Original insights into market moving news

Week in Focus; week commencing 8th July 2019


The FOMC meeting minutes may be overshadowed by Chair Powell’s semi-annual testimony to the House and Senate. Commerzbank’s analysts argue that Powell will use the testimony to push back against political pressure on the Fed from US President Trump, who has been urging the central bank to pursue a dovish policy path in order to compete with Europe and China, whom the President has accused of manipulating their currencies in order to gain an advantage over the US. Commerzbank argues that if Powell does not push back against the political meddling, it could signal that a rate cut at the July meeting is in the offing. In his recent remarks, Powell said that the Fed was insulated against political pressure in the short-term. The G20 has removed one source of uncertainty for the Fed, after the US and China agreed to a trade truce, of sorts; the FOMC’s attention will now focus on the economy. Although some of the data prints have been weak in June (regional Fed surveys, for instance), there are many idiosyncratic factors that can explain the weakness (tensions with US/Mexico were ramping up at the time, but have subsequently eased). Even though inflation is below target, the labour market is at full employment. There is a chance that Powell could retain optionality to ease, perhaps by suggesting that data has strengthened the argument for a rate cut at the 31 July meeting, although desks are sceptical as to whether he will endorse market expectations, which are currently pricing 75bps worth of rate cuts by the end of the year. Meanwhile, the minutes of the Fed meeting are likely to underscore the dovish message outlined by the central bank in June, where it tweaked its statement, but the median ‘dot’ still did not see a rate cut in 2019.


After four months of disappointing readings, analysts at Credit Suisse look for core CPI to rise 0.2% M/M in June, which should be enough for the Y/Y rate to remain at 2.0%. The firmer data should be underpinned by used vehicle sales, which has been dragging on the core goods metric in recent months. Shelter inflation eased in May, however, and the deceleration in house prices might keep CPI modest in the months ahead. The bank looks for the headline M/M print to be -0.1% on the back of declining gasoline prices. And it does not expect to see any visible impact of tariffs in the June report. “Chinese imports that entered into the US before June 15th were not subject to the additional 15% tariff rate (raised to 25% from 10%),” CS points out, “Considering the lag time from port to shelf, we’d expect the impact to start showing up in July.”


The minutes are likely to underline the dovish messaging from central bank officials of late: This week, Knott said expectations for Q2 and Q3 are less favourable than Q1, adding it's indisputable that inflation remains too low, and the Bank is ready to act in adverse scenarios. Later in the week, Rehn said further monetary stimulus is now needed until there is an improvement in economic and inflation prospects, if the central bank is to meet its mandate, adding that the slowdown was no longer temporary. And then there is the prospect of Lagarde at the helm of the ECB, and desks continue to size-up the implications of IMF head taking over from Draghi; general run of opinions is that she’d be a dovish, continuity-candidate. Indeed, the IMF’s most recent Article IV on the Euro area warned of a “precarious central forecast” and found that a downgrade of the inflation outlook could require even more accommodation from the central bank. Desks have taken this as a suggestion that Lagarde appears to have already backed lower rates and QE2. “Under her leadership the IMF has generally seemed to take a more 'Anglo-Saxon' as opposed to 'Germanic' view on monetary policy issues, largely in line with previous Fed chairs Bernanke and Yellen, as well as current ECB President Draghi and BoJ Governor Kuroda,” UBS said, “for investors, this means that further asset purchases by the ECB should very much be expected, with Draghi probably raising the issuer limit to 50% in September.” UBS thinks that the picture is less clear on negative rates, but says it may create an additional incentive for Draghi to push through tiering and further rate cut before his terms ends.


The Bank of Canada will likely hold its benchmark rate at 1.75% next week, however, attention will be on forward guidance, specifically on whether the BOC adopts an easing bias like some other major central banks; Canadian bank RBC is sceptical, and sees the Bank reiterating an accommodative, but data-dependent stance. In the April Monetary Policy Report, the BOC presented a cautious profile for economic growth, TD Securities notes, and the BOC said that it was paying special attention to developments in household spending, oil markets, and international trade tensions. TD thinks this meeting will reveal how the Bank will manage the trade-offs between these factors. The Canadian economy has held up quite well over the last three-months, and TD’s tracker for Q2 sees growth around 2.8% (vs the BOC forecast for 1.3%). Inflation has also been trending higher, with the average of the three BOC measures over 2.0% in May for the first time since 2012. TD says that with the expected upward revisions to 2019 Q2 tracking, the full year forecast could be revised higher by around 0.1ppts to 1.3%; there is likely to be and offsetting move lower to 1.9% or 2.0% growth in 2020 however (from 2.1%) to reflect the trade related uncertainty around global growth. For inflation, TD expects the BOC to revise its near-term projections upwards for 2019, with the Q2 measure rising from 2.0% to 2.2%. On the output gap, TD thinks the BOC is likely to characterize it as widening in 2019 Q1 to a range of 0.5-1.5%, but still expect it to mostly close by the end of the forecast period. On the BOC’s global view, its current forecasts are below consensus for both US and global growth, and therefore unlikely to be revised lower; they may get a mention in the statement/MPR/press conference, however.


Last month’s energy reports came in the context of escalating trade tensions. The EIA and IEA both downgraded forecasts for near-term global demand growth (to an average of +1.42mln BPD Y/Y); since then, ‘trade truces’ have somewhat eased pressure on global growth, though still linger, while some macro data also signals the need for caution, amid warnings from policymakers of downside risks ahead. Meanwhile, the supply side of the equation has recently been buttressed by OPEC+ extending its 1.2mln BPD production cut pact through March 2020; the bulls argue that this over-delivers on expectations vs December 2019, and it will contribute to the supply/demand deficit of around 0.8mln BPD in Q3, helping to draw down inventories. Risks include US shale production, which has contributed to the depressed call on OPEC, and last month’s reports saw the call edging lower through 2020 to around 29.4mln BPD, from the current level of around 30.7mln BPD; another factor might be geopolitical wildcards, in the form of Iran/Libya, as well as Angola/Venezuela. In wake of the OPEC deal, crude prices have dropped; one explanation might be a sell-the-fact play, though another might be attention re-focussing on the uncertain demand side.


Analysts expect Chinese CPI to fall in June by -0.1% M/M, though the Y/Y should remain unchanged at 2.7%. "Food inflation rose in May and early June but has been moderating in the second half of the month. So, monthly Y/Y growth is likely to be broadly comparable to the level in May," Goldman Sachs thinks and the bank sees PPI lower on the back of lower upstream prices. "While most of the focus on policy has been on the trade and domestic activity growth, inflation is also important in affecting policy," GS explains, "without the fall in inflationary expectations it would have been hard to bring the interbank rate down in June."


Analysts have warned that the trade data may be subject to a greater level of uncertainty than usual; Goldman Sachs says they are being pulled by the drag from higher tariffs on one hand, and on the other hand, are being pushed from front-loading activity. But the bank believes that the improvement in June growth is unlikely to prevent Q2 GDP decelerating vs Q1 levels. The bank has recently slightly downgraded its view of China's GDP growth, and sees Q2 at 6.2% Y/Y (prev. 6.3%), implying an annualised rate of around 6.0% after seasonal adjustments (vs 7.1% in Q1), and the bank says it signals 2019 full-year growth at 6.3%, from a prior 6.4%. "Given downward pressures to exports from ongoing tariffs, likely payback from another recent round of “front-loading” of exports to the US, and policymakers’ desire not to over-stimulate the economy, we assess risks to our annual forecast as tilted slightly to the downside".


RBC says that distortions to activity caused by the UK’s expected EU exit at the end of March make it tricky to get a feel for the underlying growth trend in the UK. In January, monthly GDP grew +0.5% M/M, and then +0.2% M/M in February (partly boosted by pre-Brexit stock building), and the monthly GDP slumped to -0.1% M/M in March, dropping further at -0.4% M/M in April. The bank notes that the major drag on April's monthly GDP print was the large fall in car production (57k units in the month, -44.5% M/M) as factories brought forward their regular shutdowns to coincide with the potential disruption of the UK’s exit from the EU, though this partially reversed in May, and car production recovered to around 116k units, which represents a M/M rise of 45k. RBC thinks that this should be enough to give back some of the 0.2ppts it estimates was shaved from 'growth' in the April data. Additionally, the bank says that a positive contribution from services should see a rebound in M/M growth, which should keep the 3m/3m rate positive at +0.1%, though this in itself would be significantly slower from the +0.3% 3m/3m pace seen in April. 


Expected at +0.1% M/M (prev. +0.3%), and 2.0% Y/Y (prev. 2.2%); the CPIF measure is seen +0.1% M/M (prev. +0.3%) and +2.0% Y/Y (prev. 2.1%; Riksbank has forecast 1.8%). Nordea thinks foreign travel will drive upside, balanced by seasonal price cuts in clothing. Energy will also contribute downside, and Nordea says that if energy prices remain around current levels, which the Riksbank assumes, the effect will trim -0.5% points Y/Y from CPIF this autumn. “CPIF-inflation peaked in May, and June is the start of a downward trend to around 1% this autumn according to our forecast,” Nordea says, “although the effect has been less than expected, the weak SEK is nevertheless boosting inflation. It will continue to do so in the second half of this year but to a lesser extent than currently according to our calculations.” Potential impact on Riksbank: “Too low inflation, sluggish GDP growth, a deteriorating labour market and easing from the Fed and ECB make rate hikes unlikely. We expect the Riksbank to stay on hold this year as well as next year, and there will probably be speculation whether the Riksbank will launch easing measures later this year.”