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Week in Focus – Week Commencing 16th July 2018

Key Events

Monday: Chinese GDP, Trump/Putin Summit, US Retail Sales

Tuesday: NZ CPI, RBA Minutes, UK Labour Market, US Industrial Production, US TIC Flows, Fed Chair Powell’s Semi-Annual Testimony

Wednesday: UK CPI, EZ CPI (Final), US Housing Starts & Building Permits

Thursday: Australian Labour Market, UK Retail Sales

Friday: Japanese CPI, Canadian CPI

 

Inflation, Inflation, Inflation

New Zealand, Japan, Canada, the Eurozone and the UK all release CPI reports throughout the week. Starting in New Zealand, CPI is expected to rebound to 1.6% Y/Y in Q2 from 1.1% in Q1 after the recent increase in oil prices and weaker currency lifts prices. “The near-term inflation outlook has firmed markedly as a result of higher oil prices, the recent fall in the NZD and incoming petrol taxes,” writes ASB, “However, on the flip side, core inflation pressures remain relatively subdued and downside risks to the outlook have also increased over recent months.”

Following Wednesday’s Bank of Canada rate decision – where the central bank hiked rates by 25bps – markets will be keeping a close eye on Canadian CPI for clues on when the next rate move will come. BoC Governor Poloz refused to commit to any sort of guidance in his post decision press conference, saying that higher interest rates would be warranted but that they are not in a position to say by how much and at what pace. Headline CPI is expected to pick up to 2.5% Y/Y from 2.2% last month. “On a monthly basis, gasoline prices were actually down slightly (-2.0%), while some seasonal declines are also anticipated,” said RBC. “On the other hand, a pick-up in food prices is expected, while meaningful reversals of May’s declines for telephone services (-4.3% m/m) and auto prices (-1.5% m/m) would add some upside to our estimates,” the bank adds.

Japanese CPI is expected to remain subdued at just 0.8% Y/Y, however, that would still be the highest rate in three months. The timelier Tokyo CPI rose to 0.7% Y/Y in June, better than the expected 0.6% and up from 0.5% in May, boding well for the national figure.

Eurozone CPI is expected to print at 2.0% Y/Y, unrevised from the flash estimate. The core figure is expected to be unrevised at 1.0% after easing from 1.1% the previous month. “Looking at the main components of euro area inflation, energy is expected to have the highest annual rate in June (8.0%, compared with 6.1% in May), followed by food, alcohol & tobacco (2.8%, compared with 2.5% in May), services (1.3%, compared with 1.6% in May) and non-energy industrial goods (0.4%, compared with 0.3% in May),” said Eurostat in the flash release.

Trade

The US-China trade spat took another step to becoming an all-out trade war last week when the Trump administration released a list of USD 200bln of Chinese imports that would face 10% tariffs, including fruit and vegetables, some white goods and clothing. The list should not have come as a surprise after Trump said they were preparing a list of goods should China respond, which they did. China said they were “shocked” by the latest escalation but China does not import enough from the US to match the tariffs. Sources suggested that countermeasures that China is taking include holding up licences for US companies, delaying approvals for M&A deals including US companies and ramping up checks and inspections of US goods. Markets will be hoping for signs of negotiations, however, Mnuchin said on Thursday that talks with China have broken down while China’s Vice Commerce Minister said talks will be pointless if the US keeps chopping and changing all the time.

A theme that has lingered in the background amid the escalating trade tensions is what China might do with its large holdings of US treasuries. The research house SGH Macro Advisors have released reports suggesting that the PBoC and China will refrain from increasing their holdings of US treasuries, and on the contrary, will seek to reduce them “appropriately”. Nevertheless, SGH say, that the PBoC has no intention of dumping large quantities of US treasuries suddenly. US TIC flow data is released on Tuesday and markets may be looking at the data for any signs that China has been reining in purchases amidst the trade tit-for-tat.

China publishes its Q2 GDP figures on Monday, with growth expected to slow slightly to 6.7% from 6.8% in Q1. The implementation of trade tariffs by the US and China is not expected to have had an impact on growth in Q2 but going forward, any escalation will likely weigh on GDP in the coming quarters. “The cumulative impact of the measures now on the table could potentially reduce China’s overall economy by 0.5 percentage points,” said Capital Economics, “but that the impact could deepen if the battle escalates.”

Central Banks

Fed chair Powell will deliver his dual testimonies to the Senate Banking Committee (Tuesday) and House Financial Services Committee (Wednesday). Ahead of these appearances, Powell gave an interview this week where he sounded upbeat about the state of the economy, with unemployment low and inflation near target. Powell did, however, sound a note of caution with regards to the state of global trade, stating that there is a rising level of concern about the effects of changes in trade policy, any trade disputes or high tariffs will be a negative for the economy. Trade will likely be a key topic Powell will be grilled on, not only because of the economic implications, but also the political nature of the subject. On wages, Powell said that although the labour market is strong by any measure, low wage growth was a puzzle. There was another note of caution with regards to inflation/fiscal stimulus, warning that it would be challenging for the Fed to raise rates while the economy was weakening. Powell believes the fiscal stimulus will support the economy over the next three years. Powell, who has tended to avoid rocking the boat in his speeches since his appointment, will likely repeat these themes in his testimony, analysts believe, which will likely see him give a nod to the Fed’s current forecast which look for two more rate hikes in 2018. His comments on the shape of the yield curve will be of note, given that the gap between 2-year and 10-year Treasury yields narrowed to just 25bps this week; the recent FOMC meeting saw staff present theories on the yield curve, apparently concerned that any inversion could be a signal of a recession. 

RBA’s meeting minutes from its July meeting will be released on Tuesday, and the minutes aren’t expected to contain any significant new information. At the meeting, the Reserve Bank kept policy on hold, with the bank concerned about the state of international trade, subdued domestic wage growth, as well as tightening credit conditions within Australia. After the RBA remove the phrase that the next move is “likely up” in its June meeting minutes, some are now questioning the notion whether the next rate move is up. “For now, RBA comments suggest the hurdle to ease is still high, but if our 'credit tightening' deteriorates into a ' credit crunch' scenario then we think the RBA would likely cut,” UBS opines.

UK Data

This week sees a data deluge from the UK with jobs, inflation and retail sales metrics all due for release. Starting off with the labour market report on Tuesday, as has been the case for a while now, focus will continue to fall on earnings metrics with headline average earnings excepted to remain at 2.5% with the ex-bonus reading set to slip to 2.7% from 2.8%. Interestingly, RBC highlight that given other reports such as the Bank of England’s Agents Report, “the MPC appear to be looking at a wider range of information on wage developments than just the ONS earnings series”. Wednesday will see the release of domestic inflation figures with headline Y/Y CPI expected to climb to 2.6% from 2.4% and core Y/Y to rise to 2.2% from 2.1%. Despite the weight placed on CPI figures in central bank policy formation, ING believe that any deviations will be unlikely to derail the BoE from lifting rates next month. ING back their view on a 25bps hike by the MPC by referencing recent solid economic data, something which could be emphasised by Thursday’s retail sales numbers.

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