FOMC decision to outline its balance

10 July, 2017

The FOMC’s decision to outline its balance sheet unwind last month kicked off the beginning of the end for the central banks’ emergency QE programs. Other central banks, including the BoE, ECB, and BoC have been following suit now too. The shift in tone was surprising given the downtrend in global inflation pressures and this will be a challenge going forward. But central bank-speak suggests policymakers are willing to look through that dynamic, especially as growth remains relatively solid. Right on cue, inflation and growth data will dominate global calendars, while Fed chair Yellen will give her semi-annual Humphrey Hawkins testimony.

United States:ВВ U.S. markets will have a lot on their plates this week as they continue to assess the June jobs data, global developments in the aftermath of the G20 meeting, while looking ahead to Fed chair Yellen’s Humphrey Hawkins testimony and a batch of key data on inflation, sales, and production. There are several important data releases on the calendar, though not untilВВ Friday, which could help clarify the near-term picture for the Fed and the markets. The June CPI report will be the focus, with the headline expected to fall 0.2% thanks to the drop in energy prices, while the core edges up 0.1%. The annual pace should slow to 1.5% y/y from 1.9% y/y on the overall reading, while the core remains steady at 1.7% y/y. The Fed remains disappointed by the sluggishness, but the comments from the June minutes that the slowdown is a function of “idiosyncratic” factors suggests officials will continue to look through the data and concentrate more on economic growth. June retail sales will be the other report of note and are expected to post an unchanged reading overall .Other data over the week includes consumer sentiment from the University of Michigan (Friday),ВВ the June NFIB small business survey is on tap (Tuesday), along with a Yellen favorite, JOLTS (Tuesday). Jobless claims and PPI, along with the June budget, are due (Thursday).

Fedspeak:ВВ Yellen’s testimony before the House Financial Services Committee (Wednesday) and the Senate Banking Committee (Thursday) will highlight. Her comments will be scrutinized for any sign that the timing could be accelerated, with an announcement on the portfolio at the upcoming July FOMC, with the start of the shrinkage in September. Or given the weaker trend in inflation, we will listen to hear any indication the slowdown in inflation is giving her cold feet on further normalization, pushing off action on the balance sheet and rate hikes further into year end, or even 2018.ВВ  Fedspeak from various others on the Committee will be of interest too. SF Fed’s Williams speaks from Australia (MondayВВ 23:05 ET). Governor Brainard’s remarks on monetary policy (TuesdayВВ 12:00 ET) will be closely monitored too. On the other end of the hawk-dove spectrum is KC’s George who will discuss the balance sheet and the economic outlook (WednesdayВВ 14:15ET). Chicago Fed’s Evans (a voter) also will speak on monetary policy and the economy (Thursday11:30 ET). The hawkish Dallas Fed’s Kaplan attends and speaks at a conference on monetary policy (FridayВВ 09:30 ET). The Beige Book (Wednesday) will be overlooked in favor of Yellen’s testimony, and won’t deviate from the moderate growth outlook.

Canada:ВВ In Canada, the Bank of Canada’s policy announcement, Monetary Policy Report and press conference (Wednesday) comprise the main event this week. A hawkish U-turn by the Bank via several recent appearances and interviews by Governor Poloz and Senior Deputy Governor Wilkins have left a widespread expectation that the Bank will increase rates by 25 basis points to 0.75%.The data calendar is lean this week. Housing starts (Tuesday) are seen improving to a 200k pace in June from the 194.7k clip in May. The June Teranet/National HPI (Wednesday) and the May new home price index are also due this week.

Europe:ВВ European bond yields continue to rise, while Eurozone spreads are widening as ECB officials continue to mull exit strategies, despite the fact that the Bank still has an easing bias on QE and that tapering won’t start until early next year. This week’s data round is unlikely to settle the argument over inflation one way or the other as there’s unlikely to be an major revisions to final price data for June. German HICP (Tuesday) is expected to be confirmed at 1.5% y/y, the French reading (Tuesday) at just 0.8% y/y, the Italian at 1.2% y/y and finally the Spanish at 1.2%. Those would all be sufficiently soft to back the doves’ arguments who maintain that the inflation remains too low and that the economy still needs a substantial degree of monetary support. Meanwhile, the hawks can find solace in May production numbers, which are expected to rise 1.2% m/m, more than doubling the 0.5% pace from April, supported by very strong German and French numbers. The data calendar also has German and Eurozone trade numbers. Germany issues 10-year Bunds (Wednesday).

UK:ВВ UK data has been flagging an onset of a stagnation in economic growth, with last week bringing unexpected weakness in production, trade, and house prices, and in all three of the PMI sector surveys. The new minority government, meanwhile, has managed to survive the early weeks of its existence, and negotiations with EU counterparts on Brexit will continue as planned. The “Great Repeal” bill will start to be debated in the coming weeks. The calendar this week is relatively quiet, highlighted by June labor data (Wednesday). The report is expected to show the unemployment rate holding steady at the cycle low of 4.6% in May. A key focus for policymakers and the markets alike, will be average household earnings, as any fresh signs of weakness will provide an offset to the hawkish stance of the BoE. The BRC June report on retail sales is also due (Monday), which will also be scrutinized for signs of weakness as incomes have tipped into negative growth in real terms in recent months.

Japan:ВВ In Japan, June PPI (Wednesday) is forecast slipping to 1.9% y/y from 2.1%, while the May tertiary index (Wednesday) is expected to fall 0.5% after rising 1.2% in April. Revised May industrial production will be released onВВ Friday.

China: The June trade report (Thursday) should see the surplus widen to $42.0 bln from $40.8 bln. June retail sales are set for aВВ SaturdayВВ release, and are forecast up 10.5% y/y from 10.7% previously.

Australia:ВВ In Australia, the pickings are slim this week. Top tier economic data is limited to housing investment (Tuesday), expected to bounce 1.0% m/m in May after the 1.9% drop in April. The Reserve Bank of Australia has nothing scheduled this week. The next event is theВВ July 17ВВ release of the July meeting minutes.

New Zealand:ВВ New Zealand’s calendar has June retail card spending (Tuesday), which we expect will rebound 0.5% after the 0.4% drop in May. REINZ house sales for June are due out during the week. The Reserve Bank of New Zealand’s next meeting is onВВ August 10.ВВ No change is expected to the current 1.75% rate through year-end.

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