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US data prints on the soft side, Russia central bank to stay on hold
US data in focus as USD extends losses
Durable goods orders printed well above median forecast suggesting a solid recovery in June after two months of contraction. The headline gauge increased 6.5%m/m versus 3.9% expected and an upwardly revised figure of -0.1% in May. The upside surprise was essentially due to a sharp bounce in new orders for aircraft, thanks to the Paris Air Show (23-25 June). Excluding the volatile transportation components, core durable goods orders came in below estimates, printing at 0.2%m/m versus 0.4% expected and 0.6% previous reading. Overall, the report suggests that the manufacturing activity continues to expand at a moderate pace, while the anaemic demand for consumer goods such as vehicles and electronic products signals households’ consumption is not ready to take of yet, which is of bad omen for inflation.
Talking about inflation, the core personal expenditure index for the second quarter is due for release later today. The gauge is expected to have increased 0.7% (SAAR), down from a rise of 2% in the first quarter. Although the slowdown in inflation pressures has already been documented through the last months, financial markets are not immune to sharp adjustments should the gauge surprise in either direction.
US Q2 GDP is anticipated to have accelerated to 2.7% (q/q annualised) compared to a reading of 1.4% in the previous quarter, mostly due to heightened expectations for personal consumption - 2.8% (saar) consensus and 1.1% in Q1.
On Friday, EUR/USD stabilised at around 1.17 after printing a multi-year high at 1.1777 on Thursday. The broad-based dollar weakness of the recent months was enhanced by the Fed’s dovish statement released on Wednesday. Investors will have to wait September to get further clarity on both the ECB and Fed thinking, which means the market will become more sensitive to economic data than usual, especially inflation figures.
Russia: Rate decision over sanctions fears
The ruble is trading sideways around 60 ruble and this may not last long as the USDRUB pair is under pressures. While the Russian economic data are improving, there are other geopolitical issues that may have strong consequences on the future of the Russian economy. Indeed, U.S senate has finally approved further strengthening of sanctions which would prevent Donald Trump from lifting them. Now Trump must revise this legislation which sounds contradictory knowing that his relation with Russia during his campaign are under investigation. There may be there a conflict of interest.
Some say that there is now growing risks that Russia, under the US sanctions, could face decades of low growth. Other economic fundamentals such as low oil prices, which remain below $50, are also weighing on the Russian economy. Inflation, even though declining, are still very high and should likely end up to 5% before year-end (4.4% at the moment). We believe that the Central Bank of Russia has some room for normalizing its monetary policy. In addition, the CBR needs to guarantee price stability because of sanctions will which will drive policymakers not tighten rates. As a result, key rate is then set to remain at 9%. We target 58 ruble for one dollar in the medium-term as we consider the ruble is still one good carry trade with, even though existing but limited downside risks.