Main Macro Events This Week
Turkey, trade, and tariffs dominated the headlines last week, though so far it’s difficult to quantify any real economic effects. Negative references to tariffs were widespread in the University of Michigan consumer sentiment report and have been noted in the Fed’s Beige Book. Trump warned that the US would not take the issue “sitting down,” with the Treasury prepping more sanctions/tariffs and rating agencies downgrading Turkish debt to “junk”. Also, the Fed’s Jackson Hole symposium begins on Thursday, with Chair Powell’s keynote address Friday. The global data calendar is thin and will keep the focus on other exogenous and geopolitical factors.
Sino-US trade talks will resume this week with “low level” talks scheduled for Wednesday and Thursday. Just the whiff of a resumption in negotiations was sufficient to staunch a probe below 25k in the Dow and 2.8k in the S&P 500 last week. While any major breakthrough on the thorny issue seems doubtful in the near term, reports of a possible Trump-Xi summit helped boost Wall Street further heading into the weekend. The WSJ indicated negotiators are working on a “road map” for talks on trade issues that could end with a meeting between the two leaders at multilateral summits in November. That may not forestall the next round of $200 bln in US tariffs on Chinese products by month-end, though substantive progress could buy some time. Note that Mexico cited progress on NAFTA negotiations and hopes for a conclusion mid-week, pending lingering issues on the rules of origin in the auto sector. A breakthrough on Mexico/NAFTA represents a very bullish signaling risk.
United States: The week of August 20 will be relatively light on the US data front, but the minutes of the July 31-August 1 FOMC meeting (Wednesday) will likely be of interest to market participants for any indications regarding the future course of policy. Markets see FOMC on course to raise rates two more times this year, in September and December, barring any shocks to the economy. Regarding the data, existing home sales (Wednesday) are expected to rise following declines in the prior three months. New home sales (Thursday) are also expected to rise, partially reversing June weakness.
FOMC minutes to the latest policy meeting aren’t likely to contain much for the markets as there weren’t any surprises from policymakers. As expected, the Fed left policy on hold with an 8-0 vote. The statement did include an upgrade to the growth outlook, consistent with what had been seen in the data leading up to the meeting. Growth was characterized as “strong,” up from the “solid” at the June 12-13 meeting. Inflation was said to have moved “close” to the 2% target. Rate guidance was repeated with Fed saying “gradual increases in the target range with the federal funds rate will be consistent with sustained expansion in economic activity.” Fed also reiterated risks to the outlook appear “roughly balanced.” The policy statement did not include any comments on trade frictions and tariffs, but these were likely discussed. However, other than the potential for slower growth and higher inflation, both of which have been mentioned in Beige Book reports, the discussion will most likely be hypothetical at this stage. Mexico’s Economy Minister hoped to finish up bilateral issues with the US on NAFTA by the middle of this week, citing most issues as “advancing well” as talks continue. An agreement with Mexico on NAFTA would be the first significant trade deal for Trump after stepping up pressure on allies and foes alike.
Canada: Bank of Canada speakers feature this week, as Senior Deputy Governor Wilkins and Governor Poloz participate in panel discussions. However, markets expect that the appearances this week are unlikely to offer any fresh policy insights – Wilkins (Monday) will participate in a panel discussion at the Central Bank Research Association, Frankfurt, Germany. Poloz is in Jackson Hole on Saturday (August 25) participating in a panel at the Fed’s annual gathering. The Bank will announce rates on September 5. Expectations suggest that BoC will look past the 3.0% y/y rise in July CPI amid temporary factors (seasonal jump in travel tour prices was a stand-out) and core inflation measures that are holding at 2.0%.
Europe: Market jitters continue with Turkey contagion risks and Sino-US trade relations remaining in focus and overshadowing the data calendar. ECB starts to slowly return from the summer break and Bundesbank President Weidmann will attend a Foreign Press Club in Berlin on Thursday. However, markets do not expect ECB to turn dovish, despite the renewed widening of Eurozone spreads and the spike in Italian yields. ECB Monetary Policy Meeting Accounts, similar to the FOMC minutes, is expected to come out on Thursday as well.
The latest sell-off in Italian assets was to a large extent related to confrontational comments from Deputy Prime Minister Salvini, who implied that EU deficit rules were partly to blame for the Genoa bridge disaster as they prevented necessary maintenance. The rise in Italian yields is less a speculative attack as markets fear that the populist government could be flirting with an exit from the monetary union. Italy appears to be more sensitive to Turkey contagion, while the country’s effective exposure may suggest this is also related to political resistance to severing the link between bank and government debt, which remains higher in Italy than in other major Eurozone countries. Italy may still need ECB, but the country is also a litmus test for the view that a too accommodative ECB policy is reducing the kind of market pressure that forces governments to implement structural reforms.
UK: The calendar is relatively light this week, though Brexit negotiations, which recommenced last Thursday after a summer hiatus, will continue and will likely generate some potentially market-moving headlines. As has usually been the case, anything that points towards a no-deal exit from the EU could be taken as a Sterling selling cue, and anything suggesting that a deal can be worked out could be taken as a Sterling buying cue. Cable last week racked up a sixth consecutive week of declines, with political and associated Brexit-related risks keeping the Pound in a lower trading band. Latvia’s foreign minister said on Friday that there was a 50-50 chance for a no-deal Brexit, which UK’s foreign minister Hunt concurred with, remarking that “time is running out.” The main data this week are monthly government borrowing figures (Tuesday), the August CBI surveys for industrial trends (Tuesday), and distributive sales (Thursday).
Japan: Consensus expects that the June all-industry index (Wednesday) will increase 0.3% m/m versus the prior 0.1% increase. The July inflation data will be the week’s focal point. The national CPI (Friday) consensus forecast suggests a rise to a 0.4% y/y rate from 0.7% last month, while core inflation is expected to remain relatively stable at 0.6% y/y. Inflation still remains well below BoJ’s 2% target.
Australia: RBA governor Lowe (Tuesday) is expected to speak at an Australian Securities and Investments Commission event. Assistant Governor (Financial Services) Debelle will also speak about low inflation at the Economic Society of Australia Business Luncheon on Wednesday.
New Zealand: Retail sales will be out on Tuesday, with imports, exports and the trade balance expected to come out on Friday.
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