With the Independence Day public holiday in the US today, it is a shortened trading week stateside. There is little data to get interested in apart from the ISM Services release (Tuesday). The European calendar has German ZEW Economic Sentiment (Tuesday) and a clutch of UK economic data (Friday). There is also the Reserve Bank of Australia (RBA) to watch for (Tuesday).
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ISM Services expected to show strong expansion but watch the employment component.
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RBA to stay relatively dovish, looking towards the next step on QE after asset purchases end in September
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German ZEW Economic Sentiment expected to continue to pull back from record highs.
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UK monthly GDP to have improved in the month May but no longer expecting any huge numbers
ISM Services to reflect inflationary pressures
Purchasing Manager Index surveys in the US continue to reflect a strong recovery from the pandemic. Strong expansion in new orders and business activity is helping to keep the services sector growth at an impressive rate, however, there is still the concern of input price rises and a shortage of labor.
Poor availability of workers since the pandemic took hold (a glut of early retirements, continued emergency unemployment benefits and childcare needs) are a drag on the sector. However, this supply bottleneck is also maintaining (and driving higher) wage growth and is feeding into inflationary forces that the Federal Reserve will be interested in.
USD strengthened in the wake of the ISM Manufacturing data last week.
Markets to watch: Major forex pairs, Gold, Wall Street indices
RBA still on the side of caution
The RBA is not expected to throw any curveballs tomorrow, especially with several major cities back in lockdown to try and counter the Delta COVID variant.
The RBA needs to see a stronger labor market and wage growth before being able to confidently commit to tightening monetary policy. It is still not there yet, with guidance for rate hikes currently suggesting 2024.
However, sitting on the immediate horizon is the end of its next round of A$100bn QE which will run out in September. What to do next will be the key issue to tackle for the near-term outlook of tapering asset purchases. This will be the key takeaway for tomorrow's meeting.
Markets to watch: AUD/USD
German ZEW Economic Sentiment to slip
With the Eurozone Composite PMI survey hitting a 15 year high in June, the German ZEW Economic sentiment for July will be eyed. Forecasts point to a slip back to 75.0 (from 79.8) despite the current conditions component expected to move into positive territory (to +5.0 from -9.1) for the first time since June 2019. This would though be a second successive month of slip lower even if this is from 20 year highs previously.
The German ZEW Economic Sentiment gauge is seen as a lead indicator for German growth and subsequently a key impact on the Eurozone data too.
Markets to watch: EUR/USD, German DAX index
UK monthly growth expected to begin to moderate
For the service sector (c. 80% of the UK economy) the big positive impact of coming out of COVID lockdown is already in the data for April. So the consensus is expecting the monthly GDP data (which has been steadily accelerating for the past three months) to begin to tail off slightly in the coming months.
Despite this, month-on-month growth is still expected to be strong with another +1.9% in May, whilst any upside surprises will still have the power to lend support to GBP. The Trade Balance for May is also announced at the same time and will be watched for getting the 2021 improvement back on track.
Markets to watch: Cable, EUR/GBP
Conclusion
It is a light economic calendar for the US this week but watch for ISM Services. The RBA meeting will impact the Australian dollar, German ZEW will impact the euro, whilst monthly US GDP will impact sterling.
