“The path of the economy will depend on the course of the virus.” This sentence was a new addition to the FOMC’s Monetary Policy statement and reflects the uncertainty of monetary policy. The number of coronavirus cases continue to grow, not only in the US, but worldwide. This week, the RBA and the BOE will also need to address this issue as hot spots have sprung up in Australia and the UK, forcing increased localized shutdowns. Meanwhile, US congress is far apart on a new relief package as extra unemployment benefits expired on July 31st. US Democratic Presidential candidate Joe Biden is expected to select a Vice President this week as election bickering continues. Beginning of month economic data should matter this month! The week culminates with employment data from the US and Canada on Friday.
Last Wednesday’s FOMC meeting didn’t really offer us any new information. However, it did reaffirm a grim outlook and lack of clear path due to the coronavirus pandemic. Fed Chairman Powell did note the positive economic data since the last meeting, however he also noted that since the recent spike in US coronavirus cases, early data suggests a slower pace of growth, at least for now. The US Dollar is at its lowest levels since May 2018, trading as low as 92.54 on Friday.
On the fiscal side of policy in the US, Congress has admitted they are far apart on approving any new relief package, and therefore, emergency benefits for unemployed workers expired on Friday. Although Republicans have dropped Trump’s insistence on a payroll tax reduction, at the heart of the issue is the increase of the emergency unemployment benefits. Democrats want to keep it at $600/week, while Republicans want to lower it to $200/week. Stay tuned!
As coronavirus cases continue to spike throughout the US, they also continue to spike around the world. In Australia, Victoria is going through a “second” wave of its own, primarily in Melbourne. The imposed 6-week lockdown is halfway through, yet cases continue to rise. Officials will review the data this week to search for answers. On Tuesday, the Reserve Bank of Australia (RBA) will have its interest rate decision meeting. Interest rates are at 0.25%, and unchanged is expected. The RBA may decide to increase bond purchases, however, expect more of the same “virus dependent” rhetoric as FOMC. AUD/USD has traded above .7200, however that has primarily been on US Dollar weakness.
The Bank of England (BOE) meets this week as well. Coronavirus cases have spiked in the UK, particularly in Manchester, Lancaster and Yorkshire, where UK Health Secretary Hancock has announced the roll back of reopening measures. The self-quarantine rule has also been extended from 7 days to 10 days. The BOE is currently has rates set at 0.10%. Unchanged is expected, however there has been some discussion of the possibility of negative interest rates by BOE officials. Although the central bank will most likely not implement this at the current meeting, watch for more dovish comments concerning the virus, the lockdowns, and negative interest rates. GPB/USD traded as high as 1.3170 last week, while EUR/GBP traded below .9000.
Rounding out the discussion on the increase in coronavirus cases, we must include higher cases numbers across Europe, such as Spain, which has had its highest numbers in 3 months. In addition, India and Brazil also reached new highs and cases are on the rise again in China. The IMF also approved a $4.3 billion loan to South Africa to combat the virus, the IMF’s largest coronavirus related loan so far.
Last week, US President Trump tweeted out some interesting comments regarding a possible delay in the US Presidential elections on November 3rd. This was quickly refuted by many, noting that Congress must approve any such measure. However, the comments did influence some markets, as S&Ps dropped 20 handles (only to later bounce). With the election roughly 3 months away and Republican and Democratic conventions later this month, comments, headlines, and mudslinging by Donald Trump and Joe Biden should have more effect on markets as we get closer and closer to the election. This week, Democratic nominee Joe Biden is expected to select his Vice President running mate. Front runners include Susan Rice, former US National Security Advisor and Kamala Harris, currently junior US senator from California.
The highlight by far for earnings season was on Thursday, when the combination of FAANG stocks FB, AAPL, AMZN, and GOOG blew estimates out of the water. However, these are the companies one would expect to outperform during a global pandemic. Over 1500 companies release earnings this week. The aggregate of all earnings will be watched to see how many of these smaller companies performed during Q2. Some of the more interesting earnings due this week include HSBC, BRKB, BP, DIS, HTZ, MRNA, KODK, and UBER.
Economic data will be closely watched this week as Global Manufacturing PMI Finals will be released for July. These could have an impact on markets as the preliminary readings (released July 24th) were taken before many of the spikes occurred in coronavirus cases. In addition, employment data for July will be released on Friday for both the US and Canada. US Non-Farm Payrolls will be particularly important, as weekly Initial Jobless Claims appear to have leveled off near 1.4 million! The current estimate is for 2.26 million new jobs, down from 4.8 million in June. Traders will keen to see how the uptick in coronavirus cases has affected employment change. Other important economic data is as follows:
Monday
- Global Manufacturing PMI Final (JUL)
- Japan: GDP Growth Rate Final (Q1)
- China: Caixin Manufacturing PMI (JUL)
- US: ISM Manufacturing PMI (JUL)
Tuesday
- Australia: Trade Balance (JUL)
- Australia: Retail Sales (JUN)
- Australia: RBA Interest Rate Decision
- Canada: Manufacturing PMI (JUL)
Wednesday
- Global Services PMI Final (JUL)
- New Zealand: Employment Change (Q2)
- Australia: RBA Chart Pack
- China: Caixin Services PMI (JUL)
- EU: Retail Sales (JUN)
- Canada: Trade Balance (JUN)
- US: ADP Non-Farm Employment Change (JUL)
- US: Trade Balance (JUN)
- US: ISM Non-Manufacturing PMI (JUL)
- Crude Inventories
Thursday
- New Zealand: Labour Costs Index (Q2)
- Germany: Factory Orders (JUN)
- UK: BOE Interest Rate Decision
- US: Initial Jobless Claims (Week ending Aug 1st)
Friday
- RBA Statement on Monetary Policy
- China: Trade Balance (JUL)
- Germany: Trade Balance (JUN)
- Germany: Industrial Production (JUN)
- Canada: Employment Change (JUL)
- US: Non-Farm Payrolls (JUL)
Chart of the Week: Monthly US Government 2Y Yields
Source: Tradingview, FOREX.com
End of month always offers up great monthly charts to get a good look at the longer-term direction of an instrument. This month was no exception. Since November 2018, US 2Y yields have been moving in one direction….lower. Recall that September of 2018 was (the first time) stocks sold off aggressively before bouncing on December 24th of that year. Stocks bounced to all-time new highs (green line) while US 2Y yields consistently moved lower have and closed July as its lowest level EVER, near 0.115. Even with the large rebound in stocks after the selloff in March this year, yields continued to move lower (stocks and yields traditionally move together). Although the RSI remains in oversold territory, there is no indication it is ready to turn higher. Traders and investors will be waiting to see if short-term rates turn negative.
There is a lot going on this week with Coronavirus headlines leading the way. Central Bank meetings will be closely watched, along with July’s economic data.
Stay safe and have a great weekend. Please remember to always wash your hands!
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