Key CPI reports for UK and CA, China data and FOMC minutes: The Week Ahead
It may be the middle of the US summer, but economic data keeps coming thick and fast. A defiantly strong set of economic data from the UK piles the pressure on the Bank of England (BOE) to keep tightening, and makes next week's Consumer Price Index (CPI) report as relevant as ever. Canada's inflation report could also be a proxy hike for the Bank of Canada (BOC) if it remains too sticky, and we also have minutes from the Federal Open Market Committee (FOMC), the Reserve Bank of Australia (RBA), and key employment and wages data for Australia.
The week that was:
- US CPI was slightly softer than expected which saw Fed Fund futures imply an 89% chance of the Fed holding rates again in September, at 89%
- However, with a core CPI rate of 4.7% y/y, inflation remains elevated relative to the Fed’s target of 2% and the US dollar caught a bid once the ‘cpi dust’ had settled
- Mary Daly tried to put a fly in the dovish ointment, saying whether another hold or hike at the Fed’s next meeting is “yet to be determined”. Thomas Barkin is sat on the fence and says the Fed has more time to go over the data ahead of their meeting in September, whilst Patrick Harker seems on board with another hold.
- A slew of strong UK data which far exceeded expectations (GDP, construction output, manufacturing and industrial production) shows the UK economy is not slowing as expected, which suggests high levels of inflation could remain high and keep the pressure on the BOE to keep hiking
- Data from China continued to point towards lower growth in Q3, with imports and exports sliding faster than expecting and China’s CPI rate deflating for this first time since 2021 (even if producer prices hint at a potential trough in the coming months).
- WTI broke to its highest level since November on supply concerns, increased demand and easing recession concerns
- Hot weather forecasts saw natural gas tease us with a break above a key resistance level, although above-forecast inventories saw it pull back from the key level of $3.00 on Thursday
- The tit-for-tat moves between US and China continued, with President Biden restricting US investments in sensitive Chinese technologies, including semiconductors, microelectronics, quantum IT, and AI systems
- Moody’s Rating agency were the latest to deliver downgrades for the US, but this time for ten small-to-medium sized US banks
- The RBA’s governor Philip Lowe hinted that they may need to tighten rate further, sending the February OIS contract to prince in a 70% chance of a hike by then
- However, Australian consumer spending has plummeted -8% y/y according to ANZ, which suggests the strain on households is greater than official data suggests
The week ahead (calendar):
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Earnings This Week
The week ahead (key events and themes):
- FOMC minutes
- China data
- UK inflation
- Canadian inflation
- Australian wage price index and employment reports
It’s debatable as to how relevant the FOMC minutes will be, given markets are pricing in an 89% probability of the Fed holding interest rates in September (and talk of peak cycle). But then that could also be a reason to pay attention to the minutes, because if anything unexpected is to surface then we’ll see quick market reaction as those odds change.
If you cast your mind back to early January, thin markets were treated to a risk-on rally stemming from hopes of a great economic recovery form China. Needless to say, data from the first half of 2023 did not live up to (arguably unrealistic) expectations. This week’s trade data revealed imports and exports continued to plunge and at a faster rate than expected and consumer prices deflated for the first time since January 2022 – which points to a bleak start for Q3. However, the government are vowing to provide more economic stimulus so we’re now waiting to see if it shows up in the data.
New loans data is yet to be released, but economists expect it to fall sharply following the record levels set in H1. If that is the case, it shows lower demand from an economy that the government is trying to be driven by consumption over exports. This also means that retail sales data will be in focus, because if households aren’t spending then the governments growth objects will not be met. And that could weigh on sentiment as estimates for global growth are lowered, and weigh on oil prices in the process (and know it from its YTD perch).
Market to watch: USD/CNH, China A50, Hang Seng, Nikkei 225, USD/JPY, AUD/JPY
UK inflation data just become a lot more relevant following today’s definitely strong data set (not that it hasn’t been relevant for a while). There were hopes that core inflation in the UK had peaked last month’s inflation report, which saw traders scale back bets for another 50bp hike and trim expectations of a peak rate from above 6%. Yet preliminary data for Q2 GDP, industrial production, construction output and manufacturing output blew past expectations to show the economy really is not cooling at all. And if the economy is defying gravity, so can inflation. Even if core CPI ‘peaked’ at 7.1%, it’s still a long way down from 6.9% to the BOE’s 2% target. And today’s strong data suggests the disinflationary process will take longer to unfold. Bets for another 50bp are likely building.
Market to watch: GBP/USD, GBP/JPY, EUR/GBP, FTSE 100
The Bank of Canada (BOC) has raised its base rate 12 times this cycle, with a two-meeting pause ahead of the two most recent hikes to 5%. While the BOC said it debated holding rates steady at its July meeting and that it does not want to hike any more than necessary, it has kept the door open for further hikes if it feels it is required to tame inflation. The BOC has already had to come out of "pause mode" once to tackle persistently higher inflation than it had anticipated. This makes next week's inflation report a key data point for its next policy decision, and could be seen as a proxy hike if inflation is hotter than desired.
JP Morgan and Goldman Sachs estimate one more hike from the BOC to take rates to 5.25%, and bets would be on for that hike on September 6th if trimmed mean or median inflation remain too sticky for the BOB’s liking.
Market to watch: USD/CAD, CAD/JPY, NZD/CAD
RBA minutes, Australian wage price index and employment report
Three things stand out on the calendar next week for Australia: the RBA minutes and wage price index (WPI) on Tuesday, and the labour force report on Thursday. With that said, it is difficult to see how the minutes will reveal any more than we already know. The RBA will hike if they need to and will continue to hold otherwise. But the statement can still manage to confuse markets with minor changes to their statement and prompt some volatility. And the fact that it is released alongside the quarterly wages report may make wages the bigger mover, if it comes in hot enough. But given that real wages remain near historical lows as wages lag inflation, it would take an almighty punchy number to warrant a hike next month. And that leaves Thursday's employment report as the biggest of the three, where wider cracks could cement calls for peak cycle and weigh on AUD.
Employment in Australia has remained robust throughout the RBA’s tightening cycle, barring a couple if negligible headline data misses along the way. Whilst that is clearly good news for the typical Australian household, it provides the RBA with a reason to keep their finger at least hovering over the hike button (even if they’d prefer to avoid using it, if at all possible).
Last month’s figures revealed that unemployment had fallen back to 3.5%, below the RBA’s own estimate for June and its own 12-month average. But employment data is lagging, and the RBA themselves acknowledge the delayed effect monetary policy has on the economy. Which means that if unemployment turns notably higher and job growth is negative, markets will likely assume rate cuts are coming sooner and weigh on AUD/USD. And if that becomes a trend of two or more data points, it might even knock the wind out of the sails of the ASX 200. But in all the time employment remains strong, the RBA will be forced to keep their finger over the hike but, just in case.
Market to watch: AUD/USD, NZD/USD, AUD/NZD, NZD/JPY, AUD/JPY, ASX 200
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