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Week in Focus – Week Commencing 7th May 2018

Key Events

Monday: BoJ Minutes

Tuesday: China Trade Balance, Fed’s Powell scheduled to speak

Wednesday: US PPI

Thursday: BoE Rate Decision & QIR, RBNZ Rate Decision (Wednesday evening UK time), China CPI, US CPI

Friday: Canadian Labour Market data

 

North America

Data releases are thin from North America in the week, with inflation in focus in the US and labour market data from Canada. Headline US CPI is expected to increase 0.3% M/M taking the annual rate to 2.5% from 2.4%, the highest level since January 2017. Higher energy prices are expected to give a lift to the headline. “Gasoline rose more than 6% in April and about double the seasonal norm,” writes RBC. Further gains in inflation are expected towards the end of the year as transitory factors – mobile phone plan increases and physician services – drop out of the Y/Y figures. On Tuesday, Fed Chair Powell is scheduled to be giving a speech on monetary policy influences on global conditions. The comments from Powell will be closely followed after Friday’s Nonfarm Payrolls which again showed soft wage growth. Previously, Powell has said there were no “decisive” signs of wage inflation and Friday’s data should support his view. The comments also come following the Fed’s latest monetary policy decision where the addition of the term “symmetric” in regards to the inflation target have attracted some attention. “The inclusion of the word ‘symmetric’ helped offset the more hawkish tone in the prior paragraph which highlighted that core inflation is moving closer to 2%,” said Bank of America.

On Friday, Canada releases its labour market data and employment is expected to increase 20K, after the 32K increase in March, that was primarily driven by construction and public administration roles. “The labour market backdrop has improved substantially of late, with the BoC’s own Labour Market Indicator (LMI) improving 0.5pp to 6.4 in the past six months, faster than the unemployment rate’s decline over that time,” writes RBC. Whether this is enough for the Bank of Canada to resume rate increases is up for debate. BoC Governor Poloz has previously spoken about the untapped supply potential in the labour market, particularly from the young, women and long-term unemployed who could be driven back into the labour market. If they return – incentivised by higher wages – then he is confident that Canada can grow quickly without generating higher inflation, which might suggest a slower pace of rate hikes going forward.

Europe/UK

One month ago, the chance of a BoE May hike was a dead-certainty; one-week ago, the probability dropped following dovish comments from Governor Mark Carney, after he suggested that while we should prepare for a number of hikes over the coming years, they might come after the May meeting. And now, with under a week to the MPC’s policy decision, a weak string of economic data (including soft Q1 GDP which came in at a meagre 0.1%; easing PMIs, signalling some loss of momentum in the underlying economy; while CPI remains above target, the latest data for March fell short of expectations), has seen the implied probability of a May hike fall into single digits. There seems to be uncertainty, however, in terms of how the vote split will be. “The pattern should be telling as it will reflect any shift in the policy outlook following the recent patch of soft data,” says Berenberg. An increase in the number of dissenters would signal that the BoE is confident about the health of the economy but concerned about inflation risks. This could point to a potential next hike as early as July or August.” But on the other hand, “if [hawkish dissenters] McCafferty or Saunders withdraw their votes for a hike, markets may start to wonder if the November 2017 rate hike was a ‘one and done’.” The meeting will also feature updated economic projections, as well as a post-meeting press conference with Governor Carney.

In terms of Italian politics, things could come to a head this weekend after Italian President Mattarella ruled out new elections in June, following the news on Monday that Italy’s 5 Star Movement leader Di Maio called for early elections after talks between the 5SM and PD broke down. Instead, Mattarella has called for a new round of consultations over possible government formation on May 7th but this was met with a largely tepid reaction from 5 Star Movement leader Di Maio who continued to bang the drum for a fresh round of elections. The interjection from the 5SM is naturally a potential hurdle for the process of negotiations given the party commanded the largest share of the vote and as such, the prospect of Italy being able to form a government continues to look bleak. That said, the PD are said to re-approach consultations of Monday with a clear mind but given the ideological differences between themselves and 5SM any solution to the matter is far from clear. In terms of the market impact, this could place a weight on BTPs given the potential for further political uncertainty but as we have mentioned frequently in our commentary, the issue seems continued to Italian assets and not those of the broader Eurozone area.

Asia-Pacific

The Reserve Bank of New Zealand is seen maintaining rates at 1.75% at its meeting next week, and the central bank is also seen presenting a neutral stance on policy. The meeting is the first for Governor Orr under the RBNZ’s new mandate, which includes an employment target, which will result in more attention around the central bank’s statement. The labour market is generally in good nick, ASB Bank argues, and don’t signal any immediate need to alter the course of policy. “Developments since the March OCR Review tilt marginally towards more caution over how long it will take to sustain inflation comfortably around the 2% inflation target mid-point,” ASB Bank writes. “It is possible that the RBNZ defers slightly the timing of its forecast OCR increases. But recent developments are well within the range of shifts the RBNZ has absorbed without tinkering with its OCR view.” ASB sees rates remaining at low levels until at least the second half of next year.

From China, trade data on Tuesday will be the key focus, particularly given the ongoing trade discussions and heightened tensions between the US and China. “After underperforming in 2017, China’s exports have performed well so far this year,” says ING. “The 13% Y/Y export growth in Q1 2018 was the third best after Vietnam and Malaysia. The consensus of 8% growth in April indicates some tapering of the strength.” The data release comes after the initial meetings between the two economic titans which failed to result in any concrete agreement. Chinese officials were said to have viewed the US proposals as unfair. Of note, the US was said to have asked China to lower its trade surplus by USD 200bln by 2020. Meanwhile, China was said to have offered to increase its imports of US goods and lower tariffs on certain products, including cars.

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