Summer doldrums are unlikely to take place as investors keep a close on eye on the trade front and if continued economic data deterioration will prompt central banks aggressive call for action. It appears the PBOC is set on a slow devaluation of the yuan, while the US is set to deliver the nightmare scenario on tariffs on September 1st. The Trump administration is expected to become more vocal about the currency manipulation and we could hear more threats about devaluing the dollar, even though it would be unsuccessful unless it was a coordinated effort with other central banks, which is extremely unlikely.
Expectations for a trade to happen this year have quickly faded away with many jumping on the camp that thinks it will occur after the 2020 election. Trade updates will continue to drive the markets and we should see it get a lot uglier before September.
This week the focus will fall heavily on economic data from Germany, China and the US. On Tuesday, the release of US inflation could tip the scale for some Fed watchers who are on the fence about beginning an easing cycle. The release of Chinese industrial production and retail sales data will show how much further the trade war is crippling their economy. Wednesday, we will see if the German economy contracted and we will get a good look at how risk averse hedge funds have become with the release of their 13F filings. Thursday, the Norway’s central bank should finally end all interest rate hike talk and become more neutral on rates. Mexico is also expected to cut rates from a decade high 8.25% level on growth concerns and on declining inflation. Earnings season is lightening up and we will see key results from Tencent, Alibaba, Cisco, Walmart, Nvidia and JD.com.
We should see a period of calm this week while illiquid conditions could keep things exciting.
Central Banks this week
Norway Central Bank (Norges)
Thursday: It’s hard to imagine how weak the krone has been despite all the hawkish talk from the Norges. After hitting the lowest levels since the 2008 financial crisis, mainly due to the collapse of oil prices, we could see Gov Olsen keep rates steady but try to keep tightening on table.
Uncertainty is high on whether the bank will try to maintain a hawkish stance or pivot due to the recent PMI contraction in overall activity, slumping retail sales and production data.
Mexico Central Bank (Banxico)
Thursday: Mexico narrowly escaped a recession in the first half of 2019, prompting economists calls for a rate cut. There is a reasonable chance (27.8%) they could cut this meeting, but at the very lease they should queue up action for the September meeting.
The last decision saw one dissenter vote for a cut and another suggest falling inflation could warrant lower borrowing costs. Inflation declined for a third consecutive month so we should not be surprised if they decide to be proactive and cut, like many other central banks.
PBOC (could act anytime before end of summer)
Have not heard any strong speculation on when, but the PBOC is likely going to deliver a strong wave of stimulus as the trade war intensifies. Historically, the PBOC likes to deliver RRR cuts during illiquid times, like after the Hang Seng close on a Friday.
All central banks this week (for currencies that we offer):
Monday – No meetings
Tuesday – No meetings
Wednesday – No meetings
Thursday – Norway Central Bank (Norges) rate decision, Mexico Central Bank (Banxico) rate decision
Friday – No meetings, but be ready for the PBOC
Central Bank Speakers (at the time of writing)
Monday – No speeches
Tuesday – NY Fed releases Q2 Household Debt and Credit Report
Wednesday – No speeches
Thursday – No speeches
Friday – No speeches
Markets
USD – The July readings of CPI and retail sales could raise the case for the Fed to deliver a 50-basis point rate cut. The market is convinced the Fed will cut in the September, but Fed speak has not backed that view. The rest of the world is heavily in the dovish camp and markets are eagerly awaiting the Fed’s pivot to an easing cycle. Inflation is expected to tick higher, while retail sales should soften.
Bitcoin – It seems the regulatory scrutiny from US congressional leaders has dissipated for now. The search for yield has benefitted the crypto space and if we see more doom and gloom, Bitcoin may mirror gold’s gains. Bitcoin and other cryptocurrencies will see enhanced volatility as negative yielding debt boost the appeal for the risky asset.
Oil– Oil continues to be sensitive to trade war rhetoric. A surprise buildup is adding extra pressure to crude prices. Saudi Arabia is willing to do more to prevent a free fall, but hard to imagine what that would look like. The prolonged trade war has been a negative factor for global growth estimates. The lower the estimates the less energy demand that is forecasted putting downward pressure on oil. Weather (Hurricane Barry) and geopolitical (Iran vs US) has added some support to crude prices, but going forward with ample supply and a strong dollar prices could drop lower. Energy ministers will likely confirm the date for a key summit in the second week of September.
Further trade war escalation will likely continue to weigh on crude and energy traders will likely be skeptical to what more OPEC can do to stabilize markets.
Gold – Gold is at a 6-month high, and broke through $1,500 as the metal is very appealing to investors looking for a safe haven after the last round of trade war escalation. Outlook depends on rising uncertainty (Brexit, trade war, US 2020 elections). Central banks have gotten out of the metal’s way as three CBs slashed rates this week. The Fed could follow suit in September with a 25 basis points cut.
Politics
There seems to be no end to the unrest in the former British colony with protests becoming more violent and disruptive as the weeks progress. Reports suggest the 250,000 Chinese troops are camped across the border with China in Shenzhen. Hang Seng down almost 3% this week, could be heading for steeper losses. Suspected capital outflows are putting pressure on the upper limit of the USD/HKD band.
Risk of increased violence and a heavy-handed response from China. Troops moving in from across the “border” would be negative for risk and China/HK shares and see further capital outflows from the region. Asia might be caught up in contagion risk.
China – The USD/CNY daily fix by the PBOC will be a major focus, with the key 7.0 mark breached, and a continued weakening of the CNY would seriously dent risk appetite. Wednesday: On the data front, the main event of the week will be the release of retail sales and industrial production data for July. IP surprised last month with a sharp rebound from record lows (according to OANDA data). Expectations are for a lower reading for last month and, if confirmed, would be a negative for risk appetite.
We could see more evidence that the trade war is hurting the Chinese economy. No doubt Trump will jump on weak data with a Tweet, but trade talks do appear to be in limbo. China does not appear to be any rush to be panicked into a deal.
North Korea – North Korea conducted more missile tests this week but they all appear to have slipped “under the radar”. Generally, it is still seen as posturing ahead of a planned August military exercise by South Korea and the US. Only really becomes an issue if they move to the longer-range “projectiles”, which could reach the US mainland. It’s just sabre rattling.
Australia – Thursday: Given that the RBA has said it will be monitoring the jobs market in response to its two consecutive rate cuts, Thursday’s jobs report will take on additional significance. Last month’s data was disappointing but the unemployment rate is seen holding steady at 5.2% this time round.
After the RBNZ cut a larger-than-expected 50 bps on Wednesday, expectations for the next RBA move have increased, with market pricing suggesting a near 60% probability of a rate cut at the September meeting. A weak jobs report would confirm this outcome. Aussie is facing a sell-the-rally scenario.
India – Bilateral relations on the India-Pakistan border at Kashmir have taken a turn for the worse this week. While it is still early stages, there is a risk that it could quickly escalate to war stance.
While not a global game-changer, a war between the two neighbors could hit risk appetite in the region and force superpowers from both East and West to be dragged into the skirmish. That would be terrible for risk.
Italy – We are heading toward elections. The battle between PM Conte and Deputy Salvini will intensify as we could see a snap election this week, with a general election in the fall. This will complicate the negotiations with the budget with the EU.
BTPs however are welcoming an election because it might actual deliver a stable government. Italians would most likely benefit if elections yielded a more traditional right-of center coalition government.
South Africa – Speculation is growing that South Africa will lose their last investment grade status. Moody’s is expected to move up their review from November as government takes on too much debt from Eskom. The rand will likely trade on EM flows, which will mirror the overall direction of the dollar. A downgrade to junk however should see a major selloff with the rand.
North Korea – North Korea has conducted two sets of “projectile” test launches in the last week. They have all been short-range missiles so far and are seen as posturing ahead of a planned August military exercise by South Korea and the US.
Only really becomes an issue if they move to the longer-range “projectiles”, which could reach the US mainland. It’s just sabre rattling.
Upcoming Week
Monday, August 12th
3:00am ET CZK CPI m/m
6:45pm ET NZD Food Prices m/m
7:50pm ET JPY PPI y/y
9:30pm ET AUD NAB Business Confidence
Tuesday, August 13th
2:00am ET EUR Germany Final CPI m/m
3:00am ET EUR Spain CPI y/y
4:30am ET GBP Jobless Claims Change and ILO Unemployment Rate
4:30am ET GBP Average Weekly Earnings
5:00am ET EUR ZEW Germany Current Situation
5:00am ET EUR ZEW Eurozone Survey Expectations
6:00am ET USD NFIB Small Business Optimism
8:30am ET USD CPI m/m
7:50pm ET JPY Core Machine Orders m/m
8:30pm ET AUD Westpac Consumer Sentiment
10:00pm ET CNY Industrial Production and Retail Sales data
10:00pm ET CNY Fixed Asset Investment ytd y/y
Wednesday, August 14th
2:00am ET EUR Germany Q2 Preliminary GDP q/q
2:45am ET EUR France CPI m/m
3:00am ET CZK Q2 Advance GDP q/q
3:30am ET SEK CPI y/y
4:30am ET GBP CPI y/y
5:00am ET EUR Q2 Preliminary GDP q/q
5:00am ET EUR Eurozone Industrial Production m/m
8:30am ET USD Import Price Index m/m
9:30pm ET AUD Employment Change
Thursday, August 15th
12:30am ET JPY Revised Industrial Production m/m
4:00am ET NOK Norges Central Bank Rate Decision
8:30am ET USD Empire State Manufacturing Index
8:30am ET USD Initial Jobless Claims
8:30am ET USD Philly Fed Business Outlook
8:30am ET USD Retail Sales m/m
10:00am ET USD NAHB Housing Market Index
10:00am ET USD Business Inventories m/m
2:00pm ET MXN Mexico Central Bank (Banxico) Interest Rate Decision
4:00pm ET USD Net Long-term TIC Flows
6:30pm ET NZD Manufacturing PMI
Friday, August 16th
3:00am ET TRY Turkey Industrial Production m/m
4:30am ET HKD Hong Kong Q2 Final GDP q/q
8:30am ET USD Housing Starts & Building Permits
10:00am ET USD Preliminary University of Michigan Sentiment
