Market sentiment remained volatile this week with further declines in US yields despite last week’s hawkish Fed surprise. Comments from Fed members confirmed that a debate on QE is on the cards, but also that policy rate changes are not around the corner. EUR/USD remained below 1.20 and we see scope for further USD upside after the summer (see FX Strategy – Snap reversal of reflation has taken EUR/USD lower, 21 June). Bank of England kept its policy rate and bond buying pace unchanged and pledged to maintain its accommodative policy stance until there is clear evidence that inflation will stay above target for a sustained period. Discussions on the ECB strategic review are also gathering pace in the Governing Council. While ECB policymakers still remain apart on a new inflation strategy, there is growing consensus to include climate and owner-occupied housing in their decisions. As we argued in ECB Research Strategy Review: ‘leaving no stone unturned‘, 18 June, we expect a rather muted market reaction to the strategic review.
The euro area recovery picked up pace at the end of Q2 according to June PMIs, with business activity growing at the fastest rate in 15 years thanks to a strong rebound in the service sector. In the US PMI services fell, but volatile transport services might have played a role and we do not see it as a cause for concern. After a ‘hot’ summer we believe the global manufacturing cycle is set to peak during Q3 as some of the strong tailwinds behind the boom are about to fade (see also Research Global – Manufacturing cycle to peak in Q3, 21 June). We see scope for Europe’s manufacturing boom to extend into H2 21, with the turn of the cycle slightly lagging China and the US, but we do not think that the European manufacturing cycle can escape abating global momentum for long (see also Research Euro Area – Tide is slowly turning for European manufacturing, 22 June).
Swedish politics was plunged into turmoil, after a majority in the Swedish Parliament supported a non-confidence vote against Prime Minister Löfven and his Social democrat-Green coalition government. The constitution gives the PM two options: 1) to resign and let the speaker investigate options for a new government backed by parliament or 2) call for snap-elections (held within three months). Despite the uncertainty we do not think it will have much of a market impact, see Research – Sweden in political crisis, 21 June.
Next week the key event for markets will be the June US jobs report, where the question will be whether “weak” jobs growth continues due to temporarily higher unemployment benefits. The June ISM manufacturing will also be monitored for any signs of accelerating/subsiding supply side constraints and inflationary cost pressures. In Europe, focus is on the June flash HICP print which should show a further uptick in core inflation to 1.1% in our view, but with headline holding steady at 2.0%. We look for a broadly unchanged Chinese manufacturing PMI in June as strong external demand and slowing domestic demand are pulling in opposite directions. We also keep an eye on oil prices, which lately touched USD/bbl 76 as a rebound in travelling is boosting demand. Higher oil prices have supported market inflation expectations and a continued rise could add to inflation risks. In Japan, the quarterly Tankan business survey is likely to paint a picture of a Japanese economy still heavily supported by the global manufacturing boom but only slowly improving services activity.
