The week ahead features important data from around the world, but there won’t be any major central bank announcements. Among the data highlights, the upcoming macro pointers from China and the UK might garner most of the attention, given ongoing concerns over global growth and Brexit. Also worth mentioning will be New Zealand’s latest Consumer Price Index (CPI) estimate, which will be important to monitor closely given the Reserve Bank of New Zealand’s desire to potentially cut interest rates further.
Before we discuss the above events in more detail, here are the data highlights for the coming week:
- Monday: Chinese GDP, industrial production and retail sales
- Tuesday: New Zealand CPI; UK wages; German ZEW survey, and US industrial production and retail sales
- Wednesday: UK and Canadian CPI, and US Housing market data
- Thursday: Australian employment data and UK retail sales
- Friday: Canadian retail sales and US consumer sentiment and inflation expectations surveys from UoM
Chinese economy in sharp focus
Japanese banks will be closed on Monday in observance of Marine Day. But it could be a busy Asian session nonetheless, with China in focus. We will have the latest GDP, industrial production and retail sales from the world’s second largest economy.
Economic growth in China has been cooling off steadily after the post-crisis rebound faded in 2010. From +10% GDP readings then, we have seen figures between 6.5% and 7.0% since the second quarter of 2015, and more towards the lower end of that range since the second half of last year. In the last quarter of 2018 and first quarter of this year, GDP grew at ‘just’ 6.4% compared to the same periods a year earlier. Although still significantly higher compared to the major developed economies, growth has been rather weak in Chinese standards. Various government stimulus measures and liquidity injections from the Chinese central bank failed to boost the rate of economic growth. Growth has been held back in part because of the US imposition of import tariffs on Chinese goods and the currency crisis in many developing economies hurting demand.
Industrial production growth has also been on the decline and although it jumped in March, that was an anomaly and recent publications have been consistent with a declining trend, with the past couple of readings missing expectations by sizeable margins. From March’s 8.5% y/y growth, industrial output slowed sharply to 5.4% in April and then to just 5.0% in May - its lowest reading since March 2009.
Underscoring fears that domestic demand is also on the decline, retail sales have been on the decline along with many other Chinese macro pointers. That being said, we have had a few positive surprises in retail sales this year. Will we see another one on Monday?
Still, Friday’s trade figures goes to show the extent of the troubles in China. Although the trade balance improved noticeably in June, this was only because imports fell sharply (by 7.3% y/y in dollar terms) relative to exports which declined more modestly (1.3% y/y). The slowdown was undoubtedly exacerbated by China’s ongoing trade dispute with the US. Indeed, in the first half the year, China’s exports to the US fell by more than 8%, while imports dropped by almost 30%.
So, things aren’t looking too good ahead of the GDP and industrial production numbers on Monday. If these fail to at least match expectations, then growth concerns may come back to the forefront of investors’ minds, after the recent dovish central action took the attention away.
UK data and Brexit delays could force BoE rate cut
After remaining stubbornly resilient, Brexit uncertainty has finally taken its toll on the UK economy. Recent data, including forward-looking numbers, point to a sharp downturn in the economy. Purchasing mangers, for example, have reported deteriorating condition in all key sectors of the economy. Consumers and businesses have repeatedly delayed purchases and expansion plans due to uncertainty over the UK’s future relationship with the European Union, especially after the Brexit deadline was extended from March 29 to Halloween and as Prime Minister Theresa May resigned.
That being said, wages have remained somewhat resilient thus far. With the ONS’s Average Earnings Index holding around the 3% mark and headline consumer inflation oscillating around the 2% target, real wages have therefore remained positive. However, if the gap between nominal wages and inflation were to close down again, or worse go into the negative, especially as a result of a noticeable downturn in wages (rather than a rise in inflation) then the Bank of England may have to seriously consider cutting interest rates again.
Indeed, senior BoE official Gertjan Vlieghe on Friday warned that interest rates will need to be cut to almost zero in the event of a no-deal Brexit, while repeated Brexit delays could also make a rate cut necessary.
So, as well as Brexit developments, traders will be monitoring Tuesday’s release of wages and Wednesday’s publication of CPI closely, for any signs of weakness could see speculators punish the pound hard as calls for rate cuts grow. UK retail sales, meanwhile, will be reported on Thursday.
New Zealand CPI could trigger August rate cut by RBNZ
Tuesday will kick off with the release of New Zealand CPI first thing. Investors will be watching incoming data from NZ very closely after the RBNZ decided against cutting interest rates further last month. It held rates at a record low of 1.5%, opting not to play catch up with RBA’s 1.25%. Yet by reintroducing talk of a cut, they kept the door open easing in August. The RNBZ noted that the risks related to trade activity have intensified and with downside risks intensifying around employment and inflation outlook, a looser policy may be needed. We think the RBNZ’s policy will converge with that of the RBA over time. The process could be quicker if incoming data deteriorates even more in NZ. This makes this quarterly CPI release very important. In the couple of quarters, CPI barely grew with prints of +0.1% respectively. Another such reading, or lower, could seriously increase the odds of a rate cut in August.