Weekly Outlook: Aug 12 – Aug 16: US and UK CPIs, AU Jobs data and Norges Bank Decision
With investors trying to figure out whether and how aggressively the Fed may continue easing, this week, focus is likely to turn to the US CPIs for July. We get inflation data from the UK as well, where a slowdown may revive speculation that the BoE could abandon its hiking bias soon. In Australia, the spotlight is likely to fall on the employment data as market participants try to gauge the timing of the RBA’s next potential cut. We also have a Norges Bank decision, where it would be interesting to see whether the Bank would maintain plans with regards to further rate increases this year.
On Monday, the calendar is almost empty, with no major economic events or data scheduled.
On Tuesday, during the Asian morning, the NAB business survey for July is coming out. Although this is not a major market mover, bearing in mind the RBA’s emphasis on the labor market, we will pay some attention to the labor costs index, which rose further in June, to +1.5% qoq from +1.1% in May.
During the European morning, we have the German ZEW survey for August, as well as the nation’s final CPIs for July. Both the current conditions and expectations ZEW indices are expected to have slid further into the negative territory, while as it is the case most of the times, the final inflation prints are expected to confirm their preliminary estimates.
From the UK, we get the employment report for June. The unemployment rate is expected to have remained unchanged at its 45-year low of 3.8%, while average weekly earnings including bonuses are expected to have accelerated to +3.7% yoy from +3.4%. The excluding-bonuses rate is anticipated to have risen as well, to +3.8% yoy from +3.6%. According to the IHS Markit/KPMG & REC Report on Jobs for the month, permanent salaries rose sharply, but the rate was among the softest seen for two years, while temp wage inflation quickened to a seven-month high. Having this in mind, it’s hard to say where the risks of the official earning-rates are tilted to.
Later in the day, the US CPIs for July are coming out. The headline rate is forecast to have ticked up to +1.7% yoy from +1.6%, while the core rate is expected to have remained unchanged at +2.1% yoy. The narrowing of the spread between the core and the headline rate is supported by the yoy change in oil prices, which, despite staying in the negative territory, has risen somewhat.
At their latest policy gathering, FOMC policymakers decided to cut rates by 25bps, as it was already factored in, but the decision was not unanimous. Two members, Boston President Eric Rosengren and Kansas City President Esther George, argued for keeping rates untouched. At the press conference after the decision, Chair Powell said that this is not the beginning of a long series of rate cuts, rather a mid-cycle adjustment to policy. Investors pushed back their expectations with regards to further easing, but they were quick to revive those bets just the following day, when Trump threatened China with fresh tariffs.
They added even more last week, after China allowed the yuan to fall past the 7.00 per dollar mark. According to the Fed funds futures, another cut is now fully factored in for September, while a third one is priced in for October. There is also a 15% chance for a “double cut” at the September gathering. In our view, a decent set of inflation data may push that percentage down, but it is unlikely to change much the picture of what the market anticipates from the Fed beyond September. For that to change drastically, positive developments from the US-China trade front are needed, something we see unlikely for now.
On Wednesday, during the Asian morning, Australia’s Wage Price index for Q2 is due to be released, just a day ahead of the nation’s employment report. The forecast is for the qoq to have remained unmoved at +0.5%, but bearing in mind that the Labor Costs Index of the NAB business survey accelerated strongly during Q2, to +1.5% qoq in June from +0.7% in March, we see the risks surrounding the wage price index as tilted to the upside.
From China, we get fixed asset investment, industrial production and retail sales, all for July. Fixed asset investment is forecast to have risen 5.8% yoy, the same pace as in June, while industrial production and retail sales are anticipated to have slowed to +5.8% yoy and +8.6% yoy from +6.3% and +9.8% respectively.
Later, during the European morning, Germany’s preliminary GDP for Q2 is forecast to reveal a 0.1% qoq contraction after a 0.4% qoq growth in Q1, while Eurozone’s second estimate of Q2 GDP is expected to confirm its initial print of +0.2% qoq. The bloc’s industrial production for June is also coming out and it is anticipated to have slid 1.3% mom after rising 0.9%.
From Sweden, we get the CPIs for July. Both the CPI and CPIF rates are forecast to have declined to +1.5% yoy and +1.4% yoy, from +1.8% and +1.7% respectively. As always, we will pay special attention to the core CPIF rate, which rose to +1.9% yoy in June from +1.7% in May. At its latest meeting, the Riksbank 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.”
However, if indeed inflation slows as expected, and the core CPIF rate also pulls back, this may force officials of the world’s oldest central bank to push back their guidance on rates, perhaps closing the door to the possibility of a hike later this year. Another important factor to take into account is the ECB’s hints with regards to a potential rate cut next month, which may also be accompanied by more measures, such a restart of QE. Remember that the Riksbank has been usually following the footsteps of the ECB in recent years and thus, this increases the chances for a more cautious stance by Swedish officials.
We get CPIs from the UK as well. The headline rate is expected to have ticked down to +1.9% yoy from +2.0%, while the core rate is anticipated to have remained unchanged at +1.8% yoy. Coming on top of Friday’s disappointing GDP for Q2, which showed a 0.2% contraction, inflation below the BoE’s target of 2% may revive bets that the BoE could soon abandon its hiking bias, despite the potential acceleration in earnings on Tuesday.
Last time, the BoE kept its monetary policy unchanged and maintained the view that conditional upon a smooth Brexit, increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target. However, the risk of a no-deal Brexit has been increasing recently and all the uncertainty surrounding the form of the divorce has been already leaving marks on the UK economy. Thus, until October 31st, the deadline for leaving the EU, a BoE hike may not be warranted, even if eventually the departure is orderly.
On Thursday, Asian time, Australia’s employment report for July is scheduled to come out. The unemployment rate is forecast to have remained unchanged at 5.2%, while the net change in employment is expected to show that the economy added 14.0k jobs from 0.5k in June.
At its latest meeting, the RBA kept interest rates unchanged at +1.00% and noted that they will continue to monitor developments in the labor market closely, and ease policy further if needed to support sustainable growth and achieve their inflation target. In our view, the message remained the same as in July. The door for further easing was kept open, but policymakers seemed not in a rush to cut rates when they meet next. The probability for a September cut now stands at 42%, while a 25bps decrease remains fully priced in for October.
With all this in mind, a decent gain in July jobs, combined with accelerating wages on Wednesday, may drive the September probability further down, but an unemployment rate of 5.2%, above the 4.5% threshold which the Bank believes would start generating inflationary pressures, could still keep the door wide open for an October cut.
During the European morning, we have a Norges Bank interest rate decision. The last time Norwegian policymakers gathered, they decided to hike rates to +1.25% from +1.00% and noted that the policy rate will most likely be increased further in the course of 2019. Since then, we got inflation data for both June and July, with the headline rate declining to +1.9% yoy from +2.5% in May, and the core rate sliding to +2.2% yoy from +2.3%. Despite the decline, the headline rate remained above the Norges Bank’s projections, and although the core print fell short of its respective forecast, it is still above the Bank’s inflation aim of 2.0%. In our view, this may allow Norwegian policymakers to maintain the view with regards to further rate increases later this year.
As for the rest of Thursday’s data, we get retail sales for July from both the UK and the US. Kicking off with the UK prints, both headline and core sales are anticipated to have declined 0.3% mom and 0.2% mom, after rising 1.0% and 0.9% respectively. As for the US data, headline sales are expected to have slowed to +0.3% mom from +0.4%, while core sales are forecast to have risen 0.4% mom, the same pace as in June. The US industrial and manufacturing production rates for July are also due to be released. IP is expected to have grown 0.1% mom after stagnating in June, while MP is forecast to have contracted 0.1% mom after rising 0.4%.
Finally, on Friday, the calendar includes Eurozone’s trade balance for June, the US building permits and housing starts for July, and the preliminary UoM consumer sentiment index for August. With regards to Eurozone’s trade data, the bloc’s surplus is expected to have declined to EUR 16.3bn form EUR 23.0bn in May. In the US, both building permits and housing starts are forecast to have risen somewhat, while the UoM index is anticipated to have slid to 97.5 from 98.4.
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