A number of key risk events next week could cause some volatility in financial markets with the UK general election taking centre stage. The European Central Bank will also be in focus as it meets to possibly discuss removing its easing bias from its policy statement. In contrast, the Reserve Bank of Australia may find it hard to maintain an upbeat outlook at its meeting on signs that growth in Australia is slowing. In terms of data, GDP figures for Japan, the Eurozone and Australia will be watched, while services PMIs for the US, the UK and China will be important too.
RBA meets amid growth worries
The slump in iron ore prices and signs of softening consumer spending has led some analysts to forecast negative growth for Australia in the first quarter. Business inventories data on Monday and the net exports contribution ratio on Tuesday should give a good indication to how the first quarter GDP growth figure will turn out on Wednesday. Australia’s economy is forecast to grow by just 0.2% quarter-on-quarter, sharply down on the prior quarter’s 1.1% rate. A weaker reading would likely weigh on the Australian dollar, which has already depreciated by almost 5% versus the US dollar from its 2017 peak in March.
It could also complicate matters for the RBA, which meets on Tuesday for its June policy meeting where it’s expected to keep rate unchanged at 1.5%. Although the RBA has firmly maintained a neutral bias since its last rate cut in August 2016, expectations of a rate increase have been pushed back, with some analysts even projecting a rate reduction. Also to watch next week are the April trade figures on Thursday.
Chinese export data eyed after conflicting PMIs
Economic indicators out of China next week will be looked at closely following recent contradicting data. The Caixin manufacturing PMI released this week showed a surprise contraction in activity just a day after the official government PMI showed a modest expansion in the sector. Some investors fear a slowdown in GDP growth in the second quarter after stronger-than-expected growth in the first three months of the year.
The latest export and import numbers out on Thursday will therefore be scrutinized for any evidence that China’s economy lost some steam in May. Friday’s CPI and PPI figures will also be important, especially producer prices as two straight months of declines in the year-on-year rate in March and April has added to concerns that China’s reflation cycle is coming to an end.
Japan GDP likely to be revised up
Japan is expected to see an upward revision to its GDP growth figure for the second quarter on Wednesday in further evidence that its economy is turning a corner. First quarter growth is forecast to be revised higher from 0.5% to 0.6% q/q, making it one of the faster growing economies among the G7. However, the strong data is unlikely to lead to a major policy shift by the Bank of Japan when it meets on June 15-16 as inflation remains stubbornly low.
US and Canadian PMIs eyed
The US will have a relatively quiet week in the coming seven days with the ISM non-manufacturing PMI being the main highlight. The bulk of the US data are due on Monday and will include Markit’s final reading of the services PMI for May and factory orders for April. However, the ISM non-manufacturing PMI will likely get the most attention. It is expected to ease slightly to 57.0 in May from 57.5 in April.
In Canada, the Ivey PMI for May will be watched on Tuesday but the big focus will be on Friday’s employment report. In April, Canada’s unemployment rate unexpectedly fell to 6.5% and this was followed by strong first quarter GDP data this week, boosting expectations that the Bank of Canada will raise rates sooner rather than later. However, the changing expectations have only had minimal impact on the Canadian dollar, which remains weighed by the muted oil prices.
All eyes on ECB as pressure mounts to drop easing bias
Speculation about the ECB’s next move has been steadily mounting in recent weeks as the Eurozone economy finally shows signs of a sustained recovery. The ECB meets in Tallinn, Estonia for its latest monetary policy meeting on Thursday, but before then, a number of key data will be watched. The final reading of the Eurozone composite PMI is due on Monday, followed by the sentix index and euro area retail sales on Tuesday.
German industrial orders and output figures on Wednesday and Thursday respectively will also attract attention, as will the revised Eurozone GDP estimates on Wednesday, which are forecast to remain unrevised for the first quarter.
On Thursday, the ECB is expected to hold policy unchanged but is likely to make some tweaks to its meeting statement. The central bank will probably remove its easing bias from its forward guidance as the downside risks to growth and inflation have sharply dissipated. However, ECB head Mario Draghi is unlikely to give much away as to when the Bank will start withdrawing its massive stimulus program and will be choosing his language carefully so as not to create premature expectations for market speculators, given the sensitivity of the euro to such talk.
UK election: another shock on the way?
The pound looks set for a rough ride next week as the general election date on June 8 approaches and the polls point to a tightening race. With more and more polls showing a surge in Labour support, a big upset for the Conservatives is looking increasingly probable and has the potential to send the pound into another downward spiral if Theresa May fails to win a majority on Thursday. A shock win for Labour could destabilize the markets but traders may decide to take comfort in Jeremy Corbyn’s less hostile stance towards the EU in such an outcome. Whereas an expected majority for May would at the very least underscore sterling’s recent gains.
UK economic data will struggle for attention amid the election fever but should not be overlooked as the strength of the economy will come to the forefront once the election is out of the way. The week will start with the Markit/CIPS services PMI on Monday, with the index expected to moderate slightly to 55.0 in May from 55.8. On Friday, industrial and manufacturing output numbers will be watched after a poor first quarter. Industrial production is expected to bounce back with 0.8% m/m growth in April and manufacturing output to rise by 0.9% m/m. April trade figures are also due on Friday.