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Monday, Aug 7, 2017

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Tuesday, Aug 8, 2017

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Wednesday, Aug 9, 2017

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Thursday, Aug 10, 2017

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Friday, Aug 11, 2017

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U.S. Review

Labor Market Dodges Summer Slowdown

• Flat June readings for real spending and headline PCE inflation capped a ho-hum first half for the consumer and price growth.
• Both of the ISM surveys pulled back in July, with a particularly sharp slowdown in the non-manufacturing index. Despite the softer numbers, the indices remain at a level consistent with economic growth of 2.0-2.5 percent.
• The labor market exhibited continued strength in this morning's employment report. Nonfarm payrolls rose by 209,000 in July, the unemployment rate dropped a tick and wage growth improved over the month.

Labor Market Dodges Summer Slowdown

Personal income and spending kicked off the week with a somewhat underwhelming print. Personal income was flat in July despite expectations for a 0.4 percent gain. The headline miss masked a quirk in the details, however, as much of the decline was due to a sharp fall in farm income. Wages and salaries increased a solid 0.4 percent. Real spending rose 0.1 percent on the month and at a 2.6 percent annualized rate in all of Q2, an acceleration from the 1.9 percent pace registered in Q1. Soft price growth in Q2 helped boost the inflation-adjusted numbers. In nominal dollars, the three-month annualized rate was just 3.1 percent in June, the lowest since March 2016. Headline and core inflation, as measured by the PCE deflator, are now half a percentage point below the Fed's target (top chart).

The total value of construction put-in-place unexpectedly fell to a seasonally adjusted annual rate of $1,205.8 billion in June. Private construction spending registered its third straight monthly decline, and public spending also tumbled in June, slipping 5.4 percent. Rising construction labor and material costs may be creating some headwinds in the industry. The producer price index (PPI) showed nonresidential input prices increasing 2.3 percent in June, and the three-month annualized rate was up a robust 13.2 percent, suggesting more upward momentum in input prices.

The ISM indices signaled a somewhat slower pace of growth in July than they had in recent months. On the manufacturing side, the pullback was modest, as the index slowed 1.5 points from June's level. Of the 18 manufacturing industries, 15 reported growth, and the survey respondents' comments were generally upbeat. Looking through the month-to-month volatility, our outlook for the factory sector has largely remained unchanged: slow but steady improvement in industrial production compared to last year.

On the services side, the slowing in the ISM index was a more precipitous 3.5 point drop t0 53.9. The decline was broad-based, with the steepest drop coming from the forward-looking new orders index. Respondent comments were mixed, with some purchasing managers citing a summer slowdown that they expect to fade in the coming months. On a three-month moving average basis, both indices are hovering just above 56, a level consistent with the 2.0-2.5 percent growth we have penciled in for the second half of the year (middle chart).

Employers added 209,000 net new jobs in July, above the consensus expectation for a 180,000 gain. The details of the report were just as strong as the headline number suggests. Manufacturers added a solid 16,000 new jobs, and education & health and professional & business services remained the drivers of job growth. Average hourly earnings rose 0.3 percent over the month and 2.5 percent over the year. In addition, the labor force participation rate rose a tick to 62.9 percent while the unemployment rate fell an equal amount. If wages accelerate a bit more in the coming months, the Fed will be well positioned to resume hiking the fed funds rate in December.

U.S. Outlook

Consumer Credit • Monday

Consumer credit rose $18.4 billion in May which was the largest increase seen so far in 2017. Revolving credit, which includes credit cards, led the acceleration in May, while the increase in nonrevolving loans, which mostly consists of motor vehicle and education loans, held steady. Interest rates also continued to drift higher in May for credit card and auto loans.

Consumer credit as a share of disposable income held steady at 26.5 percent in May, as disposable income rose 0.4 percent that month. Disposable personal income was flat in June, however, which suggests that measure could jump if credit continues to rise. Spending was also soft in June, which raises the possibility that consumer credit growth also may have slowed, although it would not take much of an increase to push the ratio of credit to income to an all-time high.

Previous: $18.4B Consensus: $16.0B

JOLTS • Tuesday

Details underlying June's strong job gain of 231,000 jobs should shed some light on the outlook for stronger wage gains in coming months. The JOLTS report in May showed a large increase in hiring while the number of openings fell; while that runs slightly counter to the softer jobs report in May, it is useful to note that hiring and openings in the JOLTS report are measured at the last day of the month. The faster pace of hiring was picked up in the June jobs report.

There was also a large increase in the number of quits in May, which may translate into stronger wage gains if sustained in coming months. Wage growth has been stubbornly subdued this year considering how low the unemployment rate has fallen. As more experienced workers quit their jobs for new opportunities, it should put upward pressure on wages.

Previous: 5666K

Consumer Price Index • Friday

Consumer prices were flat in June, extending the soft patch for inflation indicators. The consumer price data have shown that consumers paid less on a range of products and services in recent months, from home furnishings to cell phone plans. Lower gasoline prices have also been a boon to consumer wallets. However, the extra spending power appears to have had little effect on consumption decisions. Personal spending growth slowed in Q2 relative to Q1, and was flat on an inflation-adjusted basis in June.

Headline and core CPI are slipping farther from the Fed's 2 percent year-over-year growth target. Inflation and wages have put the Fed in a tough position, and the continued miss on price growth indicators caused us to push back our call for the third rate hike this year to December.

Previous: 0.0% Wells Fargo: 0.2% Consensus: 0.2% (Month-over-Month)

Global Review

Solid Global Growth in Q2

• The year-over-year rate of real GDP growth in the Eurozone rose to a six-year high of 2.1 percent in Q2, while Mexico posted another solid quarter of growth on a sequential basis. It appears that the Japanese economy also had a good quarter in Q2.

Q3 Looks to Be Off to a Good Start in Many Economies

• Recent indicators suggest that the German economy entered Q3 with a fair amount of momentum, while PMIs in the United Kingdom and China remained well above the demarcation line separating expansion from contraction in July.

Solid Global Growth in Q2

There was more evidence this week that global economic growth was solid in Q2. For starters, real GDP in the Eurozone grew at an annualized rate of 0.6 percent in Q2, which lifted the year-overyear growth rate to a six-year high of 2.1 percent (see chart on front page). In Mexico, real GDP jumped 0.6 percent (not annualized) in Q2, which followed the 0.7 percent gain registered in Q1.

We will not have Q2 GDP data from Japan until Aug. 14, but industrial production (IP) rose 1.6 percent in June relative to the previous month. Looking at Q2 in its entirety, IP grew at an annualized rate of 7.7 percent on a sequential basis. The strong IP data (top chart) give us more confidence that our projection of 1.7 percent annualized growth in Japanese GDP in Q2 is realistic.

Q3 Looks to Be Off to a Good Start in Many Economies

There are not many data releases from Q3 yet, but the data that we do have suggest that Q3 has gotten off to a good start in many foreign economies. In Germany, retail sales rose 1.1 percent on a sequential basis in June, which follows on the heels of the 0.5 percent gain registered during May. Although these data points are from Q2, they indicate that retail spending came into Q3 with a fair amount of momentum. Factory orders rose 0.8 percent in Q2 relative to Q1, pointing to strong growth in manufacturing production in Q3.

If the purchasing managers' indices are a good indication, then the British economy also got off to a decent start in Q3. The manufacturing PMI rose to 55.1 in July from 54.2 in June, while the service sector PMI edged up to 53.8 (middle chart). Despite the continued solid readings in the PMIs, the Monetary Policy Committee (MPC) at the Bank of England kept its main policy rate unchanged at 0.25 percent, where it has been maintained since last August. The decision was widely expected.

Real GDP in the United Kingdom was up only 1.7 percent on a year-ago basis in Q2 2017, and the MPC said that it expects growth will remain "sluggish in the near term as the squeeze on households' real incomes continues to weigh on consumption." Although the MPC expects that inflation will remain above its 2 percent target for the foreseeable future, the MPC appears to have a relaxed attitude to the overshoot. Most members of the MPC reason that a rate hike now would lead to even slower economic growth. As we detailed in our recent report, we expect that the MPC will keep policy unchanged until well into 2018. (See "U.K. Mid-Year Economic Outlook", which is posted on our website.)

Real GDP in China was up 6.9 percent on a year-ago basis in Q2, and the PMIs for July suggest that growth remains solid in the current quarter. The Caixin manufacturing PMI rose to 51.1 (bottom chart). Although the "official" PMI edged down last month, it generally remains well within expansion territory. See "China Mid-Year Economic Outlook" for more details on our China forecast through the end of 2018.

Global Outlook

Germany Industrial Production • Monday

After hitting a series' high of 59.6 in June of this year, Germany's Markit/BME Manufacturing PMI slowed down marginally in July, to 58.1, and reversed a seven-month upward trend for the index. However, the index remained strong and continued to point to a relatively strong German economy.

On Monday, markets will have an opportunity to validate the strength in industrial production reflected by the already released PMI index for June when the industrial production index for June is released.

On docket for release on Tuesday will be the trade and current account balances for June. Clearly, one of the reasons for the improved economy has been an improved export market for German production so the international trade numbers will also help validate the improvement in economic activity.

Previous: 1.2% Consensus: 0.2% (Month-over-Month)

U.K. Industrial Production • Thursday

The U.K. economy has weakened a bit recently even though we are not expecting a downturn any time soon (See "U.K. Mid-Year Economic Outlook", which is available on our website). On Thursday, we will take a look at the industrial production index which declined 0.1 percent in May and consensus is expecting to come in flat for June. On a year-earlier basis the index dropped 0.2 percent in May and the expectation is for the index to continue its decline at a rate of 0.1 percent. Meanwhile, consensus expects manufacturing production to rise 0.1 percent in June, compared to a decline in May by 0.1 percent. On a year-earlier basis however, consensus expects the manufacturing industry to have slightly improved to 0.6 percent in June from a growth rate of 0.4 percent in May.

We will also get the NIESR monthly GDP proxy for July on Thursday. The index increased 0.3 percent in June after a 0.2 percent print in May.

Previous: -0.1% Consensus: 0.1% (Month-over-Month)

Mexico Industrial Production • Friday

Mexican economic growth has surprised this year as some of the worse predictions regarding U.S. policy changes toward Mexico have not materialized. However, growth remains subpar for the growth needs of the country.

On Friday, markets will have a chance to take a look at industrial and manufacturing production for June, perhaps the first month in 2017 that we could say that the number will be devoid of any important "calendar" factor.

What markets will be looking for is an improvement in manufacturing production of automobiles, which has been lagging the rest of the manufacturing and industrial sector. This will also be a good indicator of the direction of automobile demand north of the border, which has eyebrows rising lately in the U.S. consumer market.

Previous: 1.0% (Year-over-Year)

Point of View

Interest Rate Watch

Inflation Dynamics at the Micro Level.

The pattern in this economic expansion is one of lower unemployment rates from 2010 to late 2015 and yet the inflation rate slowed over that same period. Only in the last year has inflation, the CPI, risen while the unemployment rate continued to decline and yet the pace of inflation remains modestly below the FOMC's 2 percent target. The traditional thinking about a tradeoff hypothesis of these two series has not played out. Why?

An Alternative Model

Our approach is to follow the path of micro foundations of the inflation process. In this case, inflation drives wage negotiations, or more precisely, changes in inflation are the driver for changes in wages. In addition, wages must reflect the value of the marginal product of workers—that is, this value depends upon the marginal product of the worker and the value of the output as measured by the price of that output.

Wages have tracked the path of inflation and productivity since 1982. This pattern reflects the underlying micro foundation that wages track the combination of productivity and inflation gains. A firm cannot pay their workers a salary in excess of their productivity and the value (price) of the output they produce. Public discussion often starts by arguing for higher wages but there is little discussion of the underlying drivers of inflation and productivity.

An Alternative View of Monetary Policy

For investors, the challenge is that interest rate expectations based upon Fed policy take into account a policy expectation that a lower unemployment rate will generate higher inflation. To date, the rise in inflation is less than what would be expected based upon a traditional model of the inflation process and thereby the extent of the increase in interest rates remains above what would be the result of our alternative model. Our alternative approach continues to indicate interest rate increases on the low side of consensus and that has been the right forecast for the past four years.

Credit Market Insights

Auto Loan Market in Distress?

The rate of new seriously delinquent auto loans has climbed for 13 consecutive quarters and reached 2.3 percent in Q1. The rate of these new seriously delinquent loans is still below its recession peak of 3.5 percent. The total value of the loans stands at $8.3 billion, just below the recession peak.

Low rates and an improving economy since 2008 fueled a vehicle sales boom, financed with increasingly more debt. Furthermore, rising auto prices, stagnant real incomes and yield-hungry investors contributed to loan quality deterioration. The average auto loan maturity climbed sharply to 67.4 months in May from 59.5 months in 2009. In addition, outstanding subprime loan balances have ballooned to an all-time high of $280 billion, and the pronounced worsening in subprime loan performance has been responsible for much of the overall rise in auto loan delinquencies.

How much of a threat is the auto loan market to households and to the broader financial system? Auto loans are only 9.2 percent of household debt, and pale in comparison to the size and level of securitization of the mortgage market, the origin of the last financial crisis.

Furthermore, the July Senior Loan Officer Opinion Survey reported a fall in auto loan demand and an increase in the percentage of banks tightening standards for auto loans. As the economic recovery continues to grind along, the auto loan market is certainly worth monitoring.

Topic of the Week

Three Hurdles to 3 Percent Growth

President Trump's 2018 budget assumes uninterrupted increases in the pace of economic growth during each of the next three years before real GDP growth levels out at 3 percent for every year thereafter. Our own forecast is less sanguine, as are those of the Congressional Budget Office and the Blue Chip consensus (top chart).

While it is true that real GDP growth has averaged 3.2 percent per year since 1950, that average is skewed by much higher growth rates in the early part of that period. For more than a generation, 3 percent real GDP growth has been much tougher to achieve on a sustained basis. Since 1970, average annual GDP growth has been 2.7 percent. Since 2000, it is just 1.9 percent.

The economy's long-run sustainable rate of economic growth is driven by three factors: labor, capital and total factor productivity (TFP). Relying on just one of these inputs to achieve 3 percent growth over the next decade would require unrealistically rosy assumptions. For example, reaching three percent potential growth through labor alone would require potential labor hours growth in the neighborhood of the rates achieved during the period when mass inflows into the labor force occurred from baby boomers and women.

Getting all three inputs moving in the right direction at once is challenging, but the bottom chart illustrates what it might look like by comparing current projections with the most recent decade over which potential growth averaged 3 percent. As the chart shows, replicating the 1997-2007 period would be a difficult task, as this past period included a major technological revolution and boomers in their prime working years.

None of this is to say that the economy could never grow at such a strong pace again, but history has shown that all three of these factors tend to change at a slow pace, which suggests long lead times before new policies could achieve the fleeting objective of 3 percent growth.

U.S. Highlights

• U.S. stock indices remained supported by the continued flow of favorable earnings releases. Bond yields and the U.S. dollar moved lower through Thursday but that dynamic reversed course with the robust payrolls report.
• The American economy continued to churn out jobs at a robust pace in July with payrolls rising by 209k. At the same time, the unemployment rate fell to a cycle low of 4.3%. Average wages rose a solid 0.3% m/m.
• Improvements in ISM manufacturing and non-manufacturing prices sub-indices, together with a slightly firmer core PCE price index suggest that a turnaround in inflation may be underway.

Canadian Highlights

• Whatever happens over the remainder of the year, 2017 will go down as a very good year for the Canadian economy. In July, the economy created 10.9k jobs and the unemployment rate fell to 6.3%, its lowest level since 2008.
• Even if economic growth is flat and no more jobs are created over the remainder of the year, real GDP will have grown by 2.5% (annual average) in 2017 and the economy will have created 290k jobs - the highest in a decade.
• With household debt levels at record highs, interest rates going up and home prices looking to decelerate further, economic growth is likely to return to a less exciting pace around 1.5% to 2.0% in 2018. This is still close to a trend rate for an economy with an aging population and limited productivity growth.

U.S. - Job Numbers Impress, But Still Waiting on Inflation

It was another good week across most markets. U.S. stock markets remained supported by continued flow of favorable earnings releases, with the DJIA breaching the 22,000 threshold by mid-week. A string of softer data releases through Thursday also led bond yields and the U.S. dollar lower. But that ended Friday morning, when a solid employment report boosted the dollar and inspired a bit of a sell-off in the bond market.

The report was indeed a beauty as the American economy continued to churn out jobs at a robust pace in July, with payrolls rising by 209k, beating market expectations for a 180k print. But there was more. The jobless rate dropped to a cycle low of 4.3%, while broader measures of labor underutilization remained near their pre-recession lows. More workers joined the labor force, with the participation rate recording a small uptick to 62.9%. While average wages failed to accelerate on a year-over-year basis, given the weakness at the beginning of the year, the monthly gain of 0.3% was very strong and marks the fastest pace in ten months. (Chart 1)

Going forward, we expect job gains to slow somewhat. However, the trend should also be accompanied by stronger wage gains. While the relationship between labor market slack and inflation has become more muted in recent years, and is taking longer to materialize, we believe the link still holds. As such, we believe that a pick-up in inflation should materialize before the end of the year, with the stronger data motivating the Fed to take interest rates higher.

A string of other data releases helped provide additional context as far as far as economic momentum heading into the third quarter. Personal spending rose by a meagre 0.1% in June, with the softness providing somewhat of a weak handoff to consumer spending into the third quarter, while personal income was essentially flat on the month. However, much of the slowdown in personal income was related to decreases in personal dividend and interest income, factors that are likely to prove temporary. On the other hand, growth in wages and salaries was a solid 0.4% m/m and looks to be strong in July also given the average hourly wage data. The strengthening in income growth, together with the relatively healthy auto sales figures for July, suggests that consumer will continue driving economic growth in the third quarter, with consumption expected to rise by 2.6%, supporting real GDP growth of 2.8% during the quarter.

The ISM surveys provided mixed signals of the economy. The manufacturing index suggested that the sector continued to expand at a healthy, but slightly slower pace, supported by a rebounding global economy and the lower U.S. dollar. The non-manufacturing index also telegraphed a deceleration in activity, but remained in expansionary territory while most industries continued to report growth. Importantly, both ISM surveys indicated significant increases in their prices sub-indices. Together with a slightly firmer core PCE price index, which was revised up to 1.5% y/y in June this suggests that a turnaround in price pressures could be underway (Chart 2). Should this in fact be the case, we expect further tightening to take place later this year, with the Fed likely to slip in a December hike. Lack of such evidence, on the other hand, will likely stay the Fed's hand as far as the hike, but is unlikely to prevent the Fed from starting the balance sheet unwinding process in the fall.

Canada - 2017 Belongs to Canada

Whatever happens over the remainder of the year, 2017 will go down as a very good year for the Canadian economy. Even if economic growth is flat and no more jobs are created, real GDP will have grown by 2.5% (annual average) and the economy will have created 290 thousand jobs - the highest in a decade.

Two phenomena explain the buoyant pace of Canadian growth over the first half of the year. First, a bounce back in energy production after setbacks over the past two years explains about a quarter of the growth. This far exceeds its share in overall economic activity (of around 6.5%).

Second, consumer spending growth has been absolutely gangbusters. Given our tracking for the second quarter, consumer spending over the first half of the year looks to have advanced by over 4%, its fastest pace since 2007. Spending on durable goods - especially autos - led the way, but there was little weakness to point to anywhere.
The Canadian economy may not slow to a halt over the remainder of the year, but is likely to cool some from its fiery pace over the first half. The best metaphor for the rebound in the energy sector is a spring that had been pushed down by the fall in prices and then pushed a bit harder by the Alberta wildfires. It has now bounced back. With the outlook for oil prices relatively stable over the next year, activity is likely see a much steadier pace of growth.

Meanwhile, consumer spending, which has been supported in part by wealth gains from outsized advances in home prices and steady gains in equities through 2016, will not get the same support going forward. The TSX composite index peaked in the first quarter of this year and has lost ground since. And, no surprise to anyone, home price growth has slowed considerably, especially since new regulations have come online in Ontario.
With debt levels at record highs, interest rates going up and home prices looking to decelerate further, there is good reason to expect consumers to rein in spending over the remainder of the year. Reining in spending doesn't have to mean a pullback, as strong job gains have also boosted aggregate incomes, but the days of 4% consumer spending growth are likely behind us.

This likely slowdown in Canadian economic activity has important implications for the Bank of Canada. It raised rates in July largely on the pace of growth observed over the first half of the year. But, with 2017 now halfway to the finish line, the story is the outlook for 2018.

In all likelihood, economic growth will return to a less exciting pace around 1.5% to 2.0%. This is still close to a trend rate for an economy with an aging population and scant productivity growth, but not a rate that is likely to put much upward pressure on inflation. With a smaller growth potential comes a smaller margin of error. Given the continued downside risks to the Canadian economy, any disappointment on this front may be enough to put the Bank of Canada back on the sidelines.

U.S.: Upcoming Key Economic Releases

U.S. Consumer Price Index - July

Release Date: August 11, 2017
Previous Result: 0.0% m/m; core 0.1% m/m
TD Forecast: 0.1% m/m,; core 0.1% m/m
Consensus: 0.2% m/m; core 0.2% m/m

Headline CPI inflation is expected to pick up to 1.7% y/y in July, with prices up 0.1% m/m. Energy prices were likely a small drag on lower gasoline prices while we look for food prices to offset. Outside of food and energy, we expect yet another subpar 0.1% gain in the core, keeping the core inflation rate stable at 1.7% y/y. Risk for a continued drag from wireless services, vehicles and apparel prices suggest that a 0.2% print may be hard to reach this month. If realized, our core inflation projection suggests that transitory factors continue to weigh, offering limited signs that price pressures are regaining steam and potentially spurring greater caution at the Fed with respect to rate normalization.

Canada: Upcoming Key Economic Releases

Canadian Housing Starts - July

Release Date: August 8, 2017
Previous Result: 213k
TD Forecast: 205k
Consensus: N/A

Housing starts are forecast to slow to a 205k pace in July, reversing some of the pickup from the prior month. While we have less conviction without building permits for June, the magnitude of last month's rebound in construction activity seems unwarranted given languishing resale activity. As usual, we expect the more volatile multi-unit component to drive the headline result while single family housing starts should remain stable around 65k. Our forecast for 205k reflects a modest deceleration from the six-month moving average, currently 215k.

Next week will be calmer in terms of data releases relative to this one, though certain figures from major economies will definitely grab the markets participants' attention. In terms of central bank meetings, the Reserve Bank of New Zealand will meet to set monetary policy, while oil prices may experience added volatility given that a meeting to monitor compliance with output cuts will be taking place in Abu Dhabi.

RBNZ decision on monetary policy

The Reserve Bank of New Zealand will be announcing its latest decision on monetary policy next week. The Bank's official cash rate currently stands at the record low of 1.75%. During this past week, the country has been on the receiving end of weaker-than-expected employment figures. These contributed to the kiwi's fall from the more than two-year highs it experienced last week relative to the greenback as kiwi/dollar rose climbed the 0.75 handle. It would be interesting to see whether those figures will push any policy normalization plans further down the road.

Out of Asian markets, potentially of most interest would be July trade data out of China given that the world's second largest economy traditionally relies on exports to boost growth. Imports are also of significance given the growing importance of consumer demand as the nation is attempting to rebalance its growth model to one that's more heavily dependent on domestic demand. Beyond this, July inflation and producer prices would also be of interest to investors. Moving to Japan, it will, among others, see the release of current account numbers and machinery orders for June.

Europe in broadly quiet mode

Next week looks like it will not be particularly exciting in terms of European releases. The Sentix index gauging investor confidence in the eurozone for the month of August could attract some attention by forex market participants. Beyond that, of most interest in Germany, Europe's largest economy, would be June industrial output and trade data, as well as final inflation numbers for the month of July.

Sterling received a blow this week as markets interpreted the Bank of England's monetary policy decision, meeting minutes and quarterly inflation report as being on the dovish side overall. Consequently, sterling tumbled relative to majors including the dollar and the euro - more notably versus the latter one as euro/pound rose to a nine-month high above the 0.90 handle. Next week will see the release of Halifax house prices for July, as well as industrial and manufacturing output figures for the month of June. It remains to be seen whether any positive surprises have the capacity to reverse the negative backdrop that seems to have set in for the pound.

JOLTS report and inflation numbers out of the US

Earlier in the week, June consumer credit and the JOLTS report on jobs openings for the same month will be gathering most attention. On Wednesday, preliminary labor costs and productivity numbers for the second quarter of the year will dominate investors' focus. Finally, producer prices and CPI data will be closely watched on Thursday and Friday respectively. It remains to be seen whether the weaker dollar in recent weeks will spur inflationary pressures and bring the Federal Reserve closer to delivering a rate hike during its December meeting. Expectations are for inflation to rise to 1.8% year-on-year in July, up from 1.6% during the previous month.

Diverting from forex markets, officials from OPEC and non-OPEC countries participating in the deal to reduce production by about 1.8 million barrels per month will be meeting in Abu Dhabi on August 7 and 8 to discuss ways to boost compliance with their supply cut agreement. Similar discussions during a meeting in the Russian city of St. Petersburg in late July led to oil prices rallying.

Following a dose of disappointing economic data out of the US with the most recent involving ISM non-manufacturing PMI released yesterday, the highly anticipated non-farm payrolls for the month of July took markets by surprise with the figures beating expectations. Consequently, the dollar surged and managed to break above the key level of 93 despite ongoing political turmoil around Trump's administration.

In July, 209,000 new positions were created in nonfarm sectors, a number that was below the previous mark of 231,000 which was upwardly revised from the initial estimate of 222,000. Nevertheless, this was a surprise to analysts who instead expected non-farm payrolls to rise by only 183,000. Among industries, food and drinking services experienced the highest employment expansion during the month, adding 53,000 workers while the last 12 months the industry added a total of 313,000 jobs. Professional and business services came second, providing 49,000 new positions in July.

The unemployment rate slipped as expected to 4.3%, from 4.4% observed last month, maintaining a 16-year-low level, whereas the U6 rate version which involves all unemployment people plus discouraged job seekers and part-time workers remained flat at 8.6%, close to 9 ½ year-low reached in May. The participation rate rose by 0.1 percentage points to 62.9%.

Regarding wage growth, monthly earnings were up by nine cents or 0.3% on average compared to 0.2% in June, recording the highest increase in five months. On a yearly basis, average earnings grew flat at 2.5% for the fourth consecutive month. Month-on-month, average working hours remained unchanged at 34.5 hours per week.

With an economy operating at full capacity and wage growth showing signs of improvement, the odds for an additional rate hike this year are increasing as higher disposable income would likely raise consumer spending and therefore drive the already subdued inflation towards the target rate. Nevertheless, more evidence on labour market will be reported before the next FOMC policy meeting, while the cloud around the Trump's administration is getting darker day by day.

Looking at the reaction in the forex markets, the greenback shot above the 93-key level against a basket of major currencies, jumping by almost 1% from 92.62 to 93.61. Dollar/yen picked by approximately 1% to reach a one-week high of 111.04, while euro/dollar sank by 1.20% to a four-day low of 1.1727. Pound/dollar dropped to a nine-day low of 1.3031.

Next week's market movers

• The RBNZ is expected to take no action. We see the case for a more cautious narrative amid deteriorating economic data. The commentary on NZD could also signal heightened discomfort regarding the currency's recent strength.
• In the US, the CPI prints for July will be closely watched as investors try to gauge the timing of the next Fed rate hike.
• In Abu Dhabi, OPEC and non-OPEC officials meet to discuss compliance over the production deal.
• We also get key economic data from New Zealand, China, and Norway.

On Monday, during the Asian day, the RBNZ will release its 2-year inflation expectations for Q2. Even though no forecast is available, this is a critical indicator that the Bank pays a lot of attention to. Remember that when this rate unexpectedly slipped in Q1 2016, it triggered a surprise rate cut, mainly to ensure that expectations do not become de-anchored from the target. As such, we will monitor this print closely, as any change could set the tone for the RBNZ meeting later in the week (see below).

During the European day, oil traders will probably turn their sights to Abu Dhabi, where OPEC and non-OPEC officials will meet to discuss why some countries are falling behind in their pledges to cut production as agreed in May. Any signals that the cartel may take a harder line on members not complying with their quotas, or that OPEC could take other steps to boost compliance, may help oil prices rebound.

On Tuesday, China's trade balance for July is due to be released and expectations are for the nation's trade surplus to have widened in USD terms. Both exports and imports are expected to have slowed slightly, but to still remain safely within the positive territory. However, we view the risks surrounding these forecasts as tilted to the upside. The case is supported by the nation's official manufacturing PMI for July, where the New Exports Orders index rose from the previous month, and was higher than a year ago. What's more, even though the import index ticked down from the previous month, it was still notably higher than a year ago, suggesting that the yearly imports rate may have risen as well.

On Wednesday, the only major indicators we get are China's CPI and PPI for July. Expectations are for both figures to have risen at the same pace as previously. The nation's official and Caixin PMIs for the same month showed that both input prices and output charges rose at a faster pace than previous months. Specifically, in the Caixin surveys, input prices rose at the strongest pace in three months, and even though prices charged by firms rose at only a modest pace, it was still the fastest since March. Meanwhile, the official surveys suggest that we may even see an upside surprise in the yearly CPI and PPI rates, as both input and output prices rose at a faster pace than a year ago.

On Thursday, during the early Asian morning, the RBNZ will announce its policy decision. Without a forecast available yet, we see the case for the Bank to remain on hold once again. At its latest gathering in June, the RBNZ appeared somewhat optimistic, dismissing soft GDP growth in Q1 as being transitory and indicating that the growth outlook remains positive. Meanwhile, policymakers did not appear very concerned with the notable appreciation in NZD, simply noting that a lower NZD would help rebalance the growth outlook. However, ever since, economic developments have been relatively downbeat. The CPI rate for Q2 declined, and now lies well below the RBNZ's own forecasts. Meanwhile the jobs market underperformed during the quarter, with the labor force participation dropping significantly. Adding insult to injury, the Kiwi is trading much higher than it was back then.

We believe that these soft data will probably keep the Bank from turning hawkish anytime soon. In case the RBNZ appears less optimistic on the economy, or if it revises down its economic forecasts, the latest pullback in NZD could continue as investors push further back their expectations for the timing of a rate hike by the Bank. Last but not least, we think there is a considerable probability that the RBNZ expresses greater discomfort with the strong NZD. Even though its currency-related language in June was mild, data have broadly deteriorated since then and the Kiwi has moved higher, a combination that will probably be worrisome. Our favorite proxy for exploiting further NZD weakness in the short run is EUR/NZD, given that we expect the euro to keep performing well as opposed to the greenback, which may continue bleeding, perhaps even more than the Kiwi.

During the European day, we get Norway's CPI data for July, though no forecast is available yet. Despite the steep slowdown in inflation, at its latest meeting the Norges Bank removed its easing bias and noted that it now expects the key policy rate to remain at the current level, while it revised slightly higher its rate path for 2017 and 2018. What's more, the Bank noted that inflation is lower than expected and although it may continue to drift lower in the months ahead, increased activity and receding unemployment suggest that inflation will eventually pick up. Therefore, even if inflation slows again, it may not be particularly worrisome for policymakers, as it would still be in line with their outlook. Having said that though, our opinion is that at least the headline rate may have actually risen somewhat. We base that on the fact that the yearly change in oil prices has turned back positive in July.

Finally on Friday, we will get the highly-anticipated US CPI data for July. These data will probably be closely watched, considering that both the headline and core CPI rates have declined significantly in recent months, pushing back Fed rate-hike expectations and dragging the dollar down. The forecast is for the headline rate to have ticked up, while the core rate is expected to have held steady. However, this combination makes us believe that the rise in the headline rate may be owed primarily to movements in volatile items, such as energy-related products and food. The yearly change in WTI is back to positive, adding validity to our view. As long as the core rate remains unchanged, we doubt that expectations for the next Fed hike will come forth on the release of this data set.

The longer inflation remains subdued, the less convincing the Fed's view becomes that soft inflation is only transitory. If the CPI rates were to remain at current levels for the next months, the FOMC would likely have to acknowledge that low inflation is not owed only to temporary factors, implying officials may have to revise down the implied policy path, also known as the "dot plot".