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by Charalambos Pissouros

Weekly Outlook: Jul 9 – Jul 13; BoC Policy Meeting and ECB Minutes Under the Microscope. US CPIs in Focus as Well

Calendar 01

Monday appears to be a relatively light day with no major economic indicators on the agenda.

On Tuesday, during the Asian morning, China’s CPI and PPI for June are due to be released. The CPI rate is anticipated to have ticked up to +1.9% yoy from +1.8% in May, while the PPI is expected to have accelerated to +4.5% yoy from +4.1%. Australia’s NAB business survey for the same month is also coming out.

During the European morning, we have Norway’s CPI data for June. Expectations are for the headline rate to have risen to +2.4% yoy from +2.3%, while the core rate is forecast to have ticked down to +1.1% yoy from +1.2%. At its latest meeting, the Norges Bank kept interest rates unchanged as was widely expected, while in the statement accompanying the decision, it was noted that “the key policy rate will most likely be raised in September 2018”, a much clearer line compared to the “after summer” that was included in the previous statement.

Even if the core rate ticks down to +1.1% yoy, this would still be in line with the Bank’s forecasts and is unlikely to affect much market expectations with regards to the prospect of a September hike. However, in order to better examine whether the Bank will stick to that view at its upcoming gathering – set for the 16th of August –, we would like to wait for the July CPIs, as this will be the inflation data set officials will have to work with at that meeting.

From the UK, we get industrial and manufacturing production data for May. Expectations are for industrial production to have risen 0.5% mom after falling 0.8% in April, something that would drive the yoy rate up to +1.9% from +1.8%. Manufacturing production is forecast to have rebounded as well, to +1.0% mom from -1.4%, which would push the yoy manufacturing rate up to +2.0% from +1.4%. The case for higher yoy rates is supported by the manufacturing PMI for the month, which rose to 54.3 from 53.9 in April.

UK IPvsPMI 090718

The UK NIESR GDP estimate for the three months to June is coming out as well. At their latest policy meeting, BoE policymakers noted that the data released since the May meeting were consistent with their view that the slowdown in Q1 was temporary and they expected a +0.4% GDP growth in Q2. Thus, investors are likely to pay extra attention to the NIESR estimate in order to see whether BoE officials were right or wrong. The UK trade balance for the same month is also due to be released.

In Germany, we have the ZEW survey for July. Expectations are for the current conditions index to have slid to 78.0 from 80.6, while the expectations one is forecast to have declined further into negative territory. Specifically, the index is anticipated to have declined to -17.9 from -16.1.

In the US, JOLTs job openings for May are coming out, while from Canada, we get building permits for May and housing starts for June.

On Wednesday, the main event is likely to be the Bank of Canada rate decision. This will be one of the bigger meetings, which are accompanied by the Bank’s quarterly Monetary Policy Report and a press conference by Governor Stephen Poloz. At its latest meeting, the Bank decided to keep interest rates unchanged at 1.25% as was widely anticipated, but the tone of the accompanying statement was more hawkish than previously, laying the ground for a July hike and hinting at faster rate hikes thereafter.

BoC rates 090718

Despite the disappointment in Canada’s CPI for May and retail sales for April, recent hawkish remarks by BoC Governor Poloz, an overall upbeat BoC Business Outlook Survey for Q2, and a decent employment report last Friday, kept the market overwhelmed with regards to the prospect of a hike at this meeting. Thus, if this is the case, the attention will quickly turn to the accompanying statement, the economic projections and the press conference by Governor Poloz.

Immediately the day after the previous BoC decision, the US decided to end a two-month exemption and impose steel and aluminum tariffs on imports from Canada (Mexico and the EU as well), with the nation retaliating on the 1st of July. Therefore, even if officials decide to increase interest rates now, it will be interesting to see whether they keep hinting at faster rate hikes thereafter, or whether developments in the global trade arena will prompt them to return to a “cautious” approach with regards to future policy adjustments.

As for Wednesday’s economic indicators, during the Asian morning, Australia’s Westpac consumer sentiment index for July and the nation’s home loans for May are scheduled to be released.

Later in the day, we have the US PPIs for June. Expectations are for both the headline and core yoy rates to have risen to +3.2% and +2.6% from +3.1% and +2.4% respectively. Although the PPIs are not major market movers, accelerating producing prices could suggest accelerating consumer prices, and thereby raise expectations that the CPI rates, due out on Thursday, may rise as well.

US CPI PPI 090718

As for the energy market, we get the OPEC monthly report. Following the decision between OPEC and major non-OPEC oil producing nations to ease production curbs, market participants may be eager to find out what’s the cartel’s outlook for the foreseeable future.

On Thursday, during the European morning, the ECB releases the minutes from its latest policy meeting. At that meeting, the Bank signaled a QE-tapering after September and a clear end to the program in December, but the decision was subject to incoming data. What’s more, the Bank noted that interest rates are expected to stay untouched “at least through the summer of 2019 and in any case for as long as necessary”, which came as a disappointment to those expecting a hike in mid-2019. In our view, the interest rate guidance means that rates are likely to start rising in September 2019 the earliest.

ECB rates 090718

Following the latest reports that some ECB policymakers are uneasy market participants are not expecting a hike until December 2019, we will scan the minutes for any discussions as to whether September or October are indeed more likely candidates for a rate increase than December.

As for the data, we get inflation numbers for June from Germany, Sweden and the US. Kicking off with Germany, we get the final prints for the month, which, as usual, are expected to confirm the preliminary estimates.

As for Sweden’s numbers, the CPI rate is expected to have risen to +2.1% yoy from +1.9%, while the CPIF one is anticipated to have ticked up to +2.2% yoy from +2.1%. At its latest meeting, the Riksbank kept rates untouched as was widely expected and maintained the view that slow repo rate rises will be initiated towards the end of the year. However, apart from the usual dissenter, Deputy Governor Ohlsson, who supported raising the repo rate to -0.25%, this time around, we had another member with reservations. Deputy Governor Martin Floden advocated for a repo rate path with an initial increase of interest rates by 25bps in September or October.

Thus, accelerating inflation could spark more speculation that the Bank may act before December, but we would like to wait for July’s data – and especially the excluding energy CPIF rate – before we start assessing that likelihood, as the July prints will be the last inflation data officials will have in hand ahead of their next meeting, which is scheduled for the 6th of September.

Moving to the US, expectations are for the headline CPI rate to have risen for the 5th consecutive month. Specifically, it is expected to have ticked up to +2.9% yoy from +2.8% in May. The core rate is expected to have ticked up as well, to +2.3% yoy from +2.2%. Although the Fed drives the monetary policy wheel mostly based on the PCE inflation metrics, further acceleration of the CPIs above the Fed’s 2% objective could raise speculation that the PCE rates may continue to edge higher as well.

US CPIs 090718

The main message we got from the minutes of the latest FOMC gathering is that policymakers are willing to continue hiking rates this year and the next, and that they could allow rates to rise above their neutral level for some time. Thus, accelerating inflation is likely to strengthen further the case for the Committee to hike two more times this year. According to the Fed funds futures, the probability for the Fed to end the year with a total of 4 hikes is around 50%.

Finally, on Friday, Asian trading, China’s trade surplus is forecast to have risen to USD 27.2bn in June from USD 24.9bn in May. Both exports and imports are anticipated to have slowed to +10.2% yoy and +22.0% yoy, from +12.6% and +26.0% respectively. Japan’s final industrial production for May is also due to be released.

Later in the day, the only indicator worth mentioning is the US UoM preliminary consumer sentiment index for July, which will be accompanied by the 1- and 5-year UoM inflation expectations. Expectations are for the sentiment index to have ticked up to 98.3 from 98.2 in June.

 

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