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Fed to hold rates, unlikely to bow to Trump’s pressure.
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US GDP, PCE and jobs reports eyed too as August 1 deadline looms.
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BoC and BoJ decisions, Eurozone and Australian CPI also in focus.
Fed to likely stay on pause, risk Trump’s wrath
The Federal Reserve meets on Tuesday amid a cooling trade war and is widely expected to leave interest rates unchanged on Wednesday for the fifth time this year, even as President Trump relentlessly pressures the central bank to slash borrowing costs. But aside from the drama with the White House, the July meeting will be significant nevertheless, as a dovish tilt is possible, amid the doves within the Fed becoming more vocal. Not only that, but September is one meeting away and some kind of messaging will be necessary if a rate cut then is on the cards.
The latest dot plot and minutes of the June meeting revealed an almost 50-50 split among FOMC participants between those that prefer to lower rates sooner rather than later and those that are inclined to remain on pause for the foreseeable future. Not so long ago, there was growing talk that the Fed might surprise with a cut in July, but the subsequent data quashed the speculation.
CPI inflation measures edged up in June and there was a solid increase in nonfarm payrolls. Unfortunately for the Fed, the next NFP report isn’t due until two days after it meets, while the next inflation data – the PCE price indices – will be released the following day. This makes the July gathering a tricky one for Chair Jerome Powell, who faces a daily barrage of insults by Trump.
But Powell himself had left the door open to a July cut, amid lack of clarity about the strength of the economy and the inflationary effects of Trump’s tariffs, and his instincts may be right. Underneath the hood, the June jobs report wasn’t so strong as there was a notable slowdown in private sector employment. And with the number of trade deals being agreed finally gathering pace, the risk of a sharp jump in average import duties on August 1 has come down substantially.
Thus, the Fed is on track to resume its easing cycle in September as the majority of policymakers have been predicting. Flagging the likelihood of a rate cut in September while holding them steady for now is probably the best compromise Powell can achieve at this moment in time. This would unlikely be enough to satisfy his critics, but all the indications are that Trump is not currently planning on firing Powell – whether by upping the pressure on him to resign or finding legal grounds to do so such as using the costly renovations of the Fed headquarters building to allege misconduct.
All eyes on NFP, PCE and GDP reports
On the data front, it’s going to be a jam-packed agenda, as apart from the NFP and PCE inflation figures, there’s also the advance GDP report, as well as a slew of other releases.
First up on Tuesday are the S&P CoreLogic Case-Shiller 20-City Composite Home Price Index, the consumer confidence index for July and the JOLTS job openings for June. Pending home sales and the ADP employment change will follow on Wednesday, while on Thursday, Challenger Layoffs and the Chicago PMI for July will be the other second-tier releases.
All those indicators will be watched closely for wider clues on the health of the economy but are unlikely to attract as much attention as the week’s data highlights, the first of which is Wednesday’s advance GDP reading for the second quarter.
The jump in imports in the first quarter before higher tariffs kicked in was a big drag on GDP, which contracted by 0.5%. It’s expected to have rebounded by 2.5% in the June quarter as most tariffs were put on pause. Still, this data will be seen as somewhat outdated as investors and policymakers are more eager to see where the economy is headed.
The Fed is worried about how much inflation will rise over the coming months while keeping one eye firmly on the labour market. The June CPI numbers already pointed to some price hikes due to higher tariffs. If Thursday’s PCE inflation readings do the same, particularly core PCE, then the Fed might even forego September, and this is why a 25-bps rate cut at that meeting is only two-thirds priced in.
The Cleveland Fed’s own Nowcast model isn’t predicting any fireworks, however. The core PCE price index is estimated to have stayed unchanged at 2.7% year-on-year in June, but headline PCE is forecast to have picked up to 2.5% from 2.3%.
Potentially even more crucial will be the July payrolls numbers out on Friday. The headline print is expected at 102k, down from 147k in the prior month. The unemployment rate is projected to tick up to 4.2%, and growth in average hourly earnings to accelerate slightly to 0.3% month-on-month.
Also important on Friday will be the ISM manufacturing PMI, which is expected to improve from 49.0 in June to 49.6 in July.
Any weakness in the upcoming data would likely boost rate cut bets for September but investors are increasingly sceptical about the possibility of a third reduction in 2025 so the downside risks to the US dollar are somewhat limited.
Will the BoJ talk up rate hike expectations?
If the greenback does come under greater selling pressure, it’s more likely to be down to the strength of other currencies, such as the yen, which received a leg up from the US-Japan trade agreement.
Whilst there’s a sizable risk that Japan’s economy will take a hit from this new deal, as it still leaves Japanese exporters worse off from where they were before the trade war, the end of the uncertainty does potentially pave the way for the Bank of Japan to restart its tightening campaign. The BoJ last hiked rates in January and following the deal, investors have ratcheted up their bets of another 25-bps increase in the policy rate by year end, helping the yen to recover from near the 150 level against the dollar.
For the July meeting, which takes place on Wednesday and Thursday, the odds of a policy change are near zero, although the Bank will publish its latest quarterly outlook report. Should policymakers revise up their forecasts for inflation and see reduced risks to growth, rate hike expectations could further intensify, boosting the yen.
In terms of data, preliminary industrial output for June is out on Thursday, along with retail sales for the same month.
BoC to stay on hold as Canada hopes to avert 35% tariffs
Before the Fed and Bank of Japan decisions, it will be the Bank of Canada’s turn on Wednesday to set rates. But the meeting could turn out to be a non-event as the BoC is not anticipated to announce any changes, keeping its overnight rate at 2.75%.
It’s been a tough few months for Canadians, least of all for BoC policymakers who’ve had to worry about both a resurgence in inflation and a recession as the country’s biggest trading partner is threatening tariffs of up to 35%. Although the steeper levy rate won’t apply to goods covered under the USMCA agreement, it could nevertheless cause significant disruption to trade between the two neighbouring countries, potentially pushing the economy into a recession.
According to the BoC’s latest outlook survey, businesses are a little less pessimistic than in the prior quarter, as the recent trade deals have boosted hopes that Trump and Prime Minister Mark Carney will be able to reach some kind of an agreement before August 1.
But with more than 70% of Canada’s exports destined for the United States, it’s probably too soon to rule out a recession. (Thursday’s monthly GDP reading will provide an update for May). At the same time, Canada’s retaliatory tariffs of 25% on certain US goods is pushing up prices domestically. Even before the onset of the trade war, underlying inflation in Canada began to head higher and this limits the scope for rate cuts should the economic picture deteriorate further.
For now, and in the absence of a trade deal announcement over the next few days, the BoC will likely maintain the same tone as in the June meeting, with the risks to the Canadian dollar being tilted sightly to the downside.
Eurozone data may fail to excite
It’s not just Canada that’s in a rush to reach a trade agreement with the US as the European Union has also not struck a deal yet, although reports suggest that negotiators are closing in on one. The European Central Bank has already done its bit to safeguard the Eurozone economy from the trade war risks and decided to keep rates on hold in July for the first time in eight meetings, having halved the deposit rate to 2.0%.
Policymakers likely want to retain some firepower in case trade tensions with America escalate again as time is running out before the August 1 deadline. But assuming that a deal is agreed, it could be several months before the ECB cuts again, if at all. Hence, next week’s data may not spur much reaction in the euro.
The preliminary GDP estimates for the second quarter are due on Wednesday, followed by flash CPI numbers for July on Friday.
Will Australian CPI give RBA the green nod?
In Australia, quarterly CPI data could be crucial for the Reserve Bank of Australia’s next policy decision, something that Governor Michelle Bullock had referenced when justifying the surprise hold in July.
Australia’s statistics office won’t begin publishing a complete monthly CPI dataset until November. Until then, the RBA is putting more weight on the quarterly release than the experimental monthly reads.
The second quarter figures are due on Wednesday when the RBA will be hoping to see a further moderation in the core CPI measures. As for headline CPI, it dipped to 2.1% in May, but the RBA wants to see a similar decline in the quarterly print before trimming rates again.
A rate cut at the RBA’s next meeting in August is not fully priced in so the Australian dollar could extend its recent gains if the CPI figures are stronger than expected, further denting easing bets. Meanwhile, traders will also be watching Chinese manufacturing PMI due on Thursday.
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