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by Charalambos Pissouros

Weekly Outlook: July 08 – July 12: Fed’s Powell Testifies, BoC Decides on Rates

The main event on this week’s agenda is likely to be Fed Chair Powell’s testimony before Congress, as following Friday’s strong NFPs, investors are scratching their heads to figure out by how much is the Fed willing to cut rates. With regards to central bank decisions, we have a BoC meeting. We believe that the BoC will hold rates steady and reiterate its data dependency, staying among the few major Banks that have not turned their eyes to the cut button yet. The minutes from the latest FOMC and ECB policy gatherings are also due to be released.

Monday appears to be a relatively light day, with no major events on indicators scheduled on the agenda.

On Tuesday, during the Asian morning, Australia’s NAB business survey for June is coming out. Although this is usually not a market mover, given the RBA’s emphasis on the labor market, we will closely monitor the labor costs index, which rose to +1.0% qoq in May from +0.6% in April. At its latest meeting, the RBA said that it will continue to monitor developments in the labor market closely and adjust policy “if needed” to support sustainable growth and the achievement of the inflation target. In June, the guidance was the same but without the “if needed” part. So, in our view, its addition means that, although the door for further action is not closed, the RBA is not in a rush to cut again when it meets next. Indeed, according to the ASX 30-day interbank cash rate futures implied yield curve, another quarter-point cut is almost fully priced in for December.

ASX 30-day interbank cash rate futures yield curve

Later in the day, we get the US JOLTs Job openings for May, where expectations are for a slight increase, and the NFIB Small Business Optimism index for June, for which no forecast is currently available. From Canada, housing starts for June and building permits for May are coming out.

On Wednesday, the main event is likely to be the semiannual testimony of Fed Chair Jerome Powell before the House Financial Services Committee of the US Congress. On Thursday, he will testify before the Senate Banking Committee. When they last met, FOMC policymakers decided to drop their “patient” language and instead noted that they will “act as appropriate” to sustain economic expansion. With 7 out of the Committee’s 17 members voting for two quarter-point rate cuts by the end of this year, investors ramped up their already elevated bets with regards to lower interest rates in the US, fully pricing in a 25bps rate cut at the Fed’s upcoming gathering. They also assigned a decent probability for a 50bps decrease.

However, although 25bps are still fully priced in for the upcoming gathering, the chance for a “double” cut eased after Powell said a couple of weeks ago that policymakers are “grappling” with whether uncertainties around trade and tame inflation warrant lower interest rates, and dropped to 5% following Friday’s strong NFP gains. Investors also pushed back the number of cuts they were expecting for this year. A few days ago, they were factoring in 3 cuts by December, but now that number has dropped to 2.5, with a 3rd decrease fully priced in for May 2020.

US fed funds futures Market vs FOMC interest rate expectations

So, having all these in mind, it would be interesting to listen what Powell has to say this time about the Fed’s future plans, especially after US President Trump agreed with his Chinese counterpart to postpone fresh tariffs and return to the negotiating table. Any comments suggesting that the Fed is unlikely to ease aggressively and perhaps proceed with just an “insurance cut” at the upcoming gathering, before turning data dependent again, could prompt market participants to price out some more of the basis points anticipated to be cut this year.

The minutes of the latest FOMC gathering are also coming out, but bearing in mind that we will get an updated view on monetary policy through Powell’s testimony, we expect them to pass unnoticed and be treated as outdated.

Apart from Powell’s testimony and the Fed minutes, we also have a BoC interest rate decision. This will be one of the “bigger” meetings and thus, if rates are left untouched as it is widely expected, the focus will turn to the meeting statement, the updated economic projections and the press conference by Governor Poloz. At their prior gathering, officials said that data were in line with their projections, and kept their forward guidance largely unchanged. They noted that the degree of accommodation provided by the current rate remains appropriate and that they will stay data dependent in taking future decisions.

Canada CPIs inflation

Latest data showed that inflation accelerated strongly in May, with the headline rate rising to +2.4% yoy from +2.0%, and the core one to +2.1% yoy from +1.5%. The monthly GDP for April slowed less than expected. Specifically, it slowed to +0.3% mom from +0.5%, while the forecast was for a slowdown to 0.1% mom. Yes, Friday’s employment data for June came on the weak side, with the unemployment rate ticking up to 5.5% from 5.4%, and the employment change revealing a 2.2k jobs loss. However, following the decline from 5.7% to 5.4% in May, a tick up to 5.5% in June for the unemployment rate is not that bad in our view, neither a minor decline in jobs, if we consider that May’s 27.7k followed April’s record print of 106.5k. Thus, we expect the BoC to stay among the few major central banks that have not turned their eyes to the cut button yet, with officials reiterating that they stay data dependent with regards to their future decisions.

As for Wednesday’s data, during the Asian morning, we get China’s CPI and PPI for June. Expectations are for the CPI rate to have held steady at +2.7% yoy, but the PPI one is anticipated to have declined further, to +0.3% yoy from +0.6%.

In the European morning, Norway’s inflation data for June are coming out. The headline rate is expected to have declined to +2.1% yoy from +2.5%, but the core one is forecast to have remained unchanged at +2.3%. At its latest meeting, the Norges Bank decided to hike rates to +1.25% from +1.00% as expected, noting that the policy rate will most likely be increased further in the course of 2019. Although the headline CPI is expected to have slowed, it is still forecast to have held above the Bank’s inflation aim. This, combined with an unchanged core rate, also above the target, may allow Norwegian policymakers to maintain their plans with regards to higher rates this year.

Norway CPIs inflation

In the UK, the monthly GDP for May is coming out, alongside the industrial and manufacturing production data for the month. The UK economy is expected to have grown 0.3% mom in May after contracting 0.4% in April, while both IP and MP are expected to have rebounded 1.2% yoy and 1.1% yoy, after sliding 1.0% and 0.8% respectively. That said, bearing in mind that the manufacturing PMI for the month slid to 49.4 from 53.1, we see the risks surrounding those forecast as tilted to the downside. Following the latest cautious remarks by BoE Governor Carney, another set of disappointing UK data could prompt investors to add to bets that the BoE may soon decide to abandon plans for higher rates. The nation’s trade balance for May is also scheduled to be released and expectations are for the deficit to have widened somewhat.

UK industrial production vs manufacturing PMI

On Thursday, it’s the turn of the ECB to release the minutes of its latest monetary policy decision. At that meeting officials decided to push back their forward guidance, noting that they expect rates to stay untouched “at least through the first half of 2020.” At the press conference following the decision, President Draghi noted that several members raised the possibility of further rate cuts, while others talked about restarting QE, in case of adverse contingencies, while a couple of weeks thereafter, he himself said that additional stimulus will be required if a sustained return of inflation to the ECB's aim is threatened.

ECB interest rates

According to Eurozone’s money markets, investors are now more-than-fully pricing in a 10bps rate cut in the deposit rate at the September gathering, while there is a 44% chance for such an action to take place at the upcoming meeting. Taking into account a recent report noting that ECB officials may not rush into additional easing in July and perhaps wait for September, when they will have the updated macroeconomic projections to work with, we believe that they could use the July meeting to lay the groundwork for a potential action in September. That said, we will scan the minutes to see whether this is the case, or whether officials were keen to act sooner, or maybe later.

As for the economic data, during the European morning, the final German CPIs for June are coming out, but as it is the case most of the times, they are expected to confirm their preliminary estimates. Namely, the CPI rate is forecast to come in at +1.6% yoy, and the HICP one at +1.3% yoy.

Sweden’s CPIs for June are also due to be released. Both the CPI and the CPIF rates are anticipated to have declined below the Riksbank’s objective of 2%. Specifically, they are expected to have slid to +1.9% yoy and +1.8% yoy, from 2.2% and 2.1% respectively. However, if this is the case, both rates will still be above the Bank’s projections for this year, which are at +1.8% and +1.7%. As always, we will pay more attention to the core CPIF metric, which excludes the volatile items of energy, which has been moving in the desired direction for the last three months and stood at +1.7% in May. If the aforementioned headline rates meet their forecasts and the core CPIF one stays unchanged, or even ticks down, we doubt that policymakers will be tempted to alter their forward guidance when they meet next. Even after the ECB pushed back its own guidance and Draghi signaled that additional stimulus may be needed, the Riksbank maintained its view that the repo rate “will be increased again towards the end of the year or at the beginning of next year”, although noting it should proceed cautiously with monetary policy.

Sweden CPIs inflation

We get inflation data from the US as well. The headline CPI rate is expected to have slid to +1.6% yoy from +1.8%, but the core one is anticipated to have held steady at +2.0% yoy. A steady core rate could probably mean that the slide in the headline print may be due to volatile items, like energy, which may not be enough for investors to add more to speculation with regards to aggressive easing by the Fed, especially if Chair Jerome Powell pours cold water to such expectations when he testifies before Congress.

US CPIs inflation

Finally, on Friday, the agenda gets lighter again. During the Asian session, China’s trade balance for June is coming out, while in Europe, Eurozone’s industrial production for May is scheduled to be released. Later in the day, the US PPIs for June are coming out, but bearing in mind that we will already have in hand the CPIs for the month, we believe that they may pass unnoticed.

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