Original insights into market moving news

RANsquawk Week in Focus (week commencing 12th August 2019)

  • MON: N/A
  • TUE: German CPI, UK Labour Market Report, German ZEW, US CPI.
  • WED: Australian Wage Price Index, Chinese Industrial Production, Retail Sales, German GDP, Swedish CPI, UK CPI, PPI and RPI, EZ GDP.
  • THU: Australian Employment Report, Norges Bank, UK Retail Sales, US Philly Fed, NY Empire State Manufacturing, Retail Sales, Industrial Production.
  • FRI: OPEC Monthly Report, Eurozone Trade Balance, US Building Permits, Housing Starts, Uni. Of Michigan.


The Street looks for consumer price growth of 0.2% M/M in July, and expects the Y/Y to rise to 1.7% from 1.6%. The core M/M is expected to come in at 0.3%, and the core Y/Y is seen unchanged at 2.1%. UBS says it is optimistic about the data, noting that after small rises in the last two months, we could see a “solid” print (it sees +0.3% M/M). The headline is likely to be driven higher by gasoline prices. The core measure, however, may be more subdued; it rose strongly in June, after four months of weak readings, and as such, there could even be some slowing, UBS warns. There will be an eye on the impact of tariffs; UBS says the pass-through could be supportive of consumer price inflation, particularly the household furnishings, which contains many goods that were subject to higher tariffs in May, which also saw rises in June. The bank is expecting further pass-through in the months’ ahead, but notes the fourth tranche of tariffs, which will kick in in September, will be focussed on clothes, cell phones, and computing items. Looking ahead, the bank sees Y/Y remaining steady, but does see some declines later in the year. Casting our attention away from CPI, UBS thinks PCE prices will also be stable in the months ahead, but sees the Y/Y rate at 1.8% in August (from the current 1.6%). 


The Street expects US retail sales to rise by 0.3% M/M (prev. 0.4%), core retail sales are expected at +0.4%, matching the prior. A cooling in the pace of vehicle sales may temper retail sales growth, after the annualised rate of 16.9mln units, from a prior 17.2mln. Firmer fuel prices at the pump rose in the month, auguring for gasoline station sales, which augurs well for the ex-autos component. Same store sales data in July has been holding up well, which could support the Control group measure, while consumer confidence around cyclical highs amid a strong labour market and rising real wages could also be a supportive factor in the months ahead. 


Italy’s right-wing League party has introduced a no-confidence motion against PM Conte. The Italian senate will convene on Monday to set the timetable for a no-confidence vote against the Conte-led government, La Stampa reported. The relationship between the League party and the 5-Star Movement reached breaking point over a project for a railway between Italy and France (TAV), as parliament rejected a motion by 5SM to block the plan. Thus, Italian Deputy PM/League Leader Salvini has called for a snap election after claiming that there is no longer a majority to support the coalition government. Italian press reported that Deputy PM Salvini favours October 13th as the date for an election (Corriere), although other newspapers noted that President Mattarella is mulling October 23rd (La Repubblica), albeit this is subject to the timing of the aforementioned confidence vote. Salvini is currently pressing for a parliamentary debate next week, whilst reports stated that the 5SM favours one after the August 15th national holiday. It’s worth keeping in mind that the Italian parliament is currently on its summer break, but it could reconvene next week. Following the confidence vote, it rests with President Mattarella to dissolve the government and decide whether the next steps would be a general election or the installation of a technocratic government in order to pass the Autumn 2020 budget. Reports from Corriere also speculated that the President could seek a “guarantee government”, i.e. a coalition that can manage. This notion has been dismissed by Salvini, who said that it would be undemocratic, and favours elections.


Next week sees the release of the latest UK labour market (Tue), inflation (Wed) and retail sales (Thu) metrics, following this week’s disappointing Q2 GDP print. On the jobs front, headline earnings are set to decline to 3.1% from 3.4% with the ex-bonus metric expected to slip to 3.5% from 3.6%, whilst employment is forecast to rise 45K and unemployment rate remain at 3.8%. Ahead of the release, RBC highlights that recent reports have seen growth driven by part-time and self-employed positions, as opposed to full-time employed and thus it is important to look at the overall quality of growth. Nonetheless, the Canadian bank acknowledges that focus will remain on any fluctuations in pay-growth, particularly if the ex-bonus metric, as forecast by RBC, rises to 3.8%, which would push wage growth up to 3.8% 3M/Y; last seen in May 2008. From an inflation perspective, headline Y/Y CPI is forecast to slip to 1.9% from 2.0% with the core metric set to slip to 1.7% from 1.8%. Ahead of the release, RBC notes that “Energy prices are likely to be the main influence on CPI inflation in the second half of the year. Last year’s sharp increases should see petrol prices drag on headline CPI through to November”. However, this was largely acknowledged by the BoE in its August QIR, with the MPC surmising that “after falling in the near-term, CPI is expected to rise above the 2% target, with CPI to reach 2.4% by the end of the three-year forecast period”. On the retail front, all M/M and Y/Y figures for the headline and core metrics are set to show declines from the priors during July. Ahead of the release, the BRC metric from July noted that “the UK may have had record temperatures in July, but retail sales were far from record-breaking at just 0.3% growth”, whilst Barclaycard Consumer Spending for July rose to 1.7% Y/Y from the prior 0.9%; Barclaycard noted that “a contraction in essential spending kept overall figures subdued”.


July industrial production, analysts look for 6.0% vs 6.3% in June. While manufacturing PMIs improved a touch in the latest reading, they are still weak, and Capital Economics thinks they are consistent with a slowdown in the growth of industrial production, especially due to base effects. July fixed asset investment data is expected at 5.9% from a prior 5.8%. While infrastructure spending may have seen support from accommodative fiscal conditions, real estate sectors have seen caution, with authorities keen to cut leverage levels within the sector. What’s more, Capital Economics says, manufacturing firms are unlikely to have stepped up factory construction as profits continue to be under pressure, and external headwinds remain. Finally, July retail sales are seen at 8.7% from a prior 9.8%; vehicle sales rise in June as dealers ran down inventories as new emissions standards came into effect, but CapEco says this effect may have unwound in July.


July’s labour market report on Thursday will carry much focus, given the RBA’s shift in attention to labour developments and readiness to act if needed, which was this week emphasised in the policy meeting, SOMP, and remarks from Governor Lowe; “The labour market will continue to provide an important guide as to which path we are on”. Wage Price Index (Wednesday) is expected to remain at 0.5% QQ and 2.3% YY. Westpac notes that there is little to suggest there has been a meaningful acceleration in Q2 but sees wage inflation to drift higher in the longer term. The main event, Thursday’s jobs data, is likely to see the employment change rebounding to 14k, the unemployment rate unchanged at 5.2%, and participation rate steady. Some desks see a more pessimistic release; Westpac highlights participation is near record highs, and thus expects a modest decline to match its +5k employment forecast, and the bank sees unemployment rate rising to 5.3%.


Norges Bank is expected to keep rates on hold at 1.25% next week, given the Bank’s current rate path and comments from Governor Olsen calling for another hike in 2019, likely in September. As such, focus in this meeting will be on whether the bank continues to present a clear intention to hike, or joins the dovish pivots undergone by many other central banks. On the domestic front, Y/Y CPI for July remained at 1.9% (Exp. 1.8%), and was in-fitting with Norges Bank’s assessment that CPI is to be largely steady in the coming months (core inflation was 2.2% Y/Y, falling from 2.3%; the Norges Bank’s forecast was for 2.4%). In terms of the labour market, the unadjusted unemployment rate jumped to 2.4% from 2.1%, slightly above both market expectations and the Norges Banks 2.1% average view for 2020; however, this is unlikely to derail the Bank’s plans for a 2019 hike, analysts said. Elsewhere, housing prices dropped in July after six consecutive months of increases, in-spite of this drop-in house price inflation, Swedish bank SEB’s view remains that it is a factor in favour of the hawkish stance. Overall, the domestic front remains supportive for the Bank’s rate path, with Governor Olsen having stated after June’s meeting that the path points to a September hike, and a further one prior to Summer 2020. On the other hand, while the domestic data and Bank comments remain supportive of this trend, the global growth environment has significantly changed since the prior meeting. The dovish pivot seen, most notably, in the Fed may be enough of a global easing bias to prevent the bank from hiking in September as initially expected; as such, signalling ahead of next month will be crucial. Conversely, oil prices have deteriorated significantly, particularly since August, which ING notes has weighed heavily on the NOK, and as such, might reassure over a September hike in order to offset the downside for the currency.


Analysts at TD Securities are expecting Banxico to keep rates unchanged next week, arguing that underlying inflation dynamics continue to evolve in an unconstructive manner in the face of non-convergent inflation expectations, which the bank says is driving upwards revisions to its own inflation forecasts. “We expect to see dovish tilts in the statement play out through the growth channel, and expect the board to continue to have at least one dissent for rate cuts.” TD says it sees the potential for cuts later in the year, should the next two months’ of inflation data show core dynamics and inflation expectations are better contained; but its base case still sees the first quarter of 2020 as the most likely time.