The conundrum of improved growth and slowing inflation continues to bedevil central bankers as the opposing dynamics lead to conflicting policy prescriptions on normalization. But there’s a new wrinkle as QT, quantitative tightening, comes into view, alongside the more traditional tool of rate management, each of which have differing implications for bond markets. And the differing views of hawks and doves have resulted in a clash of commentary that’s done more to confuse and vex the markets regarding the course of policy, rather than provide stability through transparency. The markets will remain hypersensitive to policy actions and policy-speak near term, while keeping a close eye on inflation and growth data.
United States: U.S. markets will continue to assess Fed Chair Yellen’s testimony last week, where she remained optimistic on growth, but hedged on “transitory” inflation outlook. Headlining the data slate will be June housing starts, July PMIs and trade prices, none of which will be crucial for trading. Housing starts (Wednesday) are forecast rising to a 1,190k pace in June following the 5.5% drop to 1,092k in May. However, a rise in construction jobs last month suggests upside risk. The July Empire State index (Monday) is seen falling back to 15.0 after jumping 20.8 points to 19.8 in June (which was the highest since September 2014). Also, the July Philly Fed index (Thursday) should dip to 24.0 following the 11.2 slide to 27.6 in June. The 43.3 print from February was the highest going back to January 1984. The June trade price data (Tuesday) will be of interest. Import prices are forecast falling 0.5% after dipping 0.3% in May, with petroleum the main factor behind the weakness. Export prices should edge up 0.1% following a 0.7% drop in May where declines in food and ag prices weighed. Other releases on this week’s calendar are the NAHB homebuilder survey for July (Tuesday), May Treasury capital flows (Tuesday), and weekly initial jobless claims (Thursday).
Canada: Canada’s calendar has a healthy helping of economic data this week, but nothing from the Bank of Canada. However, the economic data could influence expectations for the September announcement. The June existing home sales report is expected to be released on Monday, with a 5.0% y/y drop projected for total sales. Manufacturing (Wednesday) is seen rising 1.0% m/m in May after the 1.1% improvement in April. Retail sales (Friday) are projected to grow 0.3% m/m in May after the 0.8% gain in April. CPI is expected to dip 0.1% in June (m/m, nsa) after the 0.1% rise in May, leaving a slowing in the annual growth rate to 1.0% in June from the 1.3% y/y pace in May. But the June CPI is of little importance to the near-term policy outlook, given that the BoC is looking through the temporary factors (decline in auto prices and electricity costs) that are holding back total and core inflation growth. CPI will become more important later this year, when the temporary nature of the presumed factors restraining inflation will be tested.
Europe: All eyes will be on the ECB this week as traders look to the central bank for direction. Conflicting messages from ECB officials exacerbated volatility in recent weeks, and nerves are likely to remain high. The ECB is widely expected to be heading for tapering early next year, although Praet and Draghi are wary of committing prematurely to exit steps and have been instrumental in keeping the QE easing bias in place. Data releases this week are unlikely to add further ammunition to the arguments of the hawks at the council. The final reading of Eurozone June HICP inflation (Monday) is widely expected to be confirmed at just 1.3% y/y from 1.4% y/y in May, and clearly below the ECB’s 2% limit for price stability. However, base effects from energy prices are actually largely to blame for the slowing versus May, and core inflation ticked higher in the June preliminary to 1.2% y/y from 1.0%, as did the German headline rate. Still, with German PPI inflation seen slowing in May, the doves around Praet and Draghi will continue to argue that the low inflation environment still warrants a substantial degree of monetary stimulus. The ECB has acknowledged though, that growth is strengthening and that adverse deflation scenarios are no longer looking likely. That prompted the move to a neutral stance on rates in June. And, the expected further improvement in Eurozone consumer confidence (Thursday) to -1.1 from -1.3 should back expectations for ongoing robust growth going ahead. German ZEW investor confidence (Tuesday) meanwhile is likely to reflect market concerns about the impact of tapering as global central banks eye exit steps. The Eurozone also has current account data for May (Thursday), and there’s a German 30-year Bund sale (Wednesday). The ECB releases its bank lending survey (Tuesday).
UK: This week’s schedule brings the June inflation report (Tuesday), where expected headline CPI to remain at 2.9% y/y, a four-year high. The sharp y/y weakening in sterling following the Brexit vote in June last year has kindled inflation, and at least three of the current eight-member MPC committee (normally nine, with one position currently vacant) are now itching to reverse last August’s 25 bp cut in the repo rate. Official retail sales for June (Thursday) has us expecting a 0.2% m/m rebound after the sharp 1.2% contracting on May.
Japan: Japan is closed on Monday for Marine Day holiday. The BoJ meeting (Wednesday, Thursday) will be a focal point given the world-wide interest in all things central banking. No changes in policy are expected in either rates or stimulus. The Bank may, however, downgrade its inflation outlook, while upping expectations for the economy, consistent with recent global patters and according to recent market chatter. Data includes the June trade report which expected the balance to flip to a JPY 500.0 bln surplus, from the JPY 204.2 bln shortfall in May. The softer yen likely supported a bounce in exports after three months of weakness. The May all-industry index (Thursday) should fall 1.0% m/m based on declines in retail sales and industrial production, after the prior 2.1% increase.
Australia: The June employment report (Thursday) is the highlight this week. A 20.0k gain is projected following the 42.0k improvement in May. The unemployment rate is seen rising to 5.6% from 5.5%. The Reserve Bank of Australia (Tuesday) releases the minutes to the July 4 meeting where the cash rate was left steady at 1.50% and Governor Lowe’s statement was consistent with an unchanged stance over the rest of the year as the August 2016 easing continues to roll through the economy.
New Zealand: New Zealand’s calendar has Q2 CPI (Tuesday), expected to rise 0.1% (q/q, sa) after the 1.0% gain in Q1. The Reserve Bank of New Zealand’s next meeting is on August 10.
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