RBC Capital Markets

Week ahead: Q2 earnings announcements continue in the US and will be key for equity market direction this week, more so given the dearth of US economic data. Outside the US, the first July data (flash PMIs) in the Eurozone and UK will be the main focus (Friday) and Canada has May retail sales (tomorrow) and June CPI (Wednesday). There are no G10 central bank announcements scheduled this week, but SARB and CBRT both announce on Thursday.

EUR: Later this week we expect to see the further relaxation of social distancing measures across the euro area in July reflected in slightly better PMI readings this month. However, with all of the major euro area economies now out of lockdown, the direct marginal gain on economic activity from easing social distancing measures is much smaller.

AUD: The minutes from the July RBA meeting will be rather dated given the Victoria developments since 7 July, including the return to Stage 3 restrictions for most of the State. The minutes will likely strike a cautious tone and may well allude to the unfolding VIC developments and their implications. Ongoing support for further fiscal stimulus is likely to be repeated in the minutes and will be a central theme in the Governor’s speech later tonight, titled COVID 19, the Labour Market and Public‐Sector Balance Sheet, of which the message will likely be one suggesting that fiscal policy needs to do further heavy lifting at this stage of the fragile recovery.

JPY: Minutes of the June BoJ meeting are too dated to be of much interest. June CPI data tonight are expected to show annual inflation remaining negative on the BoJ’s target measure.

GBP: UK‐EU trade negotiations reopen today and are expected to last all week. A further easing of restrictions allowing large parts of the hospitality sector as well as hairdressers to reopen took effect from July 4. That, along with a relaxing of the 2‐metre social distancing rule, means that we expect a services PMI reading of 52.9 this month.

CAD: RBC economists see more upside than downside risks to Statistics Canada’s +19.1% m/m ‘flash’ estimate for May retail sales. Our card data points to a similar‐sized headline increase in June that would leave retail sales approaching year‐ago levels. See RBC Economics’ latest consumer spending tracker for more details. We expect the BoC’s three core CPI measures – between 1.4% and 1.9% in May – to be relatively steady at the May levels.

Danske Bank

The weekend was dominated by the EU Council summit in Brussels, where the 27 EU heads of state/government discussed the Multiannual Financial Framework for the years 2021-27 (the budget of the EU) as well as the EU Council’s proposed response to the current economic crisis. The latter consists primarily of the Recovery and Resilience Facility (RRF). At EUR560bn, this makes up the largest share of the ‘Next Generation EU’ (a temporary reinforcement of the EU budget for the years 2021-24) totalling EUR750bn, with funding stemming from EU bond issuance in three- to 30-year maturities with repayments in 2028 to 2058. The sticking point of the negotiations revolves around the share of loans vs. grants and what requirements should/can be attached to any funds paid out. The initial proposal saw the share of grants at EUR500bn out of the total EUR750bn but over the weekend this was gradually watered down and, on Sunday, EU Council president Charles Michel put forward a proposal for EUR400bn of grants. Bloomberg reported this morning that the Nordic member states and part of the ‘frugal countries’ (Denmark, Finland and Sweden) were not opposed to this number but that the Netherlands and Austria had set a hard target of EUR350bn.

Regarding the requirements, before the meeting these were largely expected to come from an economic reform standpoint, but the weekend added yet another layer as several countries, including the ‘frugal countries’, want the EU budget to be directly linked to the so-called ‘rule of law’ principle. This means that funds paid out to member states from the EU budget could be withheld if the principle is not observed. This has been met with resistance from both Poland and Hungary. An agreement on either the budget or the RRF was not expected this weekend, with both Dutch Prime Minister Mark Rutte and German Chancellor Angela Merkel downplaying any chances of success last week ahead of the meeting. This also means that the lack of an agreement so far probably won’t move markets much today. Instead, investors’ focus will be on the share of grants to be included eventually in the agreement. The EUR is unchanged versus most major currencies this morning. If an agreement is not reached this week, we would still expect it to be reached before the European Commission starts its holiday in August.

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