How many letters and symbols have we heard about the shape of the US and global economy this year? V, W, L, lower case “h”, reverse check mark, square root sign? We should get a bit more clarity this week with a fairly busy calendar of economic releases.
On Tuesday, May US retail sales will be released which is of particular interest as April saw a record -16.4% drop. If the pattern holds with the non-farm payroll release earlier this month, there would be a record gain for May. Forecasts currently center on expectations of an 8.0% rise. Following retail sales data is industrial production, which dropped -11.2% for April, with +3.0% growth expected by the analyst consensus. Housing and current account data round out the week for the US.
The UK, which reported a horrible GDP drop for April yesterday, releases employment data on Monday as well as inflation data on Tuesday. It leads up to a Bank of England rate decision on Thursday, where of course there will be no change but presents the bank with a chance to pile on the warnings of slow economic growth along with the Fed and the ECB.
The Bank of Japan gets its turn earlier in the week on Tuesday, along with a press conference by Governor Haruhiko Kuroda afterwards. The Swiss National Bank announces its “no change, the global economy is horrible” mantra on Thursday. Speaking of central banks, Jay Powell delivers his semi-annual monetary policy report to the House Financial Services Committee on Wednesday.
For what it is worth, England’s Premier League will resume matches on Wednesday, with the first match being Manchester City against Arsenal and no fans in attendance. In the US, plans are in place for the Disney World NBA fanless adventure and the NHL’s Stanley Cup season and playoffs. And then there is baseball…
The euro barely moved this week. The view was for stimulus hopes to support the euro but for uncertainty around the negotiation period to keep gains capped. The euro remains supported by stimulus hopes with additional German stimulus and the ECB’s upsizing of its Pandemic Emergency Purchase Program adding to the tailwinds from the EC’s rescue package. Markets are still in risk on mode overall, despite the Thursday sell off. There is still a material risk for a second wave/pull back in stimulus to disrupt the reopening process and for markets to realize that approving the EC’s package will not be easy. However, the trend should continue to be for optimism, which lends to USD weakness and support for the euro.
The GBP weakened a little over 1% against the USD this week as Brexit talks are heating up again. Markets are looking past the rough GDP report and looking forward to seeing how the economy takes to reopening. However, price action indicates the markets still think an extension will ultimately be requested. Despite this, expect the GBP to be increasingly under pressure as the extension deadline approaches but for USD weakness to mask some of the downward pressure on sterling.
USDJPY has drifted lower this week. Outbound investments seem to be picking up again and supporting a weaker yen. Expect the yen to continue to trade with risk sentiment, which remains positive.
The CAD followed the British pound sterling to weaken a little over 1% this week. As with other commodity currencies, the CAD has strengthened with oil markets and the positive jobs report in Canada early this month. For now, the short-term trend is for risk on and there doesn’t appear to be any catalysts to change that.
The yuan ended the week relatively unchanged. The focus on civil unrest in the US took all the air out of any real China stories this week. Economic data continues to show a pickup in activity as China continues to reopen and this, combined with investment inflows, should continue to support the currency. Expect continued currency stability, for which the PBoC strives. However, longer term election dynamics flag the risk for increased rhetoric and tougher action as bipartisan support for tougher measures against China continues to rise.
The Aussie came off a bit this week by about -1.5%, which seems to be a correction from the strong run we have seen since the low under 58 US cents. The AUD also continues to face a challenged backdrop with both the domestic economy weak and external risks coming through via weak global growth and higher geopolitical tensions. This includes both US-China and Australia-China. Near term, further upward momentum is possible, but with the Aussie’s valuation inconsistent with its backdrop, risks of correction are growing.
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