- Focus on PMIs/ISM/ Tankan, US Auto Sales also due
- Central banks: markets a little too focussed on rate outlook,
and not enough on balance sheet plans
** Please note there will be no updates tomorrow,
as I will be out of the office
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** EVENTS PREVIEW **
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A busy start statistically to H2 2017 may not translate into a higher volume session, given tomorrow's Independence Day holiday and an early close in the USA, and also given that the main 'risk' events for the week are heavily back-loaded in calendar terms. The overarching themes remain the array of domestic and geo-political risks, be they Brexit, Trump, Middle East or South China sea related, or indeed the big defeat for Japan's LDP in the Tokyo municipal elections. Surveys via way of Japan's Q2 Tankan PMIs and the ISM dominate the day's schedule, with US Construction Spending and Auto Sales the other key features.
Japan's Tankan was in broad terms mostly better than expected, and in any case improved markedly on Q1, with the most encouraging aspect being the sharp improvements in the Small Manufacturing and Non-Manufacturing indices, given that these have lagged the large company indicators for a considerable period, and reports of labour shortages, it is to be hoped that the very tight labour market will now start to translate into a pick-up in wage growth. Asian PMIs were also broadly better than May, with the exception of Malaysia (5-yr low) and Indonesia, and a modest dip in India, with the rebound in the China Caixin PMI not only more in tune with the official data, but once again suggesting some faulty seasonal adjustment given this pattern of reversal and rebound is quite frequent in Q2. The first batch of European PMIs (Netherlands, Sweden, Poland, Norway) continue to underscore the solid broad based growth momentum that has caught many forecasters by surprise, and the remaining Eurozone readings are expected to reinforce that point, and is expected to be evident in the UK Manufacturing PMI, that is seen dipping to a still very strong 56.3 after a much stronger than expected 56.7 in May. As for the US, the Manufacturing ISM is expected to edge up to 55.2 from May's 54.9, still below Q1 readings, but nevertheless indicate solid sector activity. The other key item for the day will be US Auto Sales, which are expected to slow again to a still 16.50 Mln SAAR pace (May 16.58 Mln), leaving sales well down in y/y terms. However some perspective is needed, 2016's pace of sales was always going to prove to be unsustainable, and 2017 sales at current pace are still likely to be the fourth highest on record.
RECAP & UPDATE: The Week Ahead - Bullet point highlights: 3 to 7 July
The US Independence Day holiday will likely ensure a very subdued start to the new quarter's trading, with PMIs and the weekending US Labour data likely to be the key data events; German Factory Orders, a slew of UK and European Industrial Production data and Canadian labour data will also attract attention.
- Australia's RBA meeting is expected to see the RBA on hold, though after the 'surprises' from the BoE, ECB and BoC this week, markets will be wary of a shift in their policy outlook rhetoric, given recent stronger economic data, though that is expected to be tempered by the recent strength of the AUD. Given the shift in ECB rhetoric, the Riksbank's policy outlook language will also be under the microscope, with rates and QE volumes seen on hold at this week's meeting. The June FOMC minutes, the Fed's Semi-Annual Report on Monetary Policy (ahead of Yellen's testimony on July 12) and a run of ECB and Fed speakers will also be watched closely. Rates are seen on hold in Egypt, Poland, Romania, Taiwan and Ukraine.
- One observation on the less accommodative tone from G7 central banks perhaps needs to be made. Markets appear to be very much focussed on rate hike timing, which is understandable, even if still very distant in the ECB and BoJ's case, but this may be missing a key point. Starting with last week's BIS annual report and through all the various comments, it is obvious that their primary point of concern is that unconventional policy (above all QE) has and is creating financial instability, by sowing the seeds of the next financial crisis, as well as exacerbating economic and social inequality. But DM central banks can hardly come out and say 'we have created the biggest bubble in history'. They are however likely to be far more focussed on ending QE programmes (ECB, Riskbank, BoJ) and withdrawing some of the $24.0 Trln of liquidity (Fed, perhaps BoE) that they have injected since the GFC at a rather faster pace than markets are assuming, once procedures have been established and tested, with rate trajectories likely to be lower than the term 'normalizing' policy would imply.
- Govt bond supply sees UK re-open 10-yr, Austria sell 10 & 30-yr, Germany 13-yr I-L and 5-yr, while Thursday sees France offer 10 & 30-yr and Spain re-opening 2022, 2040 & 2046 Bonos.
- Friday brings what will likely be an ill-tempered G-20 meeting hosted in Germany, with Merkel and Trump on collision course. Britain's floundering minority government will also come in for continued scrutiny
from Marc Ostwald
