Next week’s market movers
- In the UK, the BoE’s "Super Thursday" policy meeting will probably keep investors on the edge of their seats, amid speculation that the Bank could raise rates as early as this year.
- In Australia, the RBA is anticipated to remain on hold. We think the focus will be on whether policymakers are comfortable with the latest surge in Australian yields as well as AUD appreciation.
- The US jobs data for July are expected to show the labor market continues to tighten. Although that could support expectations for another Fed hike this year, we believe inflation data may be the main determinant of the Fed’s next move.
- We also get key economic data from the UK, the US, New Zealand, and Canada.
On Monday, Eurozone’s preliminary CPI data for July will be in focus. Without a forecast available yet, we see the case for both the headline and core CPI rates to have held steady, with risks skewed to the upside. The bloc’s preliminary Markit composite PMI showed that prices charged rose only modestly in July. We also have to note that the July 2016 monthly CPI prints, which will be dropping out of the yearly calculation now, were -0.6% mom and -0.7% mom for the headline and core rates respectively. Therefore, all these imply that even in case we get soft monthly prints now, as long as they are better than the dreadful prints of July 2016, they could still drag the yearly rates higher.
On Tuesday, during the Asian day, the RBA will announce its policy decision and the forecast is for the Bank to keep rates unchanged once again. July has been anything but boring for AUD traders. The fuss began after the minutes of the latest meeting showed a discussion among policymakers regarding the level of the neutral policy rate in Australia, which was enough to raise speculation that the Bank may be preparing for lift-off soon. However, a few days later, both Governor Lowe and Deputy Governor Debelle poured cold water on such expectations, signaling that markets shouldn’t read too much into that conversation. Lowe made it clear that the Bank is likely to stay on hold for the foreseeable future.
Nonetheless, we think that this meeting will be closely watched for any updated signals on policy, and in particular, whether the Bank is comfortable with the latest rise in Australian yields as well as AUD appreciation. Indeed, both Lowe and Debelle noted that a lower AUD would be desirable, implying there is a modest risk that the statement accompanying the decision communicates a similar discomfort with regards to the recent surge in AUD. Looking further ahead though, we believe that the main determinant of whether the RBA will turn hawkish anytime soon may be the wage data for Q2, due out in mid-August, given the latest concerns of RBA officials with regards to wage growth.
In the UK, the manufacturing PMI for July will be in focus. Then on Wednesday, we get the construction index for the same month and subsequently on Thursday, the all-important services print is due out. Even though no forecast is available for any of these figures, we think they will be closely tracked by the market for an indication of how the economy entered the third quarter, following a relatively uninspiring GDP print for Q2.
From the US, we get a raft of economic data. The core PCE price index for June, personal income and spending data also for June, as well as the ISM manufacturing PMI for July, are all due out. Kicking off with the core PCE index for June, without a forecast available, we see the case for the yearly rate to have remained unchanged. Even though the Markit composite PMI for the month showed that average prices charged by firms increased at the fastest pace so far this year, the month’s core CPI rate remained unchanged, supporting a similar reaction in the core PCE rate too.
Turning to personal income and spending, expectations are for income to have slowed somewhat from the previous month, while spending is expected to have accelerated somewhat. We view the risks surrounding the income forecast as skewed to the upside, perhaps for an unchanged rate, given that average hourly earnings accelerated slightly during the month. Meanwhile, we view the risks surrounding the spending forecast as tilted to the downside, bearing in mind that retail sales declined in June.
Last but not least, we get the ISM manufacturing PMI for July and then on Thursday, we get the non-manufacturing index for the same month. Both of these figures are expected to have declined. Even though these may be discouraging news for FOMC policymakers, given that both of these indices are still expected to remain at healthy levels, we doubt that such declines are going to materially affect market expectations regarding the timing of the next rate hike.
On Wednesday, during the Asian morning, we get New Zealand’s employment report for Q2. Without a forecast available, we see the case for the unemployment rate to have remained near the current low level of 4.9%, while the labor force participation rate may have risen again, for the 6th consecutive quarter. We base our view on the ANZ job ads figure, which continued to rise throughout Q2, suggesting that the labor market may have continued to tighten. Another quarter of strong employment growth would probably be pleasant news for RBNZ policymakers, but coming on top of the notable slowdown in the CPI for Q2, we doubt that these data will be enough to make the Bank shift away from its neutral bias anytime soon.
From the US, we get the ADP employment report for July, two days ahead of nonfarm payrolls. The forecast is for the private sector to have added 185k jobs, notably more than the 158k in June. Such a solid print could heighten speculation that Friday’s NFP will also meet its forecast of 180k. Having said this though, we have to sound a note of caution. Even though the ADP print is the only major gauge of the NFP, the correlation between the two figures has fallen notably in recent months.
Thursday is "Super Thursday" in the UK. Besides the BoE rate decision and the meeting minutes, we also get the quarterly Inflation Report, which will be presented by Governor Carney at a press conference after the meeting. At its June meeting, the Bank kept its policy unchanged, but the vote to remain on hold was 5-3, much tighter than the forecast of 7-1.
In the aftermath of the meeting, Governor Carney and Chief Economist Haldane, both hinted that a rate hike may be in the works soon, which raised speculation that the vote may get even tighter and that we may get a hike as early as at this meeting. Nevertheless, soon thereafter, data showed that UK inflation slowed notably, raising doubts as to whether the Bank will indeed proceed with a hike in the foreseeable future. According to the UK overnight index swaps, the market fully prices in a 25bps rate increase in December 2018.
Our own view is that the effect of the weak sterling may start filtering out of the inflation equation in a few months, which combined with the softer energy prices may bring the inflation rate closer to the BoE’s target. What’s more, even though GDP growth accelerated slightly in Q2, its pace remains lackluster. Soft economic growth and potentially easing inflationary pressures may keep policymakers’ hands away from the hiking button, at least for this year. Even if the BoE decides to hike earlier, we expect this to be a one-off move and not the beginning of a normalization period.
We also get the US ISM non-manufacturing PMI for July, as we already outlined above.
Finally on Friday, the US employment report for July will take center stage. The forecast is for nonfarm payrolls to have risen by 180k, less than the 222k in June. The unemployment rate is forecast to have ticked back down to 4.3%, while average hourly earnings are forecast to have accelerated on monthly terms. However, this would still cause the yearly rate to tick down.
Overall this would be another employment report consistent with further tightening in the labor market, which will be pleasant news for Fed officials, and may bring somewhat forth market expectations with regards to the timing of the next rate increase. While the June "dot plot" points to another rate increase this year, according to the fed funds futures, the market is only pricing in roughly a 50% probability for such action.
As for the bigger picture, we believe that the main determinants of whether the Fed will indeed proceed with another rate increase this year are inflation data. The latest prints showed that headline inflation slowed for the 4th consecutive month, while the core rate remained unchanged after falling for four months in a row as well. In our view, a strong rebound in inflation is needed before rate-hike expectations rise materially and help the dollar reverse its latest downtrend.
We also get employment data for July from Canada, though no forecast is available yet. Neither the Markit nor the Ivey PMIs for the month have been released yet ether, so we do not have any gauges of how the labor market fared in July. In any case, these data will be closely watched amid heightened speculation for another BoC rate hike this year. At the time of writing, market pricing suggests that another hike by year-end is fully priced, according to Canada’s overnight index swaps. As such, we think that the risks surrounding the Loonie moving forward are likely tilted to the downside. If economic data and developments are encouraging over the next months, they would only confirm current market pricing for a hike and may thus have little effect on CAD. On the other hand, however, in case economic indicators deteriorate, expectations for a hike could come down, possibly dragging the Loonie down with them.
