Trading Week Ahead

Week of July 31

Three major central banks - Fed, ECB, BOJ - all announced tightening, as expected, and US GDP was higher than expected. The major events continue next week with BOE and RBA rate decisions, final PMIs, EuroZone inflation, and ending next week with the NFP.

Top Events in Review

Rate decisions dominated the week, first with the Fed hiking a quarter of a point as expected.

The subsequent communication left markets with the impression that there would be no more hikes.

The ECB also raised rates by 25 bps, providing substantial ambiguity about whether a rate hike would be in the offing for September.

Press reports circulated that the BOJ would modify its YCC mechanism in the hours before the meeting, where the Japanese central bank agreed to add more flexibility to its yield control limits, effectively allowing rates on the benchmark 10-year yield to rise and boosting the yen.

Flash Eurozone PMIs disappointed and are expected to confirm the worst contraction in the manufacturing sector since covid.

Crude prices continued higher for the fourth consecutive week on a better economic outlook and improved earnings guidance from major oil firms.

Earnings provided a positive backdrop for the markets, with almost 80% of earnings reported by Wednesday beating estimates.

Biggest Market Movers

The Aussie was impacted by a drop in inflation followed by lower-than-expected retail sales as the conviction that the RBA will hike next week softens. AUD/USD plunged nearly 3% from its weekly top of $0.6824, with all eyes on $0.66 next.

Yen saw the largest gain in over a month against the British pound after reports that the BOJ would tweak policy and confirmed that YCC would be loosened, allowing yields to rise.GBP/JPY tumbled to 176.30, pending retest at 180.00.

DJIA chalked up 13 consecutive days of rises, matching a record set back in 1987, before worries about further rate tightening cut the rally off at the end of the week. The index reached 35750 before reversing towards 35h, with the round support likely determining the forward path.

The Week Ahead

NFP a Data Point for Fed

After the Fed said the next rate decision would be data-dependent, the first major data point is the release of the NFP on Friday. Gold could move towards $1990/oz or $1930/oz, depending on the greenback's strength.

The unemployment rate is expected to remain steady at 3.6%, with 190K jobs added in July compared to 209K in June. Average hourly earnings are expected to decelerate to 4.2% from 4.4% and report a second month above the inflation rate.

In the theme of rate decisions, the BOE is expected to hike once again with markets pricing in 25 bps, though a minority of economists warn that 50 bps can't be ruled out. Cable needs to break past $1.30 or $1.2759 for further clarity., with expected support at $1.2683.

The consensus for the RBA is still that there will be a hike when it meets on Tuesday, but the recent data has shaken its conviction, allowing for potentially more of a market reaction following the decision.

PMIs and Inflation

Flash PMIs were below expectations, and the major economies are expected to confirm that manufacturing has fallen further into contraction this week.

China's official manufacturing PMI is expected to be confirmed at 48.0, down from 49.0 prior and the third consecutive contraction. The private Caixin manufacturing PMI is expected to fall back into contraction at 49.0 from 50.5 in June.

US ISM Manufacturing PMI is expected to stay in contraction but buck the trend by rising to 48 from 46 prior. USD/JPY has a low at 138.00 and a  top at 142.00.

The EuroZone will publish its inflation rate, expected to decline to 5.2% from 5.5% prior, with the core rate coming down just a decimal to 5.4% from 5.5% prior. The shared economy will give a first look at its Q2 figure, which is expected to rebound to 0.3% from flat in the second quarter when it narrowly avoided falling into a technical recession. The Eurozone's unemployment rate is expected to increase to 6.6% from 6.5% in June. After falling over 1%, EUR/USD bulls might try to reclaim $1.10 unless the drop continues towards $1.0841.

Other Events and Earnings

On Monday, the BOE releases its consumer credit data for the UK. Tuesday has US JOLTs job openings. Wednesday sees Swiss consumer confidence and New Zealand jobs numbers. For Thursday, Australian and German trade balances are expected. Friday includes Canadian jobs numbers.

Earnings season is expected to reach fever pitch this week, with names reporting such as ON Semi, BP, Merk, Pfizer, Advanced Micro Devices, BAE Systems, Qualcomm, CVS, PayPal, Rolls-Royce, Apple, Amazon, Alibaba, Toyota, Next, WPP, Berkshire Hathaway, Enbridge.