Central Bankers Take to the Virtual Red Carpet
It’s been a relatively slow summer so far as we prepare for a huge run in to the end of the year. A potential multi-trillion dollar stimulus plan, Covid vaccine and fierce White House race awaits us in the final months so a few quieter summer weeks is perhaps not the end of the world. The Jackson Hole Symposium is the standout event late next week as we get an update from various central bank policy makers from around the world – albeit virtually – with the keynote coming from Fed Chair Jerome Powell.
Country
US
The main event for the trading week will be Fed Chair Powell’s Thursday speech at the annual Jackson Hole symposium. Due to the COVID-19, the event will be virtual. Powell will provide an update with the Fed’s policy framework review and reiterate their commitment to an extended period of ultra-loose monetary policy. With the ongoing public health crisis continuing to weigh on the economy and the slowness is Capitol Hill delivering more fiscal support, he will likely show a more relaxed approach towards inflation.
A wrath of economic data is unlikely to change the outlook investors have with the US economy. The housing sector has been the bright spot for the economy and any misses could add to the downside worries. The second reading of US Q2 GDP, the worst decline on record, could show a small revision. Investors will pay close attention to weekly jobless claims to see if the labor market continues to head in the wrong direction.
US Politics
As the economy continues to show signs of weakness, pressure grows on Capitol Hill to deliver the next round of stimulus. The economy has been heavily reliant on government aid and we could quickly find out that the recovery will quickly falter if they wait till late September to get a deal done.
Former-VP Biden did not see the typical momentum swing after the Democratic National Convention. This week, the four-day Republican National Convention will be held virtually, with President Trump’s formal nomination acceptance speech to take place on Thursday at the White House.
EU
Covid cases are on the rise across Europe, with Germany, France, Spain and Italy among those seeing a spike. This has already led to the UK imposing quarantine restrictions on those returning from all bar Germany, with a number of others including Croatia added to the list this week.
To make matters worse, the economic bounceback is already stalling, with flash PMIs in the services sector in particular showing strain. That’s unlikely to be helped by further restrictions being imposed if policy makers can’t get on top of the spike quickly. Employment in the surveys was another worrying point which suggests the region could have a difficult end to the year.
Brexit
As expected, this week’s talks have left both sides deflated and frustrated with the lack of progress. The key issues they were hoping to make headway on this week, including fishing and the level playing field, remain problematic as neither side is willing to soften their position. This is typical in these negotiations, as we’ve been seeing for four years. Both sides remain hopeful of a deal and, let’s face it, no-deal Brexit is the last thing they need in the midst of a pandemic. The UK is hopeful of one by the end of September while the EU is adamant that it must be concluded by the end of October in order for it to be ratified by the end of the year. So naturally, “crunch talks” will almost certainly be taking place in November.
UK
Brexit talks aside, it’s been a pretty quiet week on the UK side, with Friday’s PMIs the only notable release. While the numbers indicate a strong reopening, as we’ve seen across Europe, the bounce may be short-lived. Andrew Bailey’s Jackson Hole Symposium appearance next week is the only event of note for the UK.
Turkey
Turkey unveiled a big natural gas subsidy this week in the Black Sea which it hopes will enable it to reduce its reliance on imports and reduce its current account deficit. The discovery is around 320 billion cubic meters and President Erdogan is hopeful that production will be able to start in 2023. The currency has been volatile this week in anticipation of the news and there is already considerable doubt about the country’s ability to extract it without outside help, as well as how much it could actually access. The currency slid fell more than 2% from its high on Friday against the dollar, after the announcement.
China
A quiet week on the data front will see trader’s focusing on China’s industrial profits release, which should show the robust rebound continues even though doubts are emerging that they will be sustained. The global slowdown is contagious and not even China is immune to that. However, all eyes will be on incremental updates between the US and China.
Hong Kong
Hong Kong remains the main victim in the intensifying feud between the US and China. The US decision to suspend its extradition treaty and end reciprocal tax treatment on shipping is crippling Hong Kong’s economy.
India
Covid-19 continues to wreak havoc on the domestic economy, heightening fears about growth as the stability of the banking system. The rupee has resumed its slide and investors are growing nervous the consumer will continue to show signs of weakness as the virus spreads to the rural economy.
India’s economic conflict with China is heightening, if anything, but it’s fallout on the domestic economy is limited at this stage. India has more pressing concerns.
New Zealand
The New Zealand central bank will pay close attention to retail sales, trade, and consumer confidence releases. Financial markets are already firmly pricing in a massive drop with retail sales in the second quarter due to the lockdown. The RBNZ is considering negative rates and further signs of deterioration with the outlook will raise expectations for further easing.
Australia
Second quarter private capital expenditures are expected to plunge as coronavirus lockdowns wreaked havoc on the economy. The RBA has already signaled they expect a slower recovery, so unless the situation deteriorates further with Victoria state’s lockdown, they will likely remain steady with policy.
Japan
Japan has three big economic releases at the end of the week. The first is the June all-industry activity index which is supposed to rebound sharply. The next economic release will be the final machine tool orders reading for the month of July. The last key data release is Tokyo’s inflation which should show inflation slowed from 0.4% to 0.3%.
Markets
Oil
Oil prices are being dragged lower by the bounce in the dollar and the softening in risk appetite at the end of the week. OPEC+ stuck with the previously agreed increases in output this month, reducing the cut to 7.7 million barrels a day from 9.7 million before. The only exceptions are Iraq, Nigeria, Angola and Kazakhstan who missed their quotas and will need to make up. US production is still declining but with oil holding above $40, will that last? A weaker dollar will help support prices.
Gold
Higher real yields in the US took the legs from underneath gold again midweek and it’s continuing to struggle to find its feet again, trading around $1,935 as we head into the end of the week. The rebound in the dollar is weighing on gold but the greenback did break through significant support earlier in the week so remains on a bearish trajectory. That said, it’s been some recovery since then and a break above 94 in the dollar index would be a worrying development for the yellow metal.
