On a week which will see an early close in the US on Monday and a holiday on Tuesday due to Independence Day, we are still going to get some action in terms of events, the most important being nonfarm payrolls for the month of June and some PMI data from different countries.
Monday – Manufacturing PMI day
We get a lot of Manufacturing PMI data today from different countries such as: Germany, UK, US and China.
Unsurprisingly the expectations are that the numbers from China and US will be above 50 which would signal an expansion. And the Caixin PMI for China was released overnight – 50.5 vs the expected 50.2.
For UK and Germany, the expectations are for readings below 50 which would signal a contraction.
All this further highlights the divergence between Europe and US, China when it comes to the health of the economy.
The US economy showed a much better than expected GDP growth, even during an interest rate hiking cycle.
Europe on the other hand is still being held back by its energy crisis and in the case of the UK – Brexit.
However, with energy markets now sort of normalizing, our view is that it won’t take long for Europe to recover.
Tuesday – US Independence Day
Holiday in the US, so maybe markets will be quieter than normal. The only significant event for the day is the RBA Interest rate decision. It’s expected that the Australian central bank will raise rates by 0.25%, even though CPI last week showed a much lower than expected inflation.
Friday – US Nonfarm payrolls
This is the big one for this week. What interests us is mainly the avg hourly earnings, as it could indicate where inflation is going to be headed. In our view, a higher-than-expected reading would not be taken well by markets. With the recent rally in tech stocks, this could start a possible correction, especially if the CPI number also comes in higher than expected later this month.
That being said, our view is that inflation is likely to continue to slow down, so we don’t expect a beat on avg hourly earnings.
The headline number will also be interesting because so far, the US job market has been very resilient. With strong GDP figure, we believe that hard landing scenario has been avoided, and the US will avoid a recession while inflation will likely go down to 2% within the next 6-12months.
If this materializes , it is very bullish for investors and it would mean that the Fed managed to win Its fight with inflation without crashing the economy, while also leaving enough room to be able to ease conditions should things start to go wrong. It’s dreamland scenario which is slowly starting to materialize in our view.
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