Saxo Spotlight: What’s on investors and traders radars this week?
APAC Strategy Team
Summary: Big week ahead with another jumbo rate hike expected from the Federal Reserve and about 30% of S&P500 companies reporting earnings. Key to watch will be what Fed Chair Powell guides for the path of interest rates from here, and any signs of concern from the slowdown in economic momentum. Will the gains in US Treasury yields and the USD return? Likewise, big tech earnings take the limelight to gauge any impact on consumer spending so far from high inflation and rate hikes, and spending and hiring plans remain on watch. Also on the radar will be the growth and inflation prints from the Eurozone, inflation prints in Asia from Australia and Singapore, as well as China’s manufacturing PMI.
Another jumbo Fed rate hike amid signs of economic weakness
The Federal Reserve is expected to tighten policy further in the week ahead, with most officials so far signalling a 75bps move is on the cards. A second consecutive 75bps Fed interest rate increase would increase the federal funds rate range to between 2.25-2.5%, a territory that is considered neutral which means it is no more stimulating the economy. This suggests the pace of rate hikes may slow from here, and that will be the key thing to watch out for this week especially at Fed Chair Powell's presser. Economic data from the US has been mixed, showing some signs of some weakening despite a still-strong labor market, but we think inflation will continue to be a concern and keep the Fed's action aggressive. Still, the Fed is likely to preserve some ammunition for future meetings as key economic data is due after the July meeting and that would suggest that 100bps remains off the table for now. A day after the Fed decision we will get the US Q2 GDP growth print, which for now is expected to be mildly positive at 0.5% (seasonally adjusted and annualized) after -1.6% in Q1. Atlanta Fed's GDPNow model predicted real GDP growth of -1.6% for Q2, suggesting a technical recession cannot be completely ruled out. Q1 GDP was negative because of a sharp deterioration in net exports and an exceptionally high trade deficit in March. This is likely to reverse in Q2 as net exports improve. However, consumer spending was likely weaker in the second quarter, still somewhat supported by services demand, amid fading fiscal support and higher interest rates. Key areas of weakness will be inventories and private non-residentials construction. Also worth watching will be consumer confidence, durable goods orders and home sales also scheduled to be released this week.
No signs of easing in Eurozone inflation, even as growth concerns mount
Eurozone price pressures remain elevated, and another higher print is expected for July in the week ahead. Meanwhile, Eurozone GDP growth is likely to signal further economic weakness as the threat of Russia curbing gas flows continues to loom. High energy prices are curtailing the spending power of households, with real incomes for households in Germany, Italy and Spain expected to drop by at least 2% this year. Eurozone PMIs reported on Friday suggested manufacturing taking a hit due to the high commodity and labor costs, and the manufacturing PMI dipped into contractionary zone. Services PMI also weakened but remained in marginally expansionary territory. Still, the scope of another 50bps rate hike by the European Central Bank in September remains high as the window to tighten is fast diminishing, but sovereign spreads will stay on watch due to the limited impact expected from the ECB's anti-fragmentation tool announced last week.
IMF to further downgrade its global growth estimate
The IMF is set to cut its global GDP outlook 'substantially' in its next update due on Tuesday. The outlook for the global economy has “darkened significantly” in recent months, the head of the IMF has warned, and the world faces an increasing risk of recession in the next 12 months. Ceyla Pazarbasioglu, the IMF’s director for strategy, policy and review spoke at the G20 meeting in Bali, noting the array of risks faced by the global economy including surging food and energy prices, slowing capital flows to emerging markets, the ongoing pandemic and a slowdown in China. IMF's global GDP growth estimate was cut to 3.6% at the April review from 4.4% earlier.
China’s Manufacturing PMI is expected to remain subdued
Market economists are expecting China’s manufacturing PMI – which is scheduled to release on Sunday July 31 – to come in at 50.3 for July, just a touch better than the June reading of 50.2 and barely moving higher from the expansion/contraction threshold of 50. Non-manufacturing PMI is expected to fall to 53.7 in July from 54.7 in June. The weaker-than-expected emerging industries PMI reported last week, pick-up in Covid-19 related restrictive measures, and the turmoil in the property market are cited as contributors to the weak estimates.
China’s Politburo convenes this week to discuss about economic policies for 2H2022
The Politburo of the Chinese Communist Party is scheduled to meet this week. The market will be looking for hints and signals about China’s economic policy in the second half of the year from the readouts and statements coming out from the meeting.
Singapore and Japan's Tokyo inflation are due this week
Singapore's inflation likely nudged higher in June, coming in close proximity to 6% levels from 5.6% y/y in May. While both food and fuel costs continue to create upside pressures on inflation, demand-side pressures are also increasing as the region moves away from virus curbs. House rentals are also running high due to high demand and delayed construction limiting supplies. The Monetary Authority of Singapore tightened policy further this month in a surprise move, and more tightening can be expected in H2 even as growth forecasts may likely be revised lower after Q2 GDP growth missed expectations. Japan's nationwide CPI for June came in above the Bank of Japan's 2% target again, and Tokyo CPI for July is due in the week ahead. Consensus expectations point toward another higher print of 2.4% y/y for the headline measure and 2.2% y/y on the core measure, signalling inflationary pressures will continue to question the Bank of Japan's resolve on the ultra-easy policy stance.
Will Australia’s economic utopia end with higher-than-expected rates? CPI and retail data is key this week
Australian inflation data due Wednesday is expected to show inflation rose to 6.3% y/y in June-ending quarter, up from 5.1% in Q1 with upward pressure coming from fuel, food, non-alcoholic drinks, housing and utility bills. It will likely show Australian prices are rising at their quickest pace since 1990. This strengthens the case for the RBA to hike by 0.75% in August given inflation will likely continue on a runaway train for now. Secondly, what also gives the RBA room to hike is unemployment is a record lows, and retail spending in Australia is at a record high. Fresh retail data released for June on Thursday will be key to watch. The market expects 0.6% retail spending growth, following May’s 0.9% jump. Department store and café, restaurant and takeaway food spending has seen the most growth while spending on clothing/foot ware/accessories has been slowing; and we think these two behavioural shifts will continue, while intertest rates rise and covid restrictions stay relaxed.
Busiest earnings week; 30% of S&P500 companies report. Reports will have to beat expectations to support the equities rally
Poor tech outlooks weighed on Wall Street; so far with SNAP and Twitter guiding last week for a slowdown in marketing spending. This week’s blockbuster of 175 of companies reporting; will likely show how much corporate America’s balance sheets have been restricted in Q2 by higher costs and higher rates, logistics issues, and how much the higher US dollar will impact forward earnings. We will be watching to see what companies guide for 2022; and how much these factors will continue to bite into in 2022. The market will need to see results not as bad as expected, in order for the S&P500 and the Nasdaq to continue to rally. If results are weaker than expected, then the market will remain vulnerable to a sharp pull back. Big staple stalwart names like Coca-Cola (KA) and McDonald’s (MCD) roll out earnings first on Tuesday July 26tth. While in tech Microsoft (MSFT) reports Wednesday with Apple (AAPL) and Intec (INTC) on Friday July 29th. In industrials Boeing (BA) results will be watched Wednesday July 27, everyday essential good company Procter & Gamble (PG) reports July 29.
Oil and tech earnings in the week ahead
With oil prices staying higher in the second quarter, earnings for oil majors including Shell, Exxon Mobil, TotalEnergies and Chevron, remain on watch for next week. Shell already flagged last week a potential $1 billion gain from soaring margins at the unit that processes crude into fuels and chemicals. TotalEnergies has also said recently that its refining business had an “exceptional” performance in the period. More importantly, forward guidance will be key as gains in oil prices have stalled for now and some governments are demanding increased taxes on energy companies. Tech earnings will also accelerate into the week, with key players Alphabet, Apple, Amazon, Microsoft and Meta on the radar. We will possibly hear of more cuts in spending and hiring plans as cost pressures reign.
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