UNITED STATES
Friday is payrolls day. We will also have ISM-Manuf and Non-Manuf for June. The minutes from the June 13-14 FOMC meeting are out on Wednesday. In addition to the expected rate hike, the statement, implicitly, carried a hawkish tilt, de-emphasizing three consecutive months of below-expectations inflation. The FOMC seems to think that inflation is on track for 2% in 2018. It kept the dots basically as they were in March, and announced the start of balance-sheet reductions, a schedule of caps for the runoff of Treasuries and MBS. The minutes will help us understand these positions. Meanwhile, the economy shows small surprises with Q2 GDP tracking at about 2.2%saar.
Fed speakers: St. Louis Fed President Bullard (non-voter); San Francisco Fed President Williams (non-voter); Fed Governor Powell on “Housing Finance Reform;” and Vice Chair Fischer on labor productivity. The Fed will also publish its July 2017 Monetary Policy Report to Congress.
- Monday, July 3: ISM manufacturing, June (consensus 55.2, last 54.9). Regional surveys were positive: The Empire State (+20.8pt to +19.8), Richmond Fed (+6pt to +7), Kansas City Fed (+3.0pt to +11), and Chicago PMI. The note of caution was the result of the Philly Fed (-11.2pt to +27.6), admittedly the most closely watched regional index. Like most sentiment indexes after the election, the ISM is far more bullish than the underlying data on industrial production. Watch for new orders: in May, they were up 2pts to 59.5 but, overall, the index seesaws since the start of the year. A decline would be an indication that faith on tax and trade policies changes is waning.
- Thursday, July 6: ISM non-manufacturing, June (consensus 56.5, last 56.9). For non-manuf, the surveys were mixed, if not negative. The New York Fed (-4.0pt) and Richmond Fed (-6pt). Again, the Philly Fed was the wildcard (+10.4pt). The services sector underpins the economic recovery, and the nonmanufacturing ISM reflects it: the index has not registered a sub-50 (contractionary) reading since December 2009, and the 12-month pace of services spending has not contracted since January 2010.
- Friday, July 7: Nonfarm payroll employment, June (consensus +177k, last +138k, three- and six-month moving averages of 121k and 161k, respectively.). The labor market was already at full employment and may have improved further in June, likely driven by a faster pace of summer hiring than in the past several years. JOLTS data and anecdotal evidence suggest job openings are hitting record high levels. The Conference Board’s labor index is also at a new cycle high.Unemployment rate, June (consensus 4.3%, last 4.3%). If anything, the unemployment rate could tick up to 4.4%, as new entrants (students) cause the participation rate to rebound. Most likely, however, it will be stable. Recall that the ongoing strength of labor market led the FMOC, in June, to push their 2017/18 forecasts of the u-rate further below the natural rate of 4.6%.Average hourly earnings, (consensus +0.3%momsa, +2.6%yoy; last +0.2%momsa, last +2.5
BRAZIL
Temer was indicted, as expected. There is little chance that the Lower House will vote to have him stand trial by the Supreme Court. He will survive, ineffectually, until the end of his term. Nevertheless, the open warfare between the prosecutor’s office (PGR) and the presidency will continue, and new skirmishes will produce new news. For the President, some relief may come in September. The 4-yr term for the head of the PGR is up, and he named a new head, supposedly, less inclined to condemn the entire political class. The economy suffers, and last week’s data showed the negative impact on the fiscal accounts. The revenue budget for the first four months of 2017 was R$313bn; actual revenues, R$293bn. The loss is too large to recover in coming months. On the contrary, it will grow worse as the economy sinks (the MoF has revised its 2017 GDP forecast to 0.5%yoy and likely it will be lower) and expenditure races ahead of what is in the budget. Correctly, the MoF does not want to change the deficit target, itself a gigantic R$142bn. There was hope that the privatization and concessions program would bring additional moneys. This hope is also dashed. The alternative is to increase taxes, and they are coming. The effect, of course, will be to delay the recovery, further.
The week ahead brings new data on industrial production and inflation (IPCA).
- Tuesday, July 4: Industrial Production, May (consensus 0.6%momsa, 3.3%yoy; last, 0.6%momsa, -4.5%yoy). Most coincident indicators were up in May which should help sustain the positive, albeit modest, momentum from April when IP-momsa increased for the first time since Dec/2016. The yoy numbers reflect mainly changes in base-year data. IP has been down in 4 out of the last 5 years accumulating a loss of 18% from the previous peak in 2011. It could show a mild recovery in 2017 but, most likely, it will not.
- Friday, July 7: CPI (IPCA) Inflation, July (consensus -0.18%mom, 3.05%yoy; last, 0.31%mom, 3.60%yoy). A deflation! Favorable weather and cuts by Petrobras in domestic oil prices should produce deflation in household food and transportation prices. Moreover, the ongoing recession with the deleveraging of credit will likely exert a toll on prices of home appliances. Significant inflation persists only in healthcare due to companies’ pricing power and seasonal hikes in medical insurance costs.Last week, the National Monetary Council reduced the inflation target for 2019 to 4.25%; 4% in 2020. This year, the danger, if one may call it so, is for actual inflation to be below the floor of the band, 3.50%. The stage continues to be set for substantial reductions in interest rates, and the last poll by the Central Bank shows a median estimate for yearend, by the top-5 forecasters, of 8.00%. This is 225bp below the current rate, 625bp accumulated in the current cycle.The central bank broke the back of the inflation threat, helped by the recession and positive supply shocks. The danger, with the failure to pass meaningful reforms, is a renewed bout of adverse expectations and the COPOM is acutely aware of this. It had been suggesting a more conservative stance. The market associated “willingness to cut (fast)” to the approval of the MoF’s proposal for social security reform. With dilutions in the reform, and the Temer scandal, all bets were on hold. Lately, however, central bank president, Ilan Goldfajn, reworded their commitment: It would be enough to have a “significant” batch of reforms. Since the labor reform is expected to be approved, the bets are on, again.
IMPORTANT NOTICES:
This report is a general discussion of certain economic and geopolitical trends and forecasts. It does not constitute investment advice of any kind or constitute a recommendation to buy or sell any security or other financial instrument. Investors may not rely upon any of the conclusions or other statements contained herein.
Certain of the factual information contained herein was obtained from third party sources which the author considers reliable, but the accuracy of such information cannot be guaranteed.
Comments are closed.