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Deutsche – The Day Ahead…FXWW

From the FXWW Chatroom – USA: FOMC minutes, Markit services PMI (Jun F), ISM Non-Manufacturing survey (Jun), ADP employment (Jun), Initial jobless claims, Bloomberg consumer comfort; EMU: ECB’s Mersch speaks; UK: BOE’s Carney speaks; DEU: Factory orders (May); ESP: Industrial output (May); CHE: CPI (Jun); SWE: Industrial orders (May); AUS: RBA’s Heath speaks

US employment indicators & FOMC minutes in focus today…
With US markets closed for the Independence Day holiday it has been a predictably quiet session in markets overnight. Europe’s Stoxx600 eked out a 0.1% gain in light trading, with benchmark indices generally modestly weaker in Germany, France, Italy and the UK but modestly firmer elsewhere. Bond yields in the euro area were a smidgen higher after Bloomberg reported that some ECB policymakers were uncomfortable with the market pricing a first rate hike later than September or October next year. Gilt yields rose a little more than that following an unexpectedly strong service sector PMI reading. The PMI reading helped lift sterling, while the ECB report saw the euro erase some earlier modest losses. Earlier in the day China’s CSI300 returned to its losing way, declining 1.3% despite a better day for the yuan. The Hang Seng shed 1.1% but Japan’s Topix closed essentially unchanged.

The day’s economic data largest consisted of service sector PMI readings. In the euro area the final aggregate reading for June came in at 55.2, revised up 0.2pts from the flash estimate and up 1.4pts from the final reading in May. As a result the composite PMI was revised up 0.1pts to a final reading of 54.9, to be up 0.8pts from that seen in May. The country detail pointed to an even sharper lift in the German services sector than first estimated, with the flash reading revised up 0.6pts to 54.5 – a 2.4pt increase for the month. By contrast the French services PMI was revised down 0.5pts to 55.9 but was still up 1.6pts for the month. In Italy we learned that the services PMI rose 1.2pts to 54.3 in June while Spain’s index fell 1.0pts to 55.4. Looking elsewhere, the UK reported a 1.1pt increase in its services PMI in June, helping to lift the UK’s composite index to an 8-month high of 55.2. Japan’s services PMI rose 0.4pts to 51.4 in June, thus making a partial recovery from the decline seen in May. China’s Caixin services PMI rose 1pt to a 4-month high of 53.9 in June, thus moving it closer to its official counterpart.
Locally, Australia reported that retail sales rose 0.4% mom in May – an outcome that was slightly above expectations and on top of a small upward revision to growth in May (now 0.5% mom). While annual growth slipped to 2.5% yoy from 2.7% yoy previously, the level of spending over April/May is now running 0.9% above the average seen through Q1. In other news Australia’s trade surplus widened to AUD0.83bn in May, albeit after the April surplus was revised to AUD0.47bn from an initial estimate of AUD0.98bn. Exports rose a solid 4.0% mom in May – in particular led by a jump in exports of coal – but annual growth still slowed to 8.1% yoy. Imports had a strong month, rising 3.0% mom and 12.6% yoy (imports of consumer goods rose 5.6% mom in June). Australia’s twin service sector PMI surveys told a contradictory story in June. The CBA services PMI fell 3.2pts to 52.7, marking the lowest reading since the survey began in May 2016. By contrast the AiG services index jumped 4.0pts to 63.0, which is the highest reading since the survey began in 2003. In New Zealand the ANZ job ads index fell 1.6% mom in June. Advertising levels are now 2.2% below January’s high-point, which is consistent with the softening seen in other hiring indicators.
Before we take a look at the day ahead we would like to highlight our preview of the Q2 Australian CPI, which you can read here. We look for another relatively modest headline CPI outturn, matching the Q1 outturn at 0.4% qoq and leaving headline inflation at 2.1% yoy. We expect that both of the core RBA measures, the trimmed mean and weighted median, will print at 0.5% qoq, leaving trimmed mean inflation measure at 1.9% yoy and the weighted median inflation measure at 2.0%yoy. As far as the RBA’s forecasts are concerned, the May Statement on Monetary Policy outlined both year-ended headline and core inflation at around 2% yoy for Q2 2018, i.e. broadly in line with our forecasts. As such, we see few implications for the Bank’s policy stance if CPI prints as we expect.

We have a very quiet day ahead in the Asia-Pacific region today as far as economic data is concerned. Later in the day we will receive Germany’s factory orders Spain’s IP data for May. In the US, ahead of tomorrow’s official employment data, the ADP employment estimate and non-manufacturing ISM for June will be the main focus, while the weekly jobless claims and consumer comfort reports are also due. The minutes of last month’s FOMC meeting will also be parsed for any further insight on the Fed’s policy reaction function.

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