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Week in Focus – Week Commencing 18th June 2018

Key Events 

  • Monday: ECB Forum on Central Banking begins
  • Tuesday: RBA Minutes
  • Wednesday: BoJ Minutes, Brazil Rate Decision
  • Thursday: BoE Rate Decision, SNB Rate Decision, Norges Bank Rate Decision, Banxico Rate Decision, Eurogroup Meeting
  • Friday: Japan CPI, OPEC Meeting, EZ PMIs, Canadian CPI 

Global 

On 21 June, the JMMC will meet ahead of OPEC’s 174 the Meeting on 22 June, and then a joint OPEC non-OPEC meeting will take place on 23 June. Participants are set to review the current pact to that restricts oil output by 1.8mln BPD. Russia and Saudi Arabia has heavily hinted in recent weeks that supply curbs may be eased in order to offset production declines in Venezuela and Angola, and looking ahead, possibly (likely) Iran due to the re-imposition of US sanctions on the nation, and maintain market stability. “Saudi Arabia and Russia have been heavily hinting at an easing of production quotas, ostensibly in the interest of maintaining market stability in the context of downside risk to Venezuelan and Iranian supply, growing demand, and evident success in normalising the market,” UBS writes. “Inventories have fallen below the 5-year average and Brent prices are above $70/bbl.” But there have been comments from other OPEC+ members – Iraq and Venezuela being the loud voices – indicating that it may not be as straightforward. UBS suggests that OPEC will have memories of 1997, where it raised production into a weakening market; however, this occasion appears to be different, with global demand growth forecasts generally holding up quite well in the latest batch of EIA/IEA/OPEC monthly reports. Additionally, it remains to be seen to what extent capacity can be lifted: among OPEC members, UBS estimates spare capacity of just 1.1mln BPD, though over a horizon of 90 days, that could be seen around 3.4mln BPD. “As a non-OPEC member we expect Russia to be keen to return to unconstrained production as quickly as possible. We also think Saudi has shown itself to be willing to go it alone (as it did in 2011 and 2014) but would prefer to reach consensus,” UBS says, and its expectation is that around 300k BPD to 400k BPD will be released, implying balanced markets in 2H18, but with flexibility retained.” 

North America

Canadian CPI (Friday) is seen 0.1% MM vs 0.3% MM previously, and the YY rate is seen at 2.1%, moderating from 2.2%. Analysts at RBC are more optimistic, however, and project a 0.4% MM gain, driven by higher gas and travel prices. “The expected gas price increase contrasts with the 4% m/m decline a year ago and combines with the roll-out of the first half of the 2017 Ontario’s electricity price decline to be the drivers of the YoY rate rising from 2.2% to 2.5%,” RBC says. Regarding the BOC’s measures of inflation (trimmed, common and mean CPIs), an average of the three measures is currently sitting at 2.00%, and has remained here for the last three releases, which RBC says is consistent with the closing output gap, though the bank does suggest that there may be some upside potential in this month’s data, after the median and trimmed measures were slightly under trend a year ago. At its May meeting, the BOC dropped its previous reference to “cautious” policy adjustments, saying it will take a gradual approach to rate hikes, and said higher rates will be warranted to keep inflation near target. This was backed-up in comments from officials speaking after the rate decision. 

Canadian retail sales (Friday) are seen flat in April at 0.0% MM (prev 0.6%), though the ex-autos measure is seen rising by 0.2% MM (prev -0.2%). Auto sales are estimated to have declined by around 2% in the month after a strong March, where they rose by 3%.  

Europe/UK  

Last week for the UK saw a ramp-up in Brexit-related headlines with the House of Commons rejecting a slew of amendments proposed by the House of Lords. Tory rebels eventually fell into line after being offered a ‘compromise’ on the meaningful vote amendment. However, in what has been a common theme for UK politics, the government’s optimism was short-lived, as the concessions put together by the government to appease the remain-leaning Conservatives was ultimately rejected by the rebels after alleged last-minute adjustments by the government. Subsequently, this has once again put May on a collision course with her own party as she battles to appease by the remain and leave wings, which will likely be highlighted this week by a further round of voting in the House of Lords on Monday, and thereafter a Commons vote on Wednesday, ahead of the Eurogroup meeting on Thursday.  

Elsewhere for the UK, this week sees the latest policy announcement from the Bank of England (no QIR) with the Bank expected to keep rates at 0.50% in a 7-2 vote. Last month, the MPC drew criticism after the lack of clarity in their forward guidance after their findings appeared to be at odds with the messages presented by the February QIR. This was largely as a by-product of the soft Q1 GDP figures which showed Q/Q growth of just 0.1%. At the time, the BoE stated that they thought the impact of adverse weather conditions was larger than that suggested by the ONS and thus this week’s meeting will likely see the MPC look to buy time to confirm their viewpoint by holding fire on rates. Capital Economics highlight “May’s Markit/CIPS surveys suggest that the economy is expanding at a quarterly pace of around 0.4%, in line with the Bank of England’s latest Inflation Report forecast”. Capital Economics also go on to suggest that “since the survey does not account for activity on the high street – which has surged in Q2 so far – if anything it might be understating growth”. As such, the research consultancy expects rate hikes to resume later on in the year with the possibility of two hikes if wages recover and inflation falls at a faster rate than envisaged by the BoE.  

The Norges Bank is expected to maintain rates at 50bps at its policy meeting on Thursday, and the Bank is expected to reiterate that rates will most likely be lifted “after 2018”. Analysts at Citi are not expecting any major adjustments to the central bank’s stance, and sees the next hike coming in September. It does, however, see inflation forecasts being raised: “Since the March meeting, headline CPI inflation has been lower than Norges Bank expectations in March, in line in April and higher for May.” Core prices have also surprised to the downside, and oil prices are nearly 20% where the central bank projected they will be in June, and the trade -weighted exchange rate is marginally weaker so far in Q2. And additionally, Citi notes that there is some evidence that real wages are starting to pick up, while capacity utilisation is also rising. 

The Swiss National Bank will likely keep its policy settings unchanged at its meeting on Thursday, and the meeting is expected to be a non-event. “SNB has earlier signalled that it intends to ‘remain very prudent’ as the FX market is ‘in a relatively fragile situation’,” analysts at Nordea write. “Recent events have supported this cautious stance, as evidenced by the fall in EURCHF from 1.20 to 1.15 as political risks escalated.”  

After the European Central Bank’s policy meeting, where it adjusted its bond buying programme, and suggested rates will not be raised before the Summer of 2019, the almost customary “ECB sources” followed, and reported that policymakers were split over the wording of ending QE, as well as guidance on rate rises; some wanted to keep the door open for an extension of QE, and others wanted to signal a possible rate hike in the middle of 2019, sources said. That split will be in focus next week at the ECB’s Forum on Central Banking in Sintra; the event will feature a host of A-List central bankers, and from the ECB, will include Draghi, Praet (usually dovish, though you will recall his comments a fortnight ago triggered a repricing of expectations for this week’s ECB meeting), Coeure, and Lautenschlager. NOTE: ECB’s Weidmann will not be at Sintra, but will be making comments at the Bundesbank/Bank of France conference on monetary policy. 

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