RBC Capital Markets

Week ahead: The highlights of the week’s calendar include Japan machine tool orders, Australia ‘flash’ PMIs, EZ ‘flash’ PMIs (see EUR), UK ‘flash’ PMIs (see GBP), Germany IFO survey, US durable goods orders, and US personal income & spending (see USD). Fed Chair Powell testifies to Congress on Tuesday, and the BoE policy decision will be on Thursday.

EUR: Last month’s euro area PMIs saw the headline services reading rise sharply to 55.2 as lockdown restrictions were eased across much of the region. The easing of restrictions continued in June. Accordingly, we look for a further acceleration in the euro area services ‘flash’ PMI (Wednesday) to 58.3. As for the manufacturing sector, activity continues to remain robust despite ongoing supply disruptions, and we expect the headline index to remain little changed at 62.9. Away from the headline indices, the employment sub-index is likely to show further improvement with the European Commission’s business surveys suggesting firms’ hiring expectations have rebounded in recent months.

USD: US household spending is shifting from goods to services. The May personal income and spending report (Friday) should see services spending beginning the process of making up for lost ground. On the income side, another sizable decline is expected as fiscal stimulus fades, but beneath the surface wages and salaries are still chugging along nicely. As we already know from the recent CPI report, inflationary pressures continue to build, and we think the PCE deflators will reflect that trend too.

GBP: The second and third steps of the government’s reopening plans in mid-April and mid-May were probably the most important, so despite the postponement of the final reopening step we still see scope for a further improvement in the services ‘flash’ PMI (Wednesday) to 63.7. The manufacturing PMI has now been above 50 for the past twelve months, and despite last month’s surge in new orders we expect the PMI to drop back slightly to 64.0. No changes are expected to either the Bank Rate or asset purchases from the MPC meeting (Thursday). The meeting will be Chief Economist Andy Haldane’s last, and we expect Haldane to again dissent on proceeding with the current £150bn QE programme as planned and expect an 8-1 vote in favour of maintaining the current bond purchase target at £875bn. The growth outlook has brightened further since the last meeting with activity rebounding smartly from the economic reopening.

CAD: RBC Economics sees no reason to deviate from StatsCan’s ‘flash’ estimate of -5.1% m/m for April retail sales (Wednesday). A ‘flash’ estimate for May should show another decline, likely in the -3% to -4% m/m range, based on lockdown restrictions. Friday’s USD/CAD daily close above a 1-year resistance trendline at 1.2355 points to a major shift in sentiment in USD/CAD, with the bullish long-term trend reversal exposing 1.2502 and 1.2653 next on the topside.