Chart 2). The unemployment rate remained low at 3.6%, and average hourly wages were up a healthy 5.1% year-on-year, both pointing to tight labor market conditions.

Putting aside healthy hiring through June, sentiment indicators are showing some softness. The Institute for Supply Managements’ (ISM) readings for the manufacturing and services sectors both slipped modestly. However, both sectors remained above the 50 threshold, which suggests that both remained in expansionary territory. The underlying details paint a slightly more nuanced picture. Both sectors showed an increase in current business activity, but in the manufacturing sector, the new orders index slipped into contractionary territory, while in the services sector it eased but remained solidly expansionary.

Another important message of the ISM reports is that prices paid by businesses continue to ease – a trend that corresponds with a recent reduction in supply chain bottlenecks. Indeed, the supplier delivery times have improved since the beginning of the year, especially in the manufacturing sector. According to the San Francisco Fed’s research, the distribution of price gains as measured by core PCE inflation is equally split between supply and demand factors, suggesting that cooling on the supply side should help ease inflation going forward.

In the meantime, minutes from the FOMC meeting in June showed that members are worried about the level of stickiness in price gains, and the rising possibility that high inflation is becoming entrenched in consumers expectations. This fear clearly overshadowed any concern the members might have had about prospects for economic growth, resulting in a rare consensus when deciding to supersize the rate hike to 75 basis points. The Fed is positioned for another supersized rate hike at the end of the month, as it focuses on tempering demand.

Canada - Taming Inflation Expectations

While the weather outside is hot, the temperature dial of the Canadian housing market continued to fall in June. Preliminary sales data from the regional real estate boards confirmed that higher interest rates are rapidly cooling Canada's housing market. Home sales declined by varying degrees across the Vancouver (-10% m/m/), Calgary (8% m/m), and Toronto (-5% m/m) markets. From our perspective, there's still more downside to the housing market through the second half of the year. This is particularly true across Ontario and British Columbia, where affordability remains exceptionally low and is likely to only worsen over the near-term amid quickly rising borrowing costs (forecast).

At first blush, things were also a bit cooler across Canada's labour market in June, with employment falling by 43k jobs – more than reversing the gain in May (Chart 1). This marked the first monthly decline since January when hiring was impacted by Omicron. Job losses were concentrated in the service sector, mainly in retail trade (-58k). Despite the decline, the labour market remained extremely tight. The unemployment rate fell further in June, declining by 0.2 percentage points and reaching a new low of 4.9%. All in all, the job market in June is likely the victim of its own success: given the historically low unemployment and elevated participation rate, hiring was bound to slow at some point.

Amid the dearth of workers, wage growth continued to accelerate. Hourly earnings were up 5.2% on a year-over-year basis – a noticeable acceleration from the 3.9% y/y recorded in May. This echoes the results from the Bank of Canada Business Outlook Survey (BOS) released earlier this week, which showed that businesses were expecting to raise wages by 5.8% over the next twelve months, with the rising cost-of-living cited as an important driver of future wage gains. Indeed, both the BOS and its consumer-focused counterpart – Survey of Consumer Expectations – showed 2-year ahead inflation expectations moving notably higher in the second quarter to 4.8% and 5%, respectively (Chart 2). This implies that businesses and consumers expect inflation to be both higher and more persistent.

Rising inflation expectations and wages – the wage inflation spiral – are posing a challenge for the Bank of Canada, increasing the urgency to slay the inflation dragon before inflation expectations become even more unhinged. Falling home prices will likely help to revert some of the inflationary mindset among consumers. This week the average gasoline prices also edged lower, falling below $2/liter for the first time since the end of May. Still, with demand outstripping supply and the economy bumping up against labour constraints, we expect the Bank of Canada to stay the course of aggressive rate hikes and raise the policy rate by 75 basis points next week.

A strong nonfarm payroll report has paved the way for the Fed to deliver another 75 basis-point rate hike at the June 27^th policy meeting. An overheating economy and hot inflation will keep the Fed focused on aggressively fighting inflation.  Recession fears eased after the June payrolls impressed and wage growth remained strong.  The Fed has the all-clear signal to hike rates aggressively and that will lead to a sharp deceleration with the economic data by the end of the summer.

The upcoming week will have a chorus of Fed speak, a couple key rate decisions, massive Chinese data, and President Biden’s trip to the Middle East.  Fed’s Williams, Barkin, Waller, and Bostic will likely provide more insight as to how aggressive the Fed may have to be over the next few policy meetings. The Bank of Canada and Reserve Bank of New Zealand each have rate decisions that are expected to deliver half-point rate increases.  China’s second quarter GDP is expected to show the economy contracted due to Shanghai’s lockdown.  President Biden’s trip to the Middle East could also weigh heavily on energy markets as he makes a push for the Gulf nations to pump more crude.

Summer doldrums are not happening anytime soon as Wall Street has yet to see the inflation peak.  Financial markets are getting close to pricing in how high the Fed will take interest rates, but volatility will remain elevated until that happens.

Country

US

Wall Street will pay close attention to the latest inflation report which should keep the pressure on the Fed to tighten rates aggressively.  CPI is expected to remain hot with an 8.8% annual gain in June following an 8.6% rate in the prior month.  The start of earnings season will also draw extra attention as the banks will provide their latest assessment of the US economy and the  consumer. It will be a busy week for Fed speak as Williams talks about Libor on Monday, Barkin discusses recession on Tuesday, Waller speaks on Thursday and Bostic talks on Friday.  The Fed will also release the Beige Book on Wednesday.

UK

The Boris Johnson show has come to an end. The colorful, often irreverent prime minister has seen his popularity plummet and he resigned on Thursday after massive resignations in his Conservative party.

Johnson said he plans to remain prime minister until the fall, when a successor is named. However, given his humiliating departure, there are members of the Conservatives and the opposition who have called for his immediate replacement. The political meltdown could cause some volatility in the UK financial markets in the coming weeks.

BoE Governor Andrew Bailey will testify before the UK’s Treasury Committee on Monday. Lawmakers are sure to quiz Bailey on surging inflation and the cost-of-living crisis in the UK.

On Wednesday, the markets will get treated to a data dump. GDP is expected to remain flat but no one would be surprised if it declined by 0.1% MoM in May, following a 0.3% contraction in April. Industrial Production has also struggled, with a consensus estimate of a flat reading for May, after a -0.6% reading in April.

EU

EU sanctions against Russia over its invasion of Ukraine have raised fears of an energy crunch in Europe come winter. The Nord Stream 1 pipeline, the primary channel for Russian gas exports to Europe, will close on Monday for two weeks for annual maintenance. However, there are fears that Moscow might not reopen the pipeline, which could send natural gas prices soaring.

Germany

On Tuesday, Germany releases ZEW Economic Sentiment. The index has been in deep-freeze for months, with a June reading of -28.0. This is expected to worsen to -40.0 in July.

We’ll get a look at German CPI on Wednesday. Inflation has been soaring in the eurozone’s largest economy, but is expected to remain unchanged in June at 7.6% YoY.

China

It is a heavy week for data in China but initial risks lie over the weekend with covid zero as cases rise in Shanghai. Any moves to tighten restrictions over the weekend will see China equities move sharply lower on Monday.

Over the weekend, China releases June Inflation, but unless it leaps higher to near 3.0%, its impact will be slight. Monday sees New Yuan Loans and if they fall sharply, that will undo much of the positive new for equities of China bringing forward local government infrastructure bond issuance today.

China’s Balance of Trade Wednesday should be a non-event, but Friday’s House Price Index, Retail Sales, Fixed Asset Investment, Industrial Production and most especially GDP contraction will definitely cause some volatility. An ongoing recovery from the covid zero lockdowns is priced into the data now, so the risk is that the data series underperforms. That could see short-term weakness in China equities, although longer-term, it likely brings China closer to a wider stimulus effort. That would be good for equities and commodities.

India

With the INR hovering near record lows versus the US Dollar, as India’s current account position deteriorates, and cost of living surges, this week’s data dump carries higher than normal risk. Additionally, India is seeing record foreigner outflows from its stock market.

India releases Industrial production and Inflation on Tuesday. IP has downside risks, Infl. upside risks which will weigh on equities and the INR. WPI index releases Thursday have upside risk as well which will have markets pricing in harder RBI rate hikes, equities negative. India’s Balance of Trade on Friday has downside risks on a weak number for both the INR and equity markets as the stagflation noise returns to the country.

Australia

The Australian Dollar is hovering just on monthly lows as global investor sentiment turns south, only a continuation of this week’s Wall Street recovery is likely to avoid further weakness.

Australia releases Business and Consumer Confidence this week, but the Employment data on Thursday is most important. It is usually good for decent intraday volatility in forex and equities. That said, the data recently for Australia has been very good, so a series of weak prints could have an outsized negative impact on the AUD and local equities, with the RBA in hawkish mode.

New Zealand

The RBNZ announces its next policy decision on Wednesday, although no statement or new projections. A 0.50% hike to 2.50% is priced into the market and 0.25% would cause a sharp selloff by the NZD. In a similar vein, 0.75% would be a huge surprise and is probably good for a 150 point NZD/USD rally.

Inflation and GDP data the following week (its only released quarterly quite incredibly) potentially risks more volatility than the RBNZ decision itself.

Japan

Japan is reeling from the Abe shooting today, but any negative impact on the Yen and Nikkei will be short-lived. Japan has Upper House elections on Sunday, which the LDP will now hold comfortably following today’s tragic incident.

Japan Machinery Orders Monday, and PPI Tuesday should move higher as Japan coattails China and its own covid recovery. Bullish equities at the periphery, however Industrial Production on Thursday has downside risks.

USD/JPY remains near 136.00 despite US yields falling the past week. Given USD/JPY’s near 100% correlation to the US/Japan rate differential, a sharp move lower by either the US 2 or 10-year yield tonight or next week risks exposing a very long USD/JPY market to aggressive downside correction, potentially targeting 132.00.

Singapore

Singapore releases GDP on Thursday ,(3.70% exp YoY) and Non-Oil Exports on Friday (12.40% exp YoY). Typically they will have a very binary outcome on local stock markets. Lower number, lower Straits Times Index. Higher number, higher Straits Times Index.

The risks are rising that the MAS will announce a surprise tightening in either July or early August (before the scheduled October date), which would see a sudden rally by the Singapore Dollar as the MAS manages monastery policy via the currency.

Markets

Energy

Energy traders will have a lot to keep their eye on next week as President Biden makes a trip to the Middle East and as the Nord Stream 1 pipeline is scheduled to shut for maintenance.  Both the oil and natural gas markets could remain very tight and fears are rising that Russia may signal they might not reopen the key natural gas channel for Europe.

Recession fears will continue to weigh on the crude demand outlook, but the oil market is still looking tight given the supply risks from a wide range of suppliers to Europe.

Gold

Gold’s plunge may not be over if the short-end of the Treasury curve continues to rise.  The gold market has been beaten up and the pain won’t end until most of Wall Street is confident in pricing in Fed tightening.

Cryptos

Bitcoin’s best week since March will either be a dead cat bounce or possibly the beginning of a stabilization period.  Selling exhaustion may have settled in but until the fundamentals remotely improve for Bitcoin skepticism with any rebound will remain elevated.

Saturday, July 9

Economic Data/Events:

• China aggregate financing, money supply, new yuan loans
• ECB’s Schnabel speaks on a central banking and “greening of the economy” panel
• China’s two-day online Caixin Summer Summit begins

Sunday, July 10

Economic Events:

• ECB’s Stournaras speaks on a multilateralism panel at the Recontres Economiques
• Japan holds elections for the upper house of parliament. PM Kishida’s ruling coalition is expected to win a majority according to polls.

Monday, July 11

Economic Data/Events:

• China FDI
• Denmark CPI
• Japan money stock, machinery orders
• New Zealand card spending
• Norway CPI
• Fed’s Williams speaks on Libor at a conference co-hosted by the New York Fed and the UK Financial Conduct Authority.
• BOE Gov Bailey appears before the UK’s Treasury Committee.
• CFS-IMFS special lecture by Bundesbank President Nagel on “Digital Euro — Chances and Risks.”
• BOJ Gov Kuroda speaks at a branch managers’ meeting.
• Sweden’s Riksbank publishes minutes from its June 29 meeting.
• Nord Stream 1 gas pipeline closes for annual maintenance through July 21.

Tuesday, July 12

Economic Data/Events:

• Australia household spending, business confidence
• Germany ZEW survey expectations
• India industrial production, CPI
• Japan PPI
• Mexico international reserves, industrial production
• New Zealand net migration
• South Africa manufacturing production
• South Korea money supply
• ECB’s Villeroy speaks at Europlace International Financial Forum in Paris.
• BOE Gov Bailey discusses the economic landscape at an OMFIF event in London.
• US Treasury Secretary Janet Yellen attends events in Tokyo

Wednesday, July 13

Economic Data/Events:

• US CPI
• President Biden begins 4-day trip to Middle East
• Fed releases Beige Book
• Germany, Spain, France CPI
• Australia consumer confidence
• Canada (BOC) rate decision: Expected to raise rates by 50bps to 2.00%
• BOC releases quarterly monetary policy report and Gov Macklem holds post-rate decision conference
• China trade, medium-term lending
• Eurozone industrial production
• New Zealand food prices, home sales
• RBNZ rate decision: Expected to raise rates by 50bps to 2.50%
• BOJ to announce outright purchase amount of government securities
• South Africa retail sales
• UK industrial production, monthly GDP
• EIA Crude Oil Inventory Report

Thursday, July 14

Economic Data/Events:

• Earnings Season begins with JPMorgan and Morgan Stanley
• US PPI, Initial Jobless Claims
• Australia unemployment, consumer inflation expectations
• India trade, wholesale prices
• Japan industrial production, capacity utilization
• Kazakhstan retail trade
• Philippines overseas remittances
• Singapore GDP
• Sweden CPI, unemployment rate
• Turkey industrial production
• UK RICS house prices
• ECB’s Centeno speaks at a parliamentary hearing in Lisbon.
• Hungary’s central bank Deputy Governor Virag speaks at an online book presentation.

Friday, July 15

Economic Data/Events:

• US business inventories, industrial production, University of Michigan consumer sentiment, Empire manufacturing, retail sales
• Fed’s Bostic speaks
• China GDP, Industrial Production, Retail Sales, Surveyed Jobless Rate, Fixed Assets, liquidity operations
• Poland GDP
• Canada existing home sales
• Eurozone new car registrations
• Japan tertiary index, department store sales
• New Zealand PMI
• South Korea export and import price index
• Thailand forward contracts, foreign reserves
• G20 finance ministers and central bankers meet
• ECB’s Rehn speaks on the economy and inflation at the SuomiAreena 2022 in Pori, Finland.
• Bank of Italy releases its quarterly economic bulletin.

Sovereign Rating Updates:

• Spain (Moody’s)
• Ireland (DBRS)

The summer calm will have to wait a little longer as the coming week is filled with crucial events. Canada and New Zealand are geared to raise interest rates, although their currencies are ultimately at the mercy of global recession risks. In China, it’s a close call whether the economy contracted in Q2. Most importantly, US inflation might finally be losing its punch.

The dollar show

The US dollar rally went into overdrive this week, leaving a trail of destruction across the FX market. Concerns that the global economy is sleepwalking into a recession as interest rates are raised at full speed and government spending is rolled back are pushing nervous investors into the safety of the reserve currency.

Meanwhile, every other major currency has been dismantled. The euro has been demolished by the energy crisis, which has deprived it of its main weapon - an enormous trade surplus. The yen has been devastated by the Bank of Japan’s refusal to consider higher rates, while the British pound has transformed into a mirror image of stormy stock markets.

Admittedly, it’s been a case of ‘all news is good news’ for the dollar lately. When markets worry about runaway inflation, Fed tightening bets gain momentum and higher Treasury yields propel the dollar higher. And when traders panic about a recession, safe-haven flows eclipse everything else.

There are two elements that can change this dynamic - either more energy supply comes back online and lower prices provide relief to the euro and yen, or US inflation cools down and the Fed can take its foot off the brakes. This puts even more emphasis on the upcoming data on Wednesday.

Inflation as measured by the CPI is anticipated to have risen to 8.7% in June from 8.6% previously. However, there is scope for a softer number considering business surveys like the S&P Global PMI, which showed that companies raised their selling prices at the slowest pace in almost a year. The rollover in commodity prices adds credence to this view.

Retail sales for the same month are out on Friday and although they are expected to have bounced back in monthly terms, it is the yearly rate that tells the story. It stands at 8.1%, below the inflation rate, indicating that real consumption has been steamrolled by the cost of living crisis.

BoC - In the Fed’s shadow

In neighboring Canada, the central bank is expected to copy the Fed and raise interest rates by 75 basis points on Wednesday. The move is almost fully priced into money markets, following a string of encouraging labor market data and the BoC’s own business survey that reflected mounting inflation worries.

Since the rate hike is essentially a done deal, the market reaction will mostly boil down to the tone of the press conference and the updated economic forecasts. A rate hike of equal size is already priced in for September, so the stakes are high.

Overall, there’s reason to be cautious on the loonie. Investors assume the BoC will out-hike the Fed this year, which may be unrealistic considering how quickly the air is coming out of the nation’s ‘bubbly’ housing market. Separately, if the currency couldn’t gain ground with oil prices up 35% this year, what happens if prices extend their latest drop?

RBNZ - A steady hand 

New Zealand’s economy continues to hum along. The unemployment rate is at a record low, consumption remains healthy, and various surveys suggest inflation is raging.

There are some worrisome spots too. Consumer and business confidence has taken a sharp hit lately while the housing market is cooling. Higher rates have clearly dampened demand, but this is what the RBNZ wanted to achieve in the first place.

Hence, there’s no real reason for the Reserve Bank to deviate from its strategy of raising rates in 50bps increments when it meets on Wednesday, which is also what the market has priced in - both for this meeting and next month. The bar for a hawkish surprise is therefore high, unless the officials want to put a 75bps move on the table.

As for the kiwi, what the RBNZ does is secondary to how global forces evolve. Recession worries are currently dominating, putting pressure on risk sentiment and commodity prices, both negative for the kiwi. Any relief rallies are likely to remain shallow in this regime, until nerves around global growth calm down.

China - Economic contraction? 

Over in China, the ball will get rolling with inflation stats for June over the weekend ahead of trade data on Wednesday, culminating with economic growth numbers for the second quarter on Friday.

Several cities went into strict lockdowns during this quarter, and the collapse in demand was evident in retail sales, which contracted sharply in April and May. It was a similar story in business surveys and industrial output, thanks to the struggling property sector. This begs the question - did the overall economy contract in Q2?

It’s a close call, because most of the evidence for June points to a solid recovery as the lockdowns were lifted to close the quarter. This could be a key piece of the puzzle for global risk sentiment, with the capacity to impact equity markets and commodity currencies such as the Australian dollar.

Speaking of the aussie, Australia’s jobs report for June will be released on Thursday.

Finally in the UK, monthly GDP stats for May are out on Wednesday. That said, sterling pays more attention to stock markets these days. Politics will be in the spotlight too as the ruling Conservative party scrambles to select a replacement for outgoing Prime Minister Johnson.

Canada’s central bank isn’t done raising interest rates. RBC (and markets) expect a 75 basis point increase when the BoC announces its next decision on Wednesday. That would be the largest single rise since the 1990s. May CPI growth at 7.7% (year-over-year) is running well above the bank’s April forecast of 5.8% in the second quarter. And 60% of the prices tracked by the measure are growing above the BoC’s 1% to 3% target range by our count. Worryingly, those higher price readings are beginning to seep into longer run inflation expectations. Most businesses and consumers still expect inflation to moderate toward pre-shock levels beyond the next 2 to 3 years—but the share expecting it to last longer is edging higher. An unhinging of longer-run inflation expectations from the BoC’s targets would disrupt decades of effective inflation-targeting monetary policy. It would also require much larger and more damaging interest rate hikes to reverse.

Against that backdrop, we expect the economic growth risks from hiking rates too aggressively in the near-term will be overshadowed by the medium-term cost of not doing enough. The overnight rate remains too low at 1.5%. And the 75 basis point hike we expect this week would still leave it towards the lower end of the bank’s estimate of its ‘neutral’ range. We expect the central bank to continue on a more aggressive hiking path with another 75 basis point increase in September.

The housing market is already reacting to higher borrowing costs, with home sales in June dipping as much as 30% to 40% compared to a year ago in key markets like Toronto and Vancouver. Consumer demand for other goods and services should gradually follow and start to trend lower toward the end of this year. This pattern is being repeated abroad and is helping to ease supply chain snarls. We continue to believe inflation is close to its peak, but won’t shift to more sustainable levels until demand slows more significantly. Once that happens, expect the BoC and other central banks to again push rates lower—though this likely won’t play out until the economy undergoes a modest contraction next year.

Week ahead data watch:

U.S. CPI likely ticked higher to 8.8% in June on the back of surging food and gas prices. Rent prices have been rising faster over the past year should continue to support growth in core prices, given its high relative weight.

Manufacturing sales fell by 2.5% in May, according to StatCan’s preliminary estimate. The decline in volume was probably larger as the auto sector weakened, offset by higher petroleum and coal prices.

Markets

A temporary EUR-setback in early European trading disturbed an otherwise calm run-up to the June payrolls report. EUR/USD set a new intraday/cycle/two decade low around 1.0070. There was quite some buzz on details from energy rationing measures in Germany, but the general principle – stage two of the gas emergency plan – was already decided on end last month. Germany (and Europe) now await an anxious period between July 11 and July 21, when Nord Stream 1 is shut down for scheduled maintenance. The billion dollar question is whether gas will flow again after July 21 or not. From a market point of view, it could have a bigger impact than the ECB’s first policy rate hike this cycle (and in over a decade) a day earlier. Anyway, June payrolls beat consensus with net job growth coming in at 372k vs 265k consensus. A 74k downward revision to the previous two month’s cumulative numbers downplays the upward surprise. The unemployment rate stabilized at the cycle low of 3.6%, but there was a setback in the labour force participation rate (62.2% from 62.3%). Wage growth printed near bang in line with expectations at 0.3% M/M and 5.1% Y/Y. It’s telling about financial market fragility these days that such “average” payrolls outcome generated a rather outsized move. Especially US Treasuries sold off. We understand the logic that this print removed any remaining doubt on the Fed’s determination to move on with back-to-back jumbo 75 bps rate hikes. As Atlanta Fed Bostic reacted after the labour market report: “we can move by 75 bps without damaging the economy.” He did warn that he was starting to see the first signs of economic slowdown. The US yield curve bear flattens at the moment of writing with yields rising by 5.5 bps (30-yr) to 10 bps (2-yr). UST’s massively underperform German Bunds with the German yield curve even bull steepening somewhat. Yields lose 4.1 bps (2-yr) to 0.5 bps (30-yr). Interestingly, the dollar failed to revisit the intraday highs despite this massive relative yield advantage. EUR/USD keeps its nerve around 1.0150. Stock markets and risk sentiment give no guidance either, trading near flat on the day. We end our recap with a little follow-up on EUR/GBP’s downside break out of the upward sloping trend channel earlier this week: there was none. The pair changes hands around 0.8460.

News Headlines

Hungarian inflation quickened from 10.7% to 11.7% on a monthly pace of 1.5%. That was a little more than the 11.5% analyst consensus. MNB-calculated core inflation (ex non-processed food, energy, pharmaceutical products and services with regulated prices) shot up again by 1.9% m/m to 13.8%. Both are the highest readings since 1998 and leave the central bank zero scope to slowdown the pace of monetary tightening. It hinted at doing so a few weeks ago, after which the Hungarian forint went into a tailspin, boosting (imported) inflation even further. EUR/HUF hit new record low in the 415-417 area over the past few days. Seeking to floor the currency, Budapest yesterday raised its weekly deposit rate by a stunning 200 bps to 9.75% but it’s impact was minimal. EUR/HUF fell towards 403. The pair holds on to those levels after some intraday volatility post-CPI.

Canadian net employment fell by 43.2k in June. Expectations were for a 22.5k increase. The decline mainly occurred in the part time sector (-39.1k). The unemployment rate hit a new all-time low at 4.9% though was accompanied by an unexpected and large retreat in the participation rate from 65.3% to 64.9%. In absolute numbers, some 100k people left the labour market, the biggest one-month drop outside the pandemic. It adds to an already scarce labour supply and helped wage growth shot up from 4.5% to 5.3% y/y. The Canadian labour market remains extremely tight. The Bank of Canada started to tighten monetary policy in recent months, citing excess demand and inflation way above target. Today’s payrolls report leaves the BoC no option but to stay on that path. Markets priced in a 75 bps hike for the meeting on Thursday. There’s a more than 50% chance discounted for a 100 bps move. Canadian swap yields rise 3-6.4 bps. USD/CAD advances to just north of 1.30 because of strong US payrolls published at same time.

• Payroll employment rose by 372k; labour shortages still acute, evident by low unemployment rate at 3.6%
• Growth in wages from pre-pandemic soon to be outpaced by inflation, lowering real spending power
• Slowing consumer demand and Fed rate hikes to push unemployment rate higher in 2023

U.S. payrolls added 372k jobs in June. That was similar to the pace in the prior two months and brought the overall shortfall in employment from pre-pandemic to just over half a million. Employment continued to grow in high-contact service industries including leisure and hospitality (+67k), but was also higher in professional and business services (+74k). The unemployment rate held at 3.6% for a fourth consecutive month but the labour force participation rate at 62.2% remained over a full percent below levels immediately pre-pandemic, thanks to a slower comeback of workers aged 55 and over. Heightened demand for workers means businesses have to compete with higher wages to attract and retain talent from a shrinking labour force, adding to pressure that’s already been accelerating over the past months.

On a year on year basis average hourly earnings grew 5.1% in June, a tick lower than the 5.3% in May but still elevated comparing to rates pre-pandemic (annual wage growth was 3.3% in 2019.) The increase was also particularly elevated in leisure and hospitality (+9.2%). Up to May, growth in wages relative to pre-pandemic was still outpacing the rise in consumer prices, but just slightly. It would not take a large upside surprise in future inflation readings to close that gap. Indeed, rising inflation is increasingly biting into consumers’ spending power, pushing their confidence lower and inflation expectations higher. There is still substantial momentum in labour markets through this summer, facilitated by rebound in close contact service sectors. But with the Fed hiking rates aggressively in the near-term, we expect labour market conditions to start softening later this year, and the unemployment rate to rise more significantly in 2023.

The Canadian labour market shed 43k positions in June. Of some (cold) comfort was the fact that nearly all of the losses (39.1k) were in part-time positions, with full-time employment down a more modest 4k positions.

Self-employment was down 59.2k positions, private sector hiring was up 16.6k, and public sector employment was little changed in June.

Even with the headline drop in employment, the unemployment rate fell 0.2 ppts to 4.9%, as the labour force declined by 97.5k and the participation rate slid from 65.3% to 64.9%. Tight markets are prompting accelerating wage growth, with average hourly earnings up 5.2% year-on-year versus 3.9% in May.

By industry, job losses were concentrated in the services sector, where employment fell by 76k. Losses were spread across several industries, with the largest decline occurring in retail trade (-58k). However, there were also losses in healthcare and social assistance (-20k), educational services (-14k), and information, culture and recreation (-14k). In contrast, employment in the goods producing sector was up 33k in June, lifted by manufacturing (+26k) and construction (+23k).

On a geographic basis, the report noted job losses in Quebec (-27k) and Newfoundland and Labrador (-4.3k), while being little changed in Ontario. On the flipside, employment increase in Manitoba (+4k) and PEI (+1.6k).

Lastly, total hours worked increased 1.3% month-on-month.

Key Implications

June's soft employment print (coupled with last week's flash estimate for a decline in GDP during May), signals that Canadian economic momentum is softening. This is consistent with our view that growth will ease in the second half of this year. That said, details of the report were more encouraging, as hours worked climbed significantly during the month. In addition, the unemployment rate fell to a new low of 4.9%. A very tight job market is prompting stronger wage growth, which will go some way towards offsetting the erosion in real incomes by inflation.

For the Bank of Canada, today's report (which featured a weak headline, but better details) is unlikely to sway their aggressive stance, particularly with job markets so tight and wages accelerating rapidly. Policymakers are resolute in their determination to rein in inflation and prevent expectations from becoming further unanchored. As such, we still expect them to hike by 75 bps at their next policy meeting on July 13th.