Danske Research Team
Danske Bank A/S
Market Movers
In the euro area focus is on the first release of the service PMIs in Italy and Spain. The Spanish figure has declined from above 60 in April and although it is still on a high level, focus is on whether the downtrend continued in July. In Italy the service PMI suggests stronger activity in line with the manufacturing PMI. We expect the UK service PMI to have declined from 58.5 to 57.0, which is still very high, indicating further output growth in services.
Euro area retail sales for June are set to drop in line with the German figure released last week. Private consumption has been the main driver behind the recovery in Q1 and in the first months of Q2 it remained solid despite headwind from the higher oil price. Consumer spending is still supported by progress in the labour market and we expect it to continue to support the euro area recovery in H2.
US ADP employment is released ahead of the import labour market report on Friday. Consensus is for ADP employment growth of 215,000 in July, which is a bit lower than the strong reading of 237,000 in June. The forecast for July is in line with our expectation for non-farm payrolls on Friday but ADP employment growth is not necessarily an accurate leading indicator.
ISM non-manufacturing is also due for release in the US and is expected to have increased slightly. The service sector has been less affected by the headwind from the stronger effective exchange rate and the ISM non-manufacturing has stayed higher than the manufacturing ISM.
Selected Market News
Atlanta President Lockhart says the Fed is close to being ready to hike interest rates. In an interview in the Wall Street Journal Lockhart said that the economy is ready for the first rate increase and it would take a significant deterioration in the data to convince him not to move in September. Lockhart’s is one of the first to comment since the FOMC meeting in July, delivering a very clear signal that the FOMC is seriously considering a rate hike in September. The hawkish rhetoric from Lockhart sent US equities lower while yields on 2Y US government bonds rose 7bp and the 2-10Y US yield curve steepened with 10Y yields rising almost 10bp. In the FX market, the USD rallied and EUR/USD trades close to the 1.0860 level this morning - more than 1.2% lower than yesterday.
Danmarks Nationalbank (DN) bought DKK40.2bn in FX interventions in July. It is the fourth consecutive month of DN purchasing DKK (worth an accumulated DKK142.6bn) and the fact that DN has conducted a sizable FX intervention without raising its policy rates indicates that its reaction function currently differs from its historical one. However, we expect the outflow from the FX reserves to continue in the coming months and that DN will eventually hike the rate of interest on certificates of deposits by 15bp within 3M and another 10bp within 6M to minus 0.50%. See Denmark:DKK40.2bn in FX intervention in July for more details.
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