In our second installment of the Investment Bank Outlook 08-05-19 we're going to bring you a selection of perspectives from leading investment banks to outline the key issues and directional views for the week ahead. These excerpts, taken from research notes, will cover issues such as key market themes, economic releases, as well as any major trends and levels to watch. Please note, this material, which does not reflect the opinions of Tickmill, is provided for educational purposes only and should not be taken as an investment recommendation.
USD Hawks Ascend at the Federal Reserve Bullish
Watch: NFP, Durable Goods, UMich, Markit PMIs, PPI
The Fed surprised markets by failing to take a dovish tone. While it cut 25bp as the market widely expected, the subsequent communications suggested that the Fed held an optimistic view on the outlook and that the bar for subsequent cuts was higher than markets anticipated. This is likely to keep the USD supported as markets reprice higher USD funding costs. We are mindful of the negative impact a higher USD can have on the global outlook and the Fed's decision reinforces our view that global data will continue to slow. EM FX in particular may weaken against USD, particularly the high yielders, while counter-cyclical low yielders such as JPY and CHF may find support.
EUR Dovish ECB vs. Dovish Fed Neutral
Watch: Retail Sales, Germany Factory Orders and IP
The hawkish Fed meeting has put downward pressure on EURUSD, though we maintain our neutral stance. The hawkish Fed amid a backdrop of continued global growth softness suggests the risk outlook is likely to soften as well – and given that EUR has been a popular funding currency for EM FX longs, EUR may receive support as these trades unwind. We would argue that EUR is attractive as a funding currency in a low-volatility environment – as the Fed's hawkishness reduces risk appetite and raises volatility, these carry trades unwind, keeping EUR supported. EURUSD faces support at 1.1010 and the 1.10 level may serve as an important psychological level.
JPY Steeper Yield Curve, Weaker USDJPY Bullish
Watch: Current Account, GDP
The hawkish Fed amid slowing global growth suggests that risk appetite will soon come under pressure, keeping counter-cyclical low-yielding currencies such as JPY and CHF supported. USDJPY typically trades on rate differentials and curve slope (as the latter affects hedging behavior) and the hawkish Fed stance compared to market pricing may give the US yield curve a flattening bias, though we argue the risk impact will limit USDJPY upside. JPY longs look more attractive to us on crosses as a result, particularly against low-yielding AxJ such as CNH and KRW. USDJPY faces resistance at 109.60.
GBP Driven by Brexit Bearish
Watch: GDP, IP, Trade
GBP should continue to under-perform as markets' perceived no-deal Brexit probability rises and the USD strengthens. We are watching the 1.2080 support level in GBPUSD closely; a close below that could trigger further downside momentum. While GBP sentiment and positioning are already very bearish, for GBP to rally sustainably, it will require a concession from the EU on the Irish backstop, which is likely to take time. We like to express GBP bearishness via EUR and CHF. A close above the 0.9190 resistance in EURGBP may trigger further upside momentum.
CHF Strength Not Curbed by SNB Bullish
Watch: CPI, Sight Deposits, FX Reserves
The sight deposits data suggest the SNB intervened in FX markets last week (CHF1.7bn) to slow CHF appreciation. However, SNB interventions may only slow CHF appreciation and not change the trend. The negative global growth outlook suggests anti-cyclical currencies such as CHF staying in demand. US risk markets also look vulnerable, suggesting room for the long USDCHF carry trades to unwind. Coupled with no-deal Brexit risk lingering in the background, CHF should continue to stay in demand, with EURCHF potentially having downside to 1.08.
This week will be relatively quiet for US data. We expect a small increase in the July ISM nonmanufacturing index, consistent with recent strength in the service sector and consumer spending.
We initiated our Q3 GDP tracking estimate at 1.7% after the release of the BEA's underlying details for GDP accounts this Tuesday, but construction spending and factory orders reports lowered our estimate to 1.6% q-o-q saar. We expect personal consumption growth to continue to drive GDP growth in Q3. Business fixed investment growth will likely remain mixed. Weakness in nonresidential structures spending will likely persist although we expect some a pickup in equipment investment considering a strong increase in core capital goods orders near end-Q2 that will likely support factory activity in Q3. Elsewhere, we expect net exports to remain a notable drag in Q3. After incorporating revisions to factory activity, construction, and trade data, our tracking estimate for the second release of Q2 GDP growth is at 1.9% q-o-q saar, 0.2pp below the BEA’s advance estimate. Nomura | US Economic Weekly 2 August 2019
Nonfarm payroll employment increased 164k in July, close to expectations (Nomura: 160k, Consensus: 165k), as the labor market remains healthy but with slightly less strength relative to the past two years. As expected, goods-producing employment growth slowed and service-providing industries saw a modest step down in the pace of job creation. Average hourly earnings (AHE) rose 0.3% m-o-m in July but partly as a result of weak aggregate hours, clouding the outlook for wage growth. Finally, the unemployment rate held at 3.7% in July, propped up by an increase in the labor force participation rate (LFPR). The underemployment rate, or U6, fell 0.2pp to 7.0%, the lowest level since October 2000. Read our full report: July Employment Recap, 2 August 2019.
Other incoming data this week generally continued the theme of industrial sector weakness but firm service and consumer activity. The ISM manufacturing index inched down in July to 51.2 as momentum in the industrial sector continues to ease. Business sentiment could deteriorate further in August as a result of President Trump’s recent announcement on additional tariffs on imports from China. Consumer confidence may also decline in August as a result of tariff-related news. At the moment, the Conference Board’s index is at an elevated level of 135.7, just barely below the post-recession high of 137.9 reached in October 2018, consistent with firm consumer fundamentals.
Core PCE inflation in June accelerated to 0.248% m-o-m from 0.155% in May but downward revisions helped keep the y-o-y rate at 1.6%. However, we continue to expect the impact from tariffs and waning transitory factors to help push up core PCE inflation through H1 2020, reaching a peak of 2.3% y-o-y.