Key events this week: FOMC, BoJ, & BoC meetings; US non-farm payrolls, PCE inflation, & Q2 GDP; Aus CPI Q2; Euro area Q2 GDP & CPI prelim Jul; Aug 1 tariffs.
Recap from last week: Easing Uncertainty on the Tariff Outlook
This past week saw the first of several key central bank decisions as well as the latest prelim global PMIs for Jul. These events unfolded against the backdrop of evolving trade negotiations heading towards the next 1 Aug deadline.
Positive news on trade deals emerged during the week, helping to reduce the immediate risks of re-escalation as the next trade deadline approaches. Deals with Japan and the EU were announced, featuring tariff levels lower than previously anticipated, which is contributing to improved sentiment. However, some key details of these deals remain unclear. Meanwhile, negotiations with China appear to be progressing, with more talks scheduled this week and another extension likely. However, the upcoming 1 Aug deadline will likely bring announcements for other trade partners, and some headline risk remains. Once there is at least some certainty over tariff levels, the focus will increasingly shift to the effects of these tariffs on firms, inflation, and growth.
The concern over trade effects from tariffs continued to influence central bank communications last week. However, these communications also indicated a decreased risk of the ‘worst-case’ tariff scenario unfolding. The ECB kept rates on hold as expected. The decision noted that inflation was at the medium-term target of 2%, prior cuts were bolstering Euro area resilience, and growth was developing in line with, if not better than, expected. ECB President Lagarde noted that “we are in a good place because inflation is at 2%”. Guidance continued to reiterate a meeting-by-meeting, data-dependent approach, with President Lagarde indicating that ‘we are in a ‘wait-and-watch situation’ on further rate cuts. Several changes were made to the guidance. The first reflected this easing in worst-case fears, with previous commentary around ‘exceptional uncertainty’ removed. There was also the addition of a note that interest rate decisions will be based on the assessment of the inflation outlook and risks.
Some easing in tariff uncertainty was also evident in the latest RBA minutes. The RBA minutes outlined key reasons behind the surprise decision to stay on hold at the last meeting. The decision reflected a broad agreement to wait for more information to confirm that inflation remains sustainably on track to reach the 2.5% midpoint target. While acknowledging that underlying inflation was expected to decline further, the majority of members felt it was prudent to wait, given that some recent data had been slightly stronger than expected, especially the monthly inflation indicator suggesting the Jun quarter inflation could be firmer. Lowering the cash rate for a third time in four meetings did not align with their ‘cautious and gradual’ approach to easing policy rates. The reduced likelihood of severe global downside scenarios meant that there was less pressure to cut rates as a pre-emptive measure. Guidance pointed to more rate cuts to come, but the timing and pace will be contingent on incoming economic data, particularly inflation, while taking a cautious approach.
In the latest round of prelim PMIs for Jul, trade and tariff uncertainty remained a key theme; however, conditions broadly improved in Jul. This improvement going into Q3 was led by a strengthening in services activity, while manufacturing momentum remained subdued, led by a notable weakening in manufacturing conditions in the US and Japan. Broadly, inflationary pressures remained persistent/elevated; the exception was easing cost pressures in Japan. The Eurozone report also noted that the stronger euro and US tariffs are likely to exert downward rather than upward pressure on inflation in the coming months. With trade policy and tariffs still a key uncertainty, confidence in the outlook remained subdued, and firms tended to remain cautious around hiring, especially across manufacturing firms (except in Aus).
US data last week was limited. As we close out Q2, growth in new and existing home sales for Jun remained subdued. Durable goods orders in Jun also weakened (even after excluding the effect of large value aircraft orders), while shipment growth continued to improve. The Atlanta Fed GDP nowcast for Q2 US growth remained unchanged at +2.4% this week. The advance Q2 GDP estimate will be released this week. The US prelim S&P PMI for Jul provided a somewhat positive, albeit mixed, view at the start of Q3. According to the flash PMI, growth momentum in the US increased at a faster pace in Jul. However, this growth was driven by a stronger services sector, while manufacturing contracted for the first time this year, partly due to fading “tariff front running.” It’s worth noting that the manufacturing output PMI continued to expand, though stepped down from the more widespread expansion in Jun.
Outlook for the week ahead: FOMC, BoJ, & BoC meetings; US non-farm payrolls, PCE inflation, & Q2 GDP; Aus CPI Q2; Euro area Q2 GDP & CPI prelim Jul; Aug 1 tariffs.
Our attention will be divided across multiple fronts this week: further major central bank decisions, important US economic data, a busy lineup of corporate earnings, and headline risk from another looming tariff and trade-deal deadline.
Key factors & events to watch this week;
There will be three key central bank decisions this week, following on from the ECB last week. In all cases, policy settings are expected to remain unchanged; however, we’ll be alert to any shifts in signalling, especially as it relates to uncertainty in the outlook.
- The FOMC is expected to keep policy settings unchanged. Data this week, including non-farm payrolls, Q2 growth, and PCE inflation, are expected to be important in the lead-up to the Sept meeting, when markets are expecting/pricing in the next rate cut.
- The BoC is expected to stay on hold at this meeting. At the past few meetings, the BoC has maintained its “less forward-looking than usual” guidance. At the last meeting, an easing in tariff rhetoric was noted, but this was against a backdrop of significant uncertainty.
- The BoJ is also expected to stay on hold at this meeting. A trade deal between the US and Japan was announced last week, helping to alleviate some trade uncertainty, even amidst domestic political complexities. It’s been noted that the BoJ may consider adjusting its inflation outlook at this meeting, given that inflation has remained above its 2% target for several years. Depending on the broader impact of tariffs on domestic activity, markets are anticipating a potential rate hike late in 2025 or early in 2026 (Source: Bloomberg)
US data will feature a comprehensive suite of top-tier US economic data, offering important insights into the state of the labor market, inflation, growth, spending, incomes, and trade. These releases will be pivotal in assessing inflation and the economy’s resilience amid rising tariffs and guiding expectations for the path of Fed policy.
- One of the key reports this week will be the US labor market reports. US non-farm payrolls are expected to grow at a slower pace of 108k in Jul, down from 147k in Jun. The previous month’s report showed a smaller contribution from private sector payroll growth, and this will be an important indicator to watch.
- The unemployment rate is expected to increase to 4.2% from 4.1% in Jun.
- The Fed preferred PCE inflation measure is expected to increase in Jun. Headline PCE inflation is expected to increase by +2.5% in Jun, up from +2.3% in May, with the monthly rate increasing by +0.3% in Jun, up from +0.1% in May.
- Core PCE inflation is expected to increase by +2.8% in Jun, up from +2.7% in May. The monthly rate is also expected to increase by +0.3% in Jun, up from +0.2% in May.
- US personal spending is expected to rebound in Jun by +0.4% after falling by -0.1% in May. Personal income is also expected to rebound by +0.2% after falling by -0.4% in May.
- The advance Q2 GDP will be released this week; growth is expected to reflect trade and inventory volatility due to tariffs. Q2 growth is expected to rebound to +2.4% annualized, after a -0.5% annualized fall in Q1. The view of underlying domestic growth will be in focus, especially the contribution from personal consumption.
- Other important data releases will include; the employment cost index for Q2 (expected to ease to +0.8% over the quarter), JOLTS – with job openings also expected to slow again to 7.5m in Jun, and the ISM manufacturing PMI for Jul which is expected to show little change with conditions remaining at a subdued 49.5 in Jul, from 49 in Jun.
Euro area growth and inflation
- Euro area prelim GDP for Q2 is expected to slow to 0%, from +0.6% in Q1, likely affected by trade disruptions.
- The prelim headline Euro area CPI for Jul is expected to ease to +1.9%, from +2% in Jun. Core CPI is expected to be unchanged at +2.3%.
Australia CPI
- The important quarterly CPI report for Q2 will be released this week. This report takes on added significance in light of the RBA’s latest decision to hold, rather than cut, interest rates. This decision was partially based on a series of monthly inflation readings that had suggested that inflation could come in slightly higher than expected in Q2. Headline CPI for Q2 is expected to ease slightly to +0.8% in Q2, from +0.9% in Q1. Annual inflation is expected to ease to +2.2% from +2.4%. However, it will be the trimmed mean measure (core inflation) that will be in focus. Trimmed mean CPI is expected to be unchanged at +0.7% in Q2. This would see annual trimmed mean inflation slow to +2.75%, from +2.9% in Q1.
The full suite of S&P Global PMIs for Jul will begin to be released, starting with manufacturing this week.
The next deadline for trade deals and tariff announcements is 1 Aug this week.
It will also be a busy week of US corporate earnings.
This week, the US Treasury will auction and/or settle approx. $727bn in ST Bills, Notes, Bonds, FRNs, and TIPS, raising approx. $170bn in new money.
The latest quarterly refunding announcements will be made on 28 and 30 Jul this week.
QT this week: Approx $31.6bn of ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $2.7bn of Notes and Bonds will mature on the Fed balance sheet and will be redeemed/roll off the balance sheet.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
