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EUR and USD symbols

FX

US - rising PCE, solid employment costs and personal income highlight inflationary pressures, personal spending beats

USD: The US employment cost index (ECI) for Q2 is up 1.33%QoQ, above consensus for a 1.2% increase with details also showing a stronger reading. Wages and salaries reaccelerate to 1.40%, just below the 1.46% Q3 2021 reading that first pushed the Fed to a more hawkish stance and private labor costs are up 1.53% - above 6% annualized. Meanwhile, core PCE inflation registers a more moderate 0.59%MoM gain and 4.8%YoY in June, opening up the widest gap with CPI since the early 1980s. Strength of the Q2 employment cost index stands in contrast to slowing average hourly earnings in the monthly jobs data but is consistent with the Atlanta Fed’s wage tracker. Away from inflation data, personal spending for June is up 1.1%MoM in nominal terms, which after adjusting for inflation is a soft 0.1%MoM real increase. Goods spending is up 1.6%MoM in nominal terms but flat in real terms while services spending is up 0.8%MoM nominal and 0.1% in real terms. Given Chair Powell’s emphasis on ECI in November 2021 and at last week’s press conference, the elevated reading is likely to keep the Fed’s focus on inflation concerns for now which points to a 75bp hike in September. 
 

Euro area stagflation risks worsening – raising the stakes for ECB policy beyond September 

EUR: Euro area headline HICP inflation climbs to a new high of 8.9% YY in July (consensus: 8.7%, Citi: 8.6%) while core HICP (ex food and energy) rises to 4.0% YY consensus 3.9%, Citi 3.7%) with core goods inflation up at 4.5% YY up from 4.3% in June and services HICP inflation up more than expected at 3.7% YY, highest since May 1994. Further increases are likely in coming months as temporary government measures expire and much higher gas prices push up housing energy bills in autumn and early next year. Citi analysts forecast a peak in headline HICP in September of around 9.8% YY that likely keeps pressure on ECB to hike 50bp in September.
 
EUR: Euro area GDP growth accelerates from 0.5% QQ in Q1 to 0.7% QQ in Q2 according to Eurostat’s flash release and above expectations (Consensus 0.2%, Citi -0.1%). Compared to the June 2022 Eurosystem staff projections, the level of real GDP in 2Q-22 is 1.2% higher than at the end of 4Q-21, instead of the 0.5% estimated cumulative gain. This is a meaningful difference that will likely narrow the output gap and strengthen some of the arguments put forward by ECB hawks to continue with a sustained pace of monetary policy normalization given the strength of spot inflation. However, Citi analysts note that euro area leading indicators have retreated sharply in recent weeks pointing to a deep recession in winter and have revised their euro area GDP forecasts for 2023 significantly lower, noting that Friday’s upside GDP surprises for Q2 2022 will probably only have limited bearing. Germany remains the worst performer, with a GDP print of 0.0% in 2Q-22, albeit after 0.8% QQ gain in 1Q-22 and Citi analysts expect this “reverse divergence” to likely continue through the summer, partly due to Germany’s relatively heavy exposure to Russian energy supplies.
 
Week Ahead
 
USD: US July Nonfarm Payrolls – Citi: 300k, median: 250k, prior: 372k; Private Payrolls – Citi: 225k, median: 220k, prior: 381k; Manufacturing Payrolls – Citi: 10k, median: 15k, prior: 29k; Average Hourly Earnings MoM – Citi: 0.4%, median: 0.3%, prior: 0.3%; Average Hourly Earnings YoY – Citi: 5.0%, median: 5.0%, prior: 5.1%; Unemployment Rate – Citi: 3.6%, median: 3.6%, prior: 3.6% - Citi analysts expect to see a slowing in the average pace of job growth at 300k. There are more signs of a loosening in labor markets, with initial jobless claims increasing to ~250k for the July payrolls survey reference week. Citi analysts also expect a moderate 0.4% increase in average hourly earnings while the unemployment rate is unchanged at 3.6% with 2-sided risks.
 
USD: US July ISM Manufacturing – Citi: 52.3, median: 52.6, prior: 53.0 - ISM manufacturing should decline further in July to 52.3, although with mostly balanced risks, consistent with generally softening activity data. Citi analysts also expect details of ISM manufacturing to be on the softer side, with the more forward-looking new orders component falling further below 50 in July. The employment index should also remain soft.
 
USD: US July ISM Services – Citi: 53.5, median: 54.0, prior: 55.3 - ISM services will likely take on increased importance after a surprising decline in services PMI below 50 in July. Citi analysts expect services ISM to fall but remain above 50. Other factors like the more forward-looking new orders component could remain stronger.
 
GBP: BoE board meeting – consensus expects BoE to hike 50bp this week. But with labor supply coming back, it becomes less certain as to whether a further policy-driven hit is necessary. Citi analysts expect a further a 25bp hike this week, with a 6-3 vote. BoE Bank Rate – Citi Forecast 1.5%, Consensus 1.75%, Prior 1.25%.
 
AUD: RBA Cash Rate Target: Citi forecast; 1.85% (+50bps), Previous; 1.35% (+50bps) – Citi analysts expect the RBA to increase the cash rate target by 50bps to a level of 1.85%. The team also expects forecast changes in the quarterly SMP to include the lifting of inflation forecasts for Q4 2022 from 5.9% to around 7.5%, lowering the unemployment rate to around 3.5% and GDP growth to around 3%.
 
NZD: NZ 2Q Labor Force & Wages: Unemployment Rate; Citi forecast; 3.3%, Previous; 3.2%; Employment Change QoQ; Citi forecast; 0.6%, Previous; 0.1%; Participation Rate; Citi forecast; 71.4%, Previous; 70.9%; Private Sector Wages QoQ; Citi forecast; 1.3%, Previous; 0.7% - NZ employment growth probably accelerated in Q2. Citi analysts also expect the private wage cost index to increase by 1.3%. This would be the highest growth rate in the history of the data going back to 1993 and lift the yearly pace of wage costs to 3.4%.
 
CAD: Canada Employment (Jul) – Citi: 30k, median: 15k, prior: -43.2k; Unemployment Rate – Citi: 4.9%, median: 5.0%, prior: 4.9%; Hourly Wage Rate – Citi: 5.9%, median: NA, prior: 5.6% - following a surprising decline in jobs in June, Citi analysts expect a modest rebound in July. However, uncertainty over the path of future job growth has increased and softening demand into next year would suggest downside risks to monthly job figures.
 
CNY: China July Trade Balance (USD bn): Citi Forecast 78.90, Prior 97.94; Exports (%YoY) – Citi Forecast 13.00, Prior 17.90; Imports (%YoY) – Citi Forecast 6.00, Prior 1.00 – Citi analysts  expect export growth to start to slow but imports to rebound in July. Altogether, Citi analysts expect growth to slow from 17.9%YoY previously to 13%YoY for exports and bounce back from 1%YoY to 6%YoY for imports, leaving a narrower but still sizable trade surplus at US$78.9bn.