A preview of the key events in the coming week (which will see more Central Banks jumping on the loose bandwagon and ease, because well, that is the only ammo the academic econ Ph.D's who run the world have left) courtesy of Goldman Sachs whose Jan Hatzius is once again calling for GDP targetting, as he did back in 2011, just so Bill Dudley can at least let him have his $750 million MBS LSAP. But more on that tomorrow.
What Matters in FX This Week : China Growth and Inflation Data, Ecofin Meeting, FOMC
The past week undid a large part of the constructive price action posted the week before and a significant part of the progress made following the Euro-area summit. First off, it was a data heavy week, during which, key releases such as the ISM and Payrolls disappointed, but not to an extent that would justify further and imminent easing of monetary policy by the Fed. Overall, the deterioration in activity and the higher threshold for Fed easing continue to push the dollar higher and continue to challenge our FX views, which are predicated on dollar weakness.
On the European front, the ECB cut both the refi and the deposit rate by 25bps, pushing the EUR lower against most trading partners. Despite broader risk-off sentiment, EUR under-performed even currencies highly sensitive to global growth like NJA FX and AUD.
The latter were broadly supported by the announcement that China eased policy rates following softer growth and inflation prints. The recovery in metals and oil prices backed the market view that policy driven demand strength in Asia may prove to be a bright spot amid this generalized deceleration in DM growth. More broadly, although our GLI indicator has shown signs of deeply negative momentum in global industrial output, it is also true that PMI data hints at underperformance of DM growth vs EM.
Net-net, this has resulted in further demand for “short DM vs long EM” trades but in a risk-neutral way. The most obvious candidate over the last few weeks has been the EUR; short EUR vs long commodity or EM FX positions have attracted considerable market interest. However, the key question remains how resilient will EMs prove to be should DM growth continue to deteriorate and risk aversion continues to pick up.
Back to Euro-area issues, following the summit results, markets likely expected to hear – either from the ECB or from governments – some provisions to protect against high and rising funding costs for Spain and Italy, even if that was a short term assurance until longer term policy goals are specified more clearly. However, the lack of clarity weighed heavily on peripheral bonds pushing Italian and Spanish yields to erase more than 2/3rds of the post summit gains. The net result was obviously also negative for risky assets more broadly.
Looking ahead, China data will be closely watched. The CPI is expected to dip significantly – to 2.1% in our forecasts vs expectations of 2.3%. A lower CPI print would leave further room for easing by local authorities, particularly if growth data justified it. In that sense, 2Q GDP will be followed by markets – we expect growth to have decelerated by 0.2% from 8.1% yoy in Q1 to 7.9%. IP probably stayed flat relative to last month.
In addition to China, a large number of countries are scheduled to release IP numbers in this coming week.
The Eurogroup/Ecofin meeting will discuss some of the details missing from the latest summit results and will also discuss developments in the Greek adjustment program. FOMC minutes will provide further insight into the Fed’s assessment of slowing economic conditions in the US and the probability for balance sheet expansion ahead.
Monday July 9
- China CPI (June): China CPI was 3.0%yoy in May. Consensus expects 2.3%, while we expect a print of 2.1%.
- Draghi Speech at the European Parliament in Brussels
- BOE Tucker Testimony to Commons
- Eurogroup/Ecofin Meeting
- Also Interesting: Japan Current Account Balance, Turkey IP, US Consumer Credit, Mexico INPC Headline Inflation
Tuesday July 10
- UK Industrial Production (May): We expect -1.7%yoy, slightly above consensus at -2.1%yoy for May, down from -1.0%yoy for April.
- Weidmann Speech in German Constitutional Court
- Also Interesting: France IP, Italy IP, Sweden IP, Norway CPI
Wednesday July 11
- Japan Monetary Policy Meeting: We and consensus expect no further easing steps from the MPC at this meeting.
- Germany CPI (June): Consensus expects 1.7%yoy in June, unchanged from the print in May.
- Brazil Monetary Policy Meeting: We (and consensus) expect the SELIC to be cut by 50bps from 8.50% to 8.00%
- United States Trade Balance (May): Consensus expects -$48.4bn in May, down from -$50.1%bn in April. We expect a print of -$50.5bn.
- United States FOMC Minutes
- Also Interesting: Czech CPI, Hungary CPI, Turkey Current Account Balance
Thursday July 12
- South Korea Central Bank Meeting: Consensus expects the base rate to remain unchanged at 3.25%.
- Indonesia Central Bank Meeting: The policy rate was at 5.75% in June. Consensus expects no change in the July Meeting.
- Chile Central Bank Meeting: We and consensus expect the base rate to remain unchanged at 5.00%
- Euro-area IP (May): Consensus expects 0.0%mom up from -1.1%mom in April.
- ECB Monthly Bulletin
- Also Interesting: India IP, Sweden CPI, French CPI, US Initial Jobless Claims, Mexico IP, Peru Central Bank Meeting.
Friday July 13
- China Real GDP (2Q): We expect real GDP to grow at 7.9% yoy (consensus 7.7%yoy) down from 8.1%yoy in the first quarter.
- China IP (June): Consensus expects IP to be 9.8%yoy in June up from 9.6%yoy in May. We expect a flat reading.
- Russia Central Bank Meeting: We and consensus expect no change in the overnight auction based repo rate at 5.25%.
- US PPI (June): We expect a -0.4% print in June against consensus estimates of -0.6%mom, up from -1.0%mom in May.
- University of Michigan Consumer Sentiment – Provisional (July): We expect a print of 74, very close to consensus at 73 and marginally up from 73.2 in June
- Also Interesting: Japan IP, India WPI, Spain CPI, Poland CPI, Hungary IP