RBNZ and BoC policy decisions; US CPI and many other global data will ensure high volatility. The results season is also starting.

Markets managed to recoup some losses in the first full week of July after a bruising first half. At the European close on Friday, major US indices were testing their weekly highs after a rather strong US non-farm payrolls report. The US Dollar, however, broke off its highs, which helped the EUR/USD and. al to turn a positive course in the European close. In other words, markets were signaling risk ON, as we looked forward to the week ahead. But shortly after Europe’s close, US indices pulled sharply off their highs, suggesting that this bear market is not over yet.

Before we dive into the outlook for the week ahead, let’s first discuss the June jobs report which was released earlier today on Friday.

US payrolls exceed expectations

US payrolls rose by 372,000 in June, easily beating expectations of 268,000. It was the third month in a row that employment beat expectations. The average hourly wage rose another 0.3% over the month, in line with expectations. Hot jobs data means the Fed has no reason not to continue its aggressive hikes. However, as we noted earlier, the NFP was never going to cause a major reaction as the market only cares about growth and inflation data at the moment.

So far, the US economy has managed to stay stronger than many other parts of the world, including Europe. In terms of inflation, the US CPI hit a new 40-year high of 8.6% last month. Consequently, the Federal Reserve decided to raise rates by 75 basis points on June 15 and signaled that more aggressive tightening was on the way.

Let’s see how the situation evolved in June. The latest CPI data is due on Wednesday as we now look forward to key events in the week ahead. The RBNZ and the BoC will make decisions on interest rates. Additionally, the coming week also marks the unofficial start of corporate reporting season. So there will be a lot to look forward to.

Key data releases in the coming week

Reserve Bank of New Zealand rate decision (Wednesday)

At 2%, the RBNZ already has the highest interest rate among developed countries. But on Wednesday, a third hike of 50 basis points should be added, to bring the OCR to 2.5%. The RBNZ generally leads the way, as it was one of the first among developed nations to begin withdrawing pandemic stimulus last year. Will we see NZD/USD base around key support at 0.6150?

US CPI (Wednesday)

Inflation has wreaked havoc on financial markets, and all attention will turn to the United States on Wednesday as the government releases the June CPI estimate. If the annual CPI accelerates further from the 8.6% recorded in May, this will likely lead to renewed pressure on risky assets, given that there has been talk of an inflation spike. Keep a close eye on the Nasdaq after it managed to break out of its descending wedge pattern. Will it be able to rise further and reclaim the 2021 low in the 12210 area? A weaker inflation impression will certainly help. But so far all attempts to escape have been unsuccessful.

Bank of Canada rate decision (Wednesday)

The BOC raised rates by 50 basis points in each of its previous two meetings. Will it be a treble of 50 basis point hikes or will the central bank emulate the Fed with 0.75% on this occasion? Governor Tiff Macklem hinted he was ready to act “more forcefully”, so the market pegged prices at 75 basis points.

USD/CAD has tested the 1.30 handle so many times but so far unable to move decisively away from it. Given the upcoming US data releases and the BOC rate decision, it is possible that we will see a significant break in either direction. Keep an eye out for this pair.

Other data highlights for the week

  • Tuesday: German ZEW survey
  • Wednesday: Chinese trade figures, British construction and industrial production
  • Thursday: Australian employment numbers and US PPI
  • Friday:
    • Chinese GDP and industrial production
    • U.S. Retail Sales, UoM Surveys and Empire State Manufacturing, among others

Among the highlights, China’s trade and GDP figures will be important while the ZEW survey released in Germany could see the euro start to drift towards parity. The eurozone economy is facing growing headwinds from Russia’s war in Ukraine, which has helped drive record inflation and a gas crisis. A recession cannot be avoided now. A weakening Euro means that more inflation will be imported into the Eurozone, which is not desirable right now. Thus, we could hear ECB officials start talking about the euro, even if they will have a hard time convincing the markets given the macroeconomic risks all pointing to the downside. Any hawkish rhetoric to raise the currency might fall on deaf ears.

Focus is on business profit

The quarterly results season will start in the coming week in a weak macroeconomic environment. Recession warnings are everywhere, with the stock market repeatedly failing to hold its recovery attempts. Brace yourself for further signs of recession as we are likely to see some rather disappointing sales and earnings in the upcoming earnings season. In a deteriorating macroeconomic environment, analysts have already cut their earnings estimates fairly quickly in recent weeks. So the bar has been lowered somewhat, but even so, expect to see some disappointment.

Many of the world’s major economies are expected to experience negative growth over the next few months, which will push the United States into a recession. Central banks around the world now have a single mandate and are aggressively tightening monetary policy in an effort to control inflation. They must bring down inflation, even at the cost of a recession. The Fed has been very explicit in terms of wanting to create a soft landing for the economy. They dare not lose what little credibility they have left.

Key earnings releases in the coming week

Tuesday: PepsiCo

Wednesday: Delta Air Lines

Thursday

  • TSMC
  • JP Morgan
  • Morgan Stanley

Friday

  • Wells Fargo
  • Citigroup
  • UnitedHealth