BoE and RBA are widely expected to cut rates further this week

August 1, 2016

Main Macro Events This Week

The BoE and RBA are widely expected to cut rates further this week to 0.25% and 1.50% respectively, after the ECB and Fed held steady last month at 0.00% and 0.50%. However, some fatigue may be starting to show after the BoJ fell short on its expected stimulus last week and called for an examination of the effectiveness of its policy actions.

United States: Markets will be choppy this week, especially coming off of month-end gains that left bonds and stocks near record highs. The July employment report (Friday) will be the week’s data highlight. We expect a 180k increase after jumping 287k in June, just above the 172k six-month average, with the unemployment rate steady at 4.8%. The July report has lost much of its importance for the immediate Fed outlook after the disappointing GDP release on Friday largely took a September 20, 21 FOMC rate hike off the table. Along with jobs, data includes the ISM manufacturing index (Monday), projected falling 1.3 points to 52.0 and non-manufacturing data (Wednesday) seen falling 1 point to 55.5 after jumping 3.6 points to 56.5 in June. June personal income and consumption (Tuesday) will help fine-tune Q2 GDP estimates. A 0.3% increase is forecast for income and spending. Also due this week are June construction spending (Monday), July ADP private payrolls (Wednesday), and June international trade (Friday).

Earnings news will remain a key feature for the markets. Just over half of the S&P 500 have reported, and reports have been generally decent, led by Technology on strength in Apple, Alphabet, Facebook, Microsoft, and eBay. This week’s slate includes Pfizer, Procter & Gamble, Time Warner, Tesla, Adidas, Siemens and Viacom.

Canada: Markets are closed Monday for the Civic Holiday. The abbreviated trading week features a deluge of data on Friday. Employment is expected to rise 10.0k in July after the 0.7k dip in June. The unemployment rate is projected to tick higher to 6.9% in July from 6.8% in June. The trade deficit is expected to narrow to -C$2.9 bln in June from -C$3.3 bln in May. Exports are seen turning higher to the tune of a 1.0% gain after the 0.7% drop in May, helped by a presumed pick-up in the volume and price of oil exports. The Ivey PMI is projected to slip to 50.5 in July on a seasonally adjusted basis from 51.7 in June, in what will largely be a typically seasonal swing. Manufacturing PMI for July is also on tap (Tuesday). There is nothing from the Bank of Canada this week. Indeed, the Bank’s event schedule is empty until the September 7th announcement. We expect no change to the current 0.50% setting for the policy rate

Europe: The summer lull is starting to settle in with the ECB on hold until September and nothing on the data or events calendar this week that will change outlooks substantially. The final round of PMI readings should not hold major surprises and we expect the Eurozone manufacturing reading (Monday) to be confirmed at the preliminary 51.9 print and the services reading (Wednesday) at 52.7.  PMIs continue to point to expansion across both sectors, with the Brexit impact far more limited than feared, at least for now.

Meanwhile, Eurozone producer price inflation (Tuesday) is expected to jump higher and German manufacturing orders (Friday) are expected to post a 0.5% m/m rise after some weak months. The events calendar holds a German 2-year auction (Wednesday) and a French bond sale (Thursday). The ECB’s economic bulletin is also released (Thursday), but is unlikely to be much different from the tone of Draghi’s last press conference.

UK: The BoE takes the spotlight this week, with the MPC conducting its second policy meeting since the UK voted to leave the EU. Having played for time in July, the strong consensus is for the Old Lady to leap to the action stations now. We expect a 25 bp chop of the repo rate, which would dislodge it from 0.5%, where it’s been since March 2009, and put it at a new record low of 0.25%. Other policy measures are possible, though we and most expect the QE program to left in a dormant state, and remain at GBP 375 bln of total of assets accumulated between 2009 and 2012. The BoE has already been injecting liquidity into the banking system.

Despite the worrisome post-Brexit vote survey data, the FTSE 250 equity index last week more than recovered all of the losses seen in the wake of the vote to exit the EU. This reflected the passing of the initial shock of the vote and a well-performing financial system, along with a quick reconstruction of the governing Tory Party, and expectations for big stimulus, both from the BoE, this week, and via a looser fiscal policy. In contrast to the vibe in UK stock markets, the pound remains depressed by about 12% from pre-referendum levels. While a lot has already been priced into the currency with regard to Brexit-related uncertainties, more losses seem likely. Yield differentials between the UK and U.S. are at their widest since 2000 and are foraying into negative territory, while the expected BoE rate cut this week is set to put the UK policy rate below the U.S. policy rate for the first time in decades. The BoE is also wanting to guide the pound lower, which is seen as part of the “necessary” adjustments, in the words of Governor Carney.

UK data this week features the final PMI reports for July (due from Monday to Wednesday), which are expected to affirm the dismal preliminary readings. The flash estimates accounted for 80% of the total respondents. The final composite reading is expected to be confirmed at 47.7, which is consistent with Q3 GDP growth of -0.4% q/q.

China:  News released today – Caixin/Markit manufacturing PMI rose unexpectedly to 50.6 from 48.6. The official July CFLP PMI edged down  to 49.9 from 50.0 and  July services PMI rose to 53.9 from 53.7.  There are no no more data releases scheduled for this week.

Japan: July consumer confidence (Tuesday) is seen falling to 41.5 from 41.8. The PMI services index is on tapWednesday with the June coincident and leading indices due Friday. Markets will be looking for the Japanese government’s detailing of the Y28 tln stimulus package this week, which was likely why the BoJ went easy on the stimulus levers on Friday. The central bank kept the door wide open for a further policy expansion at the September 20th-21st meeting, saying it will then make a “thorough assessment” of policy, which will be the full light of the government’s exact fiscal plans.

Australia:  The Reserve Bank of Australia meeting (Tuesday). CPI did not provide the clear cut signal for a cut this week that analysts or the market had been hoping for, as Q2 CPI rose 0.4% (q/q, sa) after the 0.3% drop in Q1 that drove the 25 bp May reduction. But annual CPI growth slowed to a 1.0% y/y pace in Q2 from the 1.3% growth rate in Q1, leaving the slowest growth pace since 1999. We think the slowing in the annual growth pace is enough to prompt a rate cut to 1.50% given ongoing concerns about the domestic and global growth outlook and disinflationary pressures. The Bank updates it growth and inflation projections in Friday’s Statement on Monetary Policy. Economic data has June retail sales (Thursday), expected to rise 0.2% in June after the 0.2% gain in May. The trade report (Tuesday) is seen revealing a -A$2.3 bln deficit in June following the -A$2.2 bln shortfall in May. Building approvals (Tuesday) are projected to fall 1.0% in June after the 5.2% drop in May.

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