Weekly Market Outlook — Markets are once again sagged by concerns about a looming recession. Several data are coming out that could alleviate those concerns, including a new job report in the United States. Even if upcoming releases offer some relief, central banks are a downside risk to sentiment. The Federal Reserve’s and European Central Bank’s policy meeting minutes will likely reinforce their hawkish stance, while the Reserve Bank of Australia is going to announce another rate hike.
The Fed is expected to raise rates again.
The Federal Reserve is expected to raise interest rates one more time later this month amid soaring price pressures. While the dollar may find support whichever way the data goes, Wednesday’s FOMC minutes may surprise markets. Due to recession fears, investors have priced out a 50 basis points rate hike. Also, they expect the Fed to begin cutting rates as early as the second half of 2023.
Despite the doom and gloom surrounding sky-high inflation and the real risk of a serious economic downturn, the US dollar appears to be recovering due to the demand for safe-haven assets. There are already signs that America’s consumer spending is beginning to soften and that some businesses are scaling back their hiring. This is one of the pivotal moments for investor sentiment. Meanwhile, investors worry about a slowdown in economic growth. The US manufacturing data on Friday didn’t do much to ease worries, with new orders dipping for the first time in two years.
We can probably expect this trend to be confirmed in Friday’s nonfarm payroll report. It is expected that the US economy added 295k jobs in June, down from 390k in May. Unemployment is forecasted to remain at 3.6%, and average hourly earnings are forecast to grow by 0.3% m/m, a further warning sign.
ADP’s private employment report to be released on Thursday will provide hints for Friday’s employment report. US markets will be closed today for Independence Day. Other than NFP, traders will focus on the ISM non-manufacturing PMI for July due Wednesday to assess how recent Fed rate increases and oil’s resurgence will impact business activity and cost pressures.
Euro is battling recession blues.
The ECB is planning to introduce a new tool to keep periphery yield spreads low before it raises interest rates for the first time in more than a decade in July. However, investors are worried about how the tighter policy will affect not only Eurozone yield spreads, but also the broader economy.
Since the flash PMI readings for June raised concerns about slowing growth in the eurozone, a close eye will be kept on any revisions to the final services PMI for Tuesday. On Wednesday, retail sales figures for May might also draw attention, while German industrial output data on Thursday could also sway opinions about the recession.
On Thursday, however, the ECB’s June meeting account could be more critical for the euro in an otherwise quiet week.
Policymakers at the ECB are pushing for rate increases of 50 basis points or higher for the subsequent meetings after July, and the minutes might provide insight into how widely this view is held. Euro traders are wondering if hawkish minutes will strengthen or weaken the euro. It’s more likely that aggressive rate hike talk will hurt the Euro against the USD and Swiss Franc if optimism fades.
As a result of safe-haven flows and the SNB’s unexpected early liftoff, the euro just fell below parity against the franc for the second time this year, reaching 7½-year lows. Investors will monitor June’s CPI numbers due today to determine whether the Swiss National Bank’s rate hikes outpace those of the ECB. Understand how CPI and PPI data can affect exchange rates.
RBA will likely deliver another rate hike
The RBA raised the cash rate by 75 basis points since May as part of its rate hike cycle. Following June’s 50-bps increase, it is widely expected to make a similar move at its meeting on Tuesday. A bigger increase cannot be ruled out as policymakers are rushing to the front load as many rate increases as they can while their economies are still on solid ground due to all the panic about global inflation.
Rate hike bets in money markets have cooled lately as investors worry about the need for aggressive tightening by central banks amid all the pessimism. Most economists had expected the RBA to hike rates by 50 basis points last week, but expectations have plummeted to 85% now.
Risk-sensitive Australian dollar would probably only be modestly boosted by a hawkish surprise given the fear of a recession. If risk appetite rebounded, the currency would have a better chance of re-establishing its foothold above $0.70. This week’s mid-tier data, building approvals issued today and the AIG services index comes out on Wednesday, won’t offer much support either.
Loonie is outperforming its rivals
Despite being on a steady downward trend against the greenback for the past year, the Canadian dollar has posted impressive gains against most other major currencies in 2022. A big reason for the Loonie’s relative strength is, of course, the strong oil price rally, since oil is Canada’s biggest export. Another factor is the tight labour market.
As a result, the Bank of Canada is almost fully priced in to raise rates by 50 basis points at its July 13 rate-hike meeting, matching the Fed in its hawkish rhetoric. Friday’s employment numbers are not expected to have a major impact on those expectations unless there is a massive miss. Yet, if the mood on the market doesn’t change in the next few days, the Loonie might find it hard to ride out stormy seas.
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