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by Charalambos Pissouros

Weekly Outlook: Jul 29 – Aug 02: BoJ, Fed and BoE Rate Decisions; US-China Talks and US Jobs Data

We have a very busy week ahead of us, with three central bank decisions on the agenda: The BoJ, the Fed and the BoE. Among the three, the only one expected to act is the Fed. With a quarter-point cut fully priced in, if indeed this is the case, investors may quickly shift attention to hints with regards to the Committee’s future plans. With regards to the BoJ and the BoE, it would be interesting to see whether the former will ramp up warnings with regards to additional stimulus, and whether the latter will drop its hiking bias. The face-to-face US-China trade talks, as well as the US employment report for July will also be in focus.

On Monday, there are no major indicators on the economic agenda and thus, investors may keep their gaze locked on headlines surrounding the new round of trade talks between China and the US. Remember that last week, media noted that US officials will travel to China today for face-to-face negotiations, though the talks are reported to take place on Tuesday and Wednesday. US Treasury Secretary Steven Mnuchin said last week that these talks would be followed with more in the US as “there’s a lot of issues” to be worked out, while on Friday, US President Trump said that he thinks China may not want to seal a deal before the 2020 election as it may have the opportunity to negotiate more favorable terms with a new President. With all these in mind, we see the case of the two sides agreeing to a final accord this week as a hard task. However, any progress signs and remarks could be very welcome by the financial community, which, in the aftermath of the Trump-Xi meeting, stood skeptical as to whether the world’s two largest economies will indeed make concrete steps towards solving their differences.

On Tuesday, during the Asian morning, the Bank of Japan will announce its monetary policy decision. When they last met, Japanese policymakers decided to keep their ultra-loose policy unchanged, also maintaining the forward guidance that the current extremely low levels of interest rates are likely to stay unchanged “at least through around spring 2020”. Nonetheless, at the conference following the decision, Governor Kuroda said that extra stimulus would be considered if momentum towards reaching the inflation aim is lost.

Japan CPIs inflation

His remarks were echoed by Deputy Governor Amamiya a couple of weeks thereafter, while latest inflation data showed that underlying inflation has slowed, which may have strengthened the case for additional accommodation by the BoJ. However, bearing in mind comments Governor Kuroda made last week, that the economy was finally no longer in deflation, as well as reports suggesting that officials are divided on whether to ease at this gathering, we don’t expect a new round of stimulus to be introduced now. We believe that policymakers may just ramp up warnings with regards to additional easing in the not-too-distant future, perhaps by altering their forward guidance.

Apart from BoJ’s policy decision, we also get Japan’s employment data and the preliminary industrial production for June. Both the unemployment rate and the jobs-to-applications ratio are expected to have remained unchanged at 2.4% and 1.62 respectively, while industrial production is anticipated to have declined 2.0% mom after rising by the same percentage in May.

Later, during the European morning, Sweden’s GDP for Q2 is scheduled to be released and the forecast suggests that the yoy rate declined to +1.9% from +2.1% in Q1. At its previous meeting, the world’s oldest central bank decided to keep interest rates unchanged at -0.25% as was widely expected, and maintained the view that the repo rate “will be increased again towards the end of the year or at the beginning of next year.” Latest inflation data showed that both the CPI and CPIF rates slid more than expected, but they matched the Riksbank’s projections. On top of that, the core CPIF rate rose to +1.9% from +1.7%, which in our view, still allows Swedish policymakers to keep the door open for a hike towards the end of the year. A GDP slowdown to 1.9% yoy would be just a tick above the Bank’s projection for the year, which is at +1.8%, and may not be that worrisome. That said, the next Riksbank meeting is scheduled for September 5th, and ahead of that we have several data points that could alter the view of Swedish officials. The dovish stance by the ECB last week may be another factor to take into account, as the Riksbank has been following the ECB’s footsteps in recent years.

From Germany, we have preliminary inflation data for July. Expectations are for both the CPI and HICP rates to have declined to +1.5% yoy and +1.3% yoy, from +1.6% and +1.5% respectively, which may raise speculation that Eurozone’s headline inflation, due out on Wednesday, may also slow.

In the US, we get personal income and spending data for June, alongside the yoy core PCE rate for the month. Both income and spending are expected to have slowed, to +0.4% mom and +0.3% mom, from +0.5% and +0.4% respectively. The case for a slowdown in income is supported by the downtick in the earnings rate for the month, but the steady retail sales rate suggests that the risks of the spending forecast may be tilted somewhat to the upside.

US CPIs vs core PCE inflation

With regards to the core PCE index, the Fed’s favorite inflation gauge, it is expected to have remained unchanged at +1.6% yoy. However, bearing in mind that the core CPI rate for the month ticked up, we see the case for a similar move in the PCE as well. Something like that would encourage investors to slash further their bets with regards to a 50bps cut at Wednesday’s FOMC gathering, but it is unlikely to alter expectations with regards to a quarter-point decrease. It would enter the basket of data suggesting that after cutting rates now, there may be no need for further easing anytime soon.

The Conference Board consumer confidence index for July, as well as pending home sales for June are also due to be released. The CB index is expected to have risen to 125 from 121.5, while the pending home sales rate is forecast to have slid to +0.5% mom from +1.1%.

On Wednesday, the main event is likely to be the FOMC policy decision. At their prior gathering, policymakers decided to drop their “patient” language and instead noted that they will “act as appropriate” to sustain economic expansion. What’s more, 7 out of the Committee’s 17 members voted in favor of two quarter-point cuts by the end of the year, which prompted investors to ramp up their already elevated bets with regards to lower US rates. According to the Fed funds futures, a quarter-point cut is fully priced in for this meeting, another one is expected in October, while a third one is factored in for March next year. There is also a 21% chance for a “double cut” of 50bps at this gathering. However, taking into account that St. Louis Fed President James Bullard, who was the only member voting for a cut at the prior gathering, does not believe that such a move is needed, we see the case for a 25bps reduction.

US Fed funds futures Market vs FOMC rate expectations

If this is the case, a quarter-point cut by itself is unlikely to prove a major market mover. We believe that investors will turn their attention to clues and hints on how officials intend to move next. Anything suggesting that this was the first of a series of future cuts could hurt the greenback which has been on the front foot last week. However, we stick to our guns that a dollar slide is unlikely to lead to a major downtrend. The market is already overly pessimistic with regards to the Fed’s plans, and if upcoming data and developments come on the positive side, matching market expectations could be a hard task for the Fed. Now, in case the Fed signals that the potential cut was an insurance move and that they will turn data dependent again, the greenback may strengthen as investors may scale back some of the basis points they anticipate to be cut by the end of the year.

As for Wednesday’s data, during the Asian morning, we get Australia’s CPIs for Q2. The headline rate is forecast to have risen to +1.5% yoy from +1.3%, while the trimmed mean rate is anticipated to have ticked down to +1.5% yoy from +1.6%. Although expected to rise, a +1.5% yoy headline rate would still be below the Bank’s latest forecast for June, which is at 1.75%, while the trimmed mean rate would match its respective projection.

Australia CPIs inflation

Therefore, if the forecasts are met, we see it unlikely of market expectations around the RBA’s future plans to change much. Following the soft employment report for June and recent remarks by Governor Lowe that the Bank stands ready to ease further in order to make sure inflation returns to the 2-3% target range, investors have nearly factored in the next cut to come in October. We believe that for that timing to come forth, the CPIs would have to disappoint.

China’s manufacturing and non-manufacturing PMIs for July are also on the Asian agenda. The manufacturing index is expected to have risen to 49.6 from 49.4, while the non-manufacturing one is expected to have slid to 54.0 from 54.2.

During the European morning, Eurozone’s preliminary CPIs for July and the 1st estimate of Q2 GDP are coming out. The headline CPI rate is anticipated to have slid to +1.1% yoy from +1.3%, while the core rate is anticipated to have ticked down to +1.0% yoy from +1.1%. The case for slowing inflation, at least in headline terms, is supported by the German forecasts, which also point to a slowdown. With regards to the qoq GDP rate, it is expected to have declined to +0.2% from +0.4%.

German vs Eurozone CPIs inflation

At last week’s meeting, the ECB officially opened the door to lower rates and added that additional measures, such as a potential QE restart, may also be introduced. According to Eurozone money markets, investors are almost fully pricing in a 10bps cut in the deposit rate for the upcoming meeting. Thus, slowing inflation and economic growth may prompt them to add more basis points and/or enhance the case for a cut to be accompanied by the introduction of a new round of asset purchases.

Later in the day, from the US, we have the ADP employment report for July. Expectations are for the private sector to have gained 150k jobs, more than June’s 102k, but we doubt that investors would pay any attention, as they would probably have their gaze locked on the FOMC decision later in the day. The Employment Costs Index for Q2 is also coming out and the qoq rate is expected to have remained unchanged at +0.7%.

In Canada, the monthly GDP for May is coming out, which is expected to have slowed to +0.1% mom from +0.3% in April. This would drive the yoy rate down to +1.3% from +1.5%.

On Thursday, it’s the turn of the BoE to decide on monetary policy. This would be a “Super Thursday” for the Bank as besides the interest rate decision and the meeting minutes, we will get the quarterly Inflation Report and a press conference by Governor Mark Carney. The Bank is widely expected to keep interest rates unchanged at +0.75%, so if this is the case, focus will quickly turn to signals with regards to the Bank’s future plans.

UK Overnight Index Swaps BoE interest rate expectations

At their latest meeting, BoE officials decided to maintain the view that an ongoing tightening, at a gradual pace and to a limited extend, would be appropriate. However, last week, MPC member Michael Saunders said that Brexit vulnerabilities may stop the BoE from raising rates, even if its forecasts imply the need to do so. Saunders is known as one of the Bank’s most hawkish members, and thus his dovish remarks make us believe that other policymakers may be even less optimistic over their future policy plans. Coming on top of the cautious remarks by Governor Carney at the beginning of the month, as well as the disappointing PMIs for June, Saunders’s comments may have added to expectations that the BoE may soon abandon its hiking bias. Thus, investors may be eager to find out whether this would happen at this meeting. According to the UK OIS (Overnight Index Swaps) forward curve, they are nearly pricing in a rate cut for February 2020.

As for the data, during the Asian morning, China’s Caixin manufacturing PMI for July is expected to have risen to 49.6 from 49.4, in line with the official index which is released on Wednesday. We get July manufacturing PMIs during the rest of the day as well, with the final Euro-area ones anticipated to confirm their preliminary estimates, and the UK index expected to have slid further into contractionary territory. Specifically, it is forecast to have declined to 47.7 from 48.0. In the US, the final manufacturing PMI is anticipated to confirm the first estimate of 50.0, while the ISM index is expected to have declined to 52.8 from 54.5.

Finally, on Friday, the main event is likely to be the US employment report for July. Nonfarm payrolls are anticipated to have risen 160k, less than June’s 224k, while the unemployment rate is expected to have held steady at 3.7%. Average hourly earnings are forecast to have grown +0.2% mom, the same pace as in June, but the yoy rate is expected to tick up to +3.2% from +3.1%. Overall, the forecasts point to another decent report, something that could prompt investors to push back their expectations with regards to more rate cuts by the Fed. However, this would be conditional upon policymakers turning data dependent after Wednesday’s potential rate cut, and not signaling that a series of cuts is already in the works.

Average hourly earnings vs core CPI

As for the rest of Friday’s data, during the Asian morning, Australia’s retail sales for June are expected to have accelerated to +0.3% mom from +0.1%, which will drive the qoq rate for Q2 to +0.3% from -0.1%. Later in the day, the UK construction PMI for July is forecast to have risen to 46.0 from 43.1, while Canada’s trade balance for June is expected to show that the nation’s trade surplus has turned into deficit.

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