Monetary policy will dominate the coming week as the central banks of Australia, Canada, the Eurozone and Sweden hold their scheduled policy meetings. Data wise, the focus will be on trade and industrial output indicators, with a number of countries reporting, including Germany, France and the United Kingdom. However, it will be a slow start to the week with both US and Canadian markets closed on Monday for Labour Day.
Important week for Aussie with GDP and RBA meeting
The Australian dollar has been consolidating after reaching a two-year high against the greenback in late July. Next week’s risk events could provide investors some much-needed direction. Business inventories data due on Monday for the second quarter will be watched closely as it should be indicative of Wednesday’s GDP data. The Australian economy is expected to have picked up speed in the second quarter. After growing by just 0.3% quarter-on-quarter in the first three months of the year, GDP growth is forecast to improve to 0.8% in the second quarter.
The Reserve Bank of Australia will likely have advance knowledge of the GDP data when it meets on Tuesday to set interest rate policy. RBA Governor Philip Lowe had said back in August:
I think that they are reasonable assumptions, that the next move will be up, rather than down, but it will not be for some time.
His comments reinforced expectations that the RBA will keep rates at the record low of 1.5% for a considerable period of time and no deviation from the neutral stance is expected next week. However, the Bank’s wordings on the strength of the economy and the exchange rate in its statement will nevertheless be carefully scrutinized.
Also to watch out of Australia next week will be July retail sales and trade figures on Thursday, and housing finance data on Friday.
Bank of Canada rate rise on the horizon after strong GDP
Canada’s economy grew by an unexpectedly robust annualized rate of 4.5% in the second quarter, fuelling expectations that the Bank of Canada may raise rates as early as the September meeting on Wednesday. Prior to the GDP figures, October was seen as the favourite after the BoC signalled that a second rate increase was likely following its surprise hike in July.
The strong growth figures have raised the odds of a September move to around a third and it’s now looking almost certain that the overnight rate target will go up to 1.00% by October. The Canadian dollar’s rally against the US dollar has stalled over the past month as a second rate hike has already been priced in. The loonie could therefore prove sensitive to any shift in the Bank’s tone next week.
Important data releases will also attract attention, starting with July trade figures on Wednesday, the Ivey PMI on Thursday and the August employment report on Friday.
Quieter week for the US
South of the border, the US calendar will take a backseat with major data being limited to the ISM non-manufacturing PMI. The closely watched indicator is forecast to increase to 55.3 from 53.9 in August when released on Wednesday. Other US data will include factory orders on Tuesday, and trade figures and IHS Markit’s final services PMI on Wednesday.
Chinese trade and inflation data eyed
Following the release of better-than-expected manufacturing PMIs in China this week, there is growing confidence that China’s economy will slow only marginally in the second half of 2017. Exports from China have recovered strongly this year despite a gradual appreciation of the yuan, signalling a strengthening global demand.
The latest trade numbers out on Friday should show if this trend continued in August. Producer and consumer price data will follow on Saturday. Rising producer prices is seen as a positive development not just for China’s economy but also for the global economy as it can boost profitability for local companies as well as export inflation to the rest of the word. After surging to 7.8% in February, producer prices eased to 5.5% in May and have been stuck there ever since. Another fall in August could worry investors.
UK industrial output and PMIs in focus
The stalemate in the Brexit negotiations has been weighing on the pound this week but UK data due in the next seven days may provide some much needed distraction for traders. First up will be the IHS Markit/CIPS construction PMI on Monday, which will be followed by the services PMI on Tuesday. The construction PMI is forecast at 51.8 in August, while the services PMI is expected at 53.5, both down on the month. Although this week’s manufacturing PMI beat expectations, a similar upside surprise is less likely for the services PMI given the weakening picture for consumer spending.
On Friday, attention will shift to trade and industrial output. Industrial production is expected to rise by 0.1% month-on-month and 0.4% year-on-year in July. Output in the manufacturing sub-sector is forecast to expand by 0.3% m/m and 1.7% y/y. The figures are not impressive when considering the significant depreciation of sterling after the Brexit vote. The pound’s Effective Exchange Rate Index has recently come close to reaching last October’s 7½-year low, but so far, UK exports have received only a modest boost, leaving the country’s current account position highly exposed at a time of uncertainty. July trade numbers out on Friday should show whether there’s been any improvement on this front.
All eyes on Draghi as ECB tapering discussions loom
A decision on winding down its massive asset purchases has been a long time coming for the European Central Bank, but investors will probably have to wait till October for any announcement on the decision, with discussions on the topic only set to start at the September 6-7 policy meeting. ECB officials have been signalling that any scaling back of the stimulus program will be very gradual and that scenario is looking increasingly likely given the euro’s recent sharp rally. Sources close to the ECB told Reuters this week that “the exchange rate has become a bigger issue” for ECB policymakers, adding to speculation that ECB chief, Mario Draghi, will use his press conference next Thursday to verbally intervene to stem the euro’s rise.
The single currency may find it difficult to repeat this week’s 2½-year high of above $1.20 in the run up to the ECB meeting, but Eurozone data should give traders something other than the ECB to talk about. The Eurozone sentix reading for September is due on Monday, along with the July producer prices for the region. July retail sales and the final services and composite PMIs for August are out on Tuesday, and the third revision to Eurozone GDP for the second quarter is due on Thursday (though no revision is expected). Also of interest will be German and French industrial output and trade data on Thursday and Friday.
The ECB will not be the only central bank in Europe holding a meeting as Sweden’s Riksbank will announce its decision a few hours before the ECB. The Riksbank was criticised this week by one of Sweden’s largest banks, SEB, for its continued dovish policy stance, which has failed to keep a lid on the krona’s gains.
The Swedish krona has appreciated around 12% against the dollar in the year to date and is flat against the euro. Markets see the Riksbank’s ultra-loose policy as unsustainable given above 2% inflation (July) and 4% GDP growth (Q2). Although no change in the repo rate is expected on Thursday, currently at -0.50%, the bank may signal the end to its easing bias.