The Daily Update: The Week Ahead

Last week, Friday’s US non-farm payroll data was a key focus as market participants try to gauge the strength of the US economic recovery. In June 850,000 jobs were added which exceeded expectations (Bloomberg survey) of 720,000 jobs. The prior reading was revised up to 583,000 from 559,000. However, the household survey data showed the June unemployment rate came in at 5.9% against expectations of 5.6% and the prior reading of 5.8%. The labour force participation rate was unchanged at 61.6%. Average hourly earnings rose 3.6% yoy which was in line with expectations. While the jobs created figure (850k) was the highest since August 2020, the unemployment rate at 5.9% implies there is still slack in the economy suggesting the Fed’s ‘substantial further progress’ target is still likely some way from being met. Earlier in the week, the US ISM manufacturing reading for June came in at 60.6, a bit below expectations of 60.9 (Bloomberg survey), and down from the prior month of 61.2, but still indicating a healthy expansion. Pending home sales for May increased 8% mom well ahead of expectations (Bloomberg survey) of -1% mom. Over the week, the yield on the UST 10 year tightened 10 bps to 1.43%. The yield on the 30 year UST tightened 11bps to 2.04% and the 5s30s spread tightened 4bps to 118bps. The S&P 500 and Nasdaq made new highs closing the week +1.67% and 1.94% respectively.

In the Eurozone, the preliminary reading for Eurozone CPI in June rose 1.9% yoy which was in line with expectations and down from 2% yoy in May. The core reading slowed to 0.9% yoy in June from 1% yoy the prior month and was in line with expectations. This backdrop was supportive for Eurozone Government Bonds along with some concerns about the spread of the Delta variant: for example, Portugal imposing night-time curfews in 45 municipalities towards the end of the week. Elsewhere, Japan’s 2Q Tankan survey showed an improvement in sentiment for the large manufacturing and non-manufacturing sectors compared to the prior survey although the readings undershot expectations. Some improvement was expected as the country has relaxed some of the earlier covid restrictions. That said, there is still some debate whether restrictions will be extended beyond July 11th in Tokyo as covid infections continue. Other parts of Asia and Australia have also been facing covid outbreaks and reimposing restrictions. In China, the recent covid outbreak in Guangdong province, port disruption and supply shortages are factors cited for the softer PMI data in China. China’s official PMI data for June showed both the manufacturing and services gauges softened from the prior month: the manufacturing reading fell to 50.9 from 51 in May although the reading was marginally ahead of expectations (50.8 Bloomberg survey). The non-manufacturing PMI fell to 53.5 from 55.2 in May which was below expectations of 55.3. The Caixin manufacturing PMI for June came in below expectations at 51.3 and down from the prior month of 52.

The week ahead is expected to start on a quieter note with the US market shut for the Independence Day holiday. The spread of covid infections from the Delta variant in countries with low vaccination rates remains an issue with the potential for further restrictions being imposed. Today, OPEC+ remains a focus, as having failed to agree production targets/increases at last week’s meeting, talks resume. The Brent crude price closed the week at USD 76.17pb having rallied strongly YTD. The White House has also voiced concern about the increase in gasoline prices.

In terms of central bank meetings, the RBA meeting is due on Tuesday: no change is expected to interest rates but the market will be looking to see if it extends its bond purchase programme and whether it extends the maturity of bonds it targets under yield curve control to bonds maturing in November 2024 from April 2024. The minutes of the June 15-16 FOMC meeting are also due on Wednesday and are likely to be scrutinised for any further insights into the FOMC discussions on tapering and views on the strength of the labour market. Following this, Minutes of the ECB meeting from June 9-10 are due with any discussion around the PEPP bond buying programme an area of interest. Central bank speakers this week include Andrew Bailey, BoE Governor, and ECB President Christine Lagarde who are both due to appear on a panel on digitalisation and intangibles. ECB Vice President Luis de Guindos is also due to speak.

Economic data releases due over the week include the US services ISM for June, the German ZEW survey on Tuesday, German industrial production for May on Wednesday and UK GDP data for May on Friday. Key data releases from China include the Caixin June PMI for services due on Monday and on Friday, the June CPI and PPI data are due with the Bloomberg survey looking for 1.3% yoy and 8.7% yoy respectively.