Ok, well this should be an interesting week.
We’ll get the BoC, which will make Bloomberg’s Luke Kawa happy because it means Canada will be in the spotlight for once. He’s got some fun Canada-themed socks we imagine he might wear on Wednesday.
“The recent avalanche of hawkish messages from the BoC, as well as from central bankers of advanced economies around the world, indicate that a hike is highly likely,” BofAML wrote this evening.
We’ll also get Yellen yellin’ on Capitol Hill, which always makes for riveting television. And then there’s CPI, which will obviously be scrutinized to death (especially in light of the lackluster AHE print we got on Friday) given that the one thing missing from DM central banks’ hawkish lean is an inflation justification.
You’ll also want to to watch crude for any sign that confidence is deteriorating further.
And don’t forget about China.
Here’s what’s coming up in terms of data from the country that’s responsible for the entirety of global private sector credit creation:
“Bigly.” Or “big league.” You get it.
Here’s a quick bullet point summary from BofAML:
- In the US, in addition to Chair Yellen’s testimony we get inflation (CPI and PPI), retail sales, industrial production and Michigan sentiment, as well as several Fed speakers.
- In the Eurozone, a quiet calendar with only industrial production and several ECB members participating in a Eurogroup meeting in Brussels.
- In the UK, focus will be on the labor market report. The government will also present the Brexit repeal bill on Monday.
- In Japan, machine orders, trade balance, money supply, PPI and the final print of industrial production are on the schedule. BoJ Governor Kuroda also speaks at a quarterly branch managers meeting.
- In Canada, attention will be centered on the Bank of Canada rates decision.
- It is inflation week in the Scandies, with inflation releases in both Norway and Sweden as well as the inflation expectations survey in Sweden. Inflation will be watched after both central banks removed their easing bias at their latest meetings.
For those interested in a bit more color on what to expect, here’s Barclays with their “Thoughts For The Week Ahead” and then, finally, a calendar from BofAML…
Markets will witness this week if “hawks take flight”, with the Bank of Canada rates decision being the key focus (Wednesday). Despite the increasingly hawkish tilt of central bank rhetoric in recent weeks, we believe the BoC and BoE, in particular, will proceed with greater caution than is priced by the market. Our Taylor rule model for Canada suggests scope for the BoC to slowly undo its “insurance” cuts. However, the future policy rate path as suggested by our model will likely be shallower than the current market pricing of 67bp of hikes over the next year. Weak inflation, wage growth and external risks will also likely lead the BoC to adopt a more cautious approach. As such, we see the possibility of signalling a highly data-dependent rather than a committed rates path ahead even the Boc hikes rates this week. Accordingly, we see risk of a CAD sell-off, considering that the rates market has priced in a more aggressive rates path than our expectation, and that the CAD has outperformed since June. The next CPI print on 21 July could also dampen market expectations of future policy hikes, should it disappoint.
In the UK, we will keep watch for more comments by BoE MPC members; with both Ben Broadbent and Andy Haldane delivering speeches on Tuesday. Ben Broadbent is widely perceived as at the center of the MPC’s hawk-dove sprectrum and an influential member, and markets will likely place emphasis on his speech. In our view, he reinforces the Carney/Cunliffe group advocating a wait-and-see approach before taking action. Similar to the BoC, the market has significantly repriced the expected rates path by the BoE, from around 7bp of hikes in May to almost 30bp over the next year. We believe the balance of risks has not yet shifted towards a rate hike as UK data surprises have been negative. We expect no BoE rate hikes and, hence, do not see the MPC as a source of GBP strength. The UK’s employment report (Wednesday) should support this view.
FOMC Chair Janet Yellen’s testimony before Congress and the US CPI print will be scrutinized for implications for policy normalisation, after minutes from the Fed’s June meeting revealed a lack of consensus among FOMC members on the timing of future balance sheet reduction. Following weak wage growth in last week’s employment report, negative surprises in US CPI growth could lead to a lower implied probability of a rate hike and USD softness, although FOMC officials have broadly set expectations for one more hike this year. We remain of the view that fiscal policy will be more important than monetary policy in shaping the USD’s path in the coming months. The details of the Republicans’ fiscal package is likely to determine the strength of the last hurrah for the USD.
Following hawkish rhetoric from DM central banks, markets will closely watch for signs of similar shifts in EM central banks. South Korea, Malaysia and Israel will release monetary policy rate decisions this week. While we do not expect these central banks to change rates, we look for a GDP forecast increase by the BoK and a more confident tone from the BNM amid modest increases in core inflation and a trade-driven growth recovery.