CALENDAR HIGHLIGHTS THIS WEEK
- Monday: UK Manufacturing & Production
- Tuesday: UK Earnings Data, Unemployment Rate, UK debate on EU withdrawal bill, GE ZEW Economic Sentiment, US CPI, Weekly API Crude Oil Inventory, US President Trump & Kim Jong-Un meeting in Singapore
- Wednesday: UK CPI, PPI, 2nd day of UK debate on EU withdrawal bill, EU Industrial Production, US PPI, FOMC Interest Rate Announcement with Summary of Economic Projections and Press Conference, Weekly DoE Inventories
- Thursday: AU Employment Change and Unemployment Rate, GE CPI, UK Retail Sales, ECB Interest Rate Decision and Press Conference
- Friday: BoJ Interest Rate Decision and Press Conference, EU CPI, US NY Empire Manufacturing, Industrial Production, Michigan Consumer Sentiment, Baker Hughes Rig Count
A busy schedule awaits with a potent mix of economic data, monetary policy decisions and geopolitics all to look forward to. I think it’s particularly important to look at the week as a whole in order to put into context where the main pivot points of price action and changes in sentiment may occur. As such, I would be looking for Wednesday and Thursday to be the peak of trading activity.
A “special place in hell”…
The quote was in fact the exact words uttered by Trump trade adviser Peter Navarro as the US administration goes into full assault following the fallout from the G7 Summit, and specifically in response to comments of retaliation from the Canadian PM Justin Trudeau. Interestingly the market has not had much of a reaction to this latest escalation in the trade situation, but my feeling is time will tell and all eyes will be on whether China joins the chorus of the other major powers which would be a significant change of direction in arguably the most important of trade partners.
As a reminder, the US President and North Korean leader are due to meet in Singapore this week in what is set to be a historical meeting between the two parties. Despite their fiery past my expectation of that this meeting may well turn out to be a damp squib with the end result being an agreement to continue dialogue rather than anything ground breaking. Therefore, I would still be eyeing a key area of interest to the upside in the S&P as the week progresses with risks to that view emanating from a further worsening in globe trade talks.
Fed to stay the course for the time being…
The FOMC are expected to deliver their second-rate hike of 2018 this week, with a 25bps increase priced in at 91.3%. Given this overwhelming certainty from traders, attention as usual will be firmly on the accompanying statement and summary of economic projections. A Bloomberg poll conducted last week showed that optimism on a potential upside tweak to the infamous dot-plots is looking less likely than in March as policy makers look to weigh up economic expansion against a souring mood on the prospects of economic trade.
The above has led to the consensus that the assessment of near-term conditions will be left “roughly balanced” despite subtle upgrades to growth and inflation forecasts. In summary, I think the event will largely keep the status quo with a moderately hawkish undertone in language but not to the extent that would warrant a distinct move to 4 interest rate hikes this year. As such, I would recommend tuning in this Wednesday evening but if you’re expecting fireworks you may be better served watching Trump’s Twitter account than studying the latest Fed announcement!
Economics and politics combine to make for a busy week in GBP…
The week has got off on a negative footing with UK manufacturing output showing the biggest monthly fall since October 2012, with weakness observed across 9 of the 13 sub-sectors measured, according to the ONS. This came in combination with the Britain’s trade balance falling to a 19-month low in April where exports fell more than imports, with exports of goods and services both declining.
This is maybe an ominous sign of things to come with UK wage data, CPI and retail sales all coming up throughout the week, however, analysts at Deutsche Bank foresee risk of an upside surprise in the wage data supported by the new National Living Wage and firmer inflation considering rising commodity prices and a falling pound.
On the political front, Theresa May will face a stern test in the Commons this Tuesday and Wednesday as the PM attempts to throw out 15 amendments to the EU withdrawal bill brought forward by the more ‘remain’ friendly House of Lords. The risk to the vote is that Troy rebels jump ship and join forces with Labour which would be a major body blow for May’s ambitions but a knockout situation. The other key story to monitor will be the rocky relationship between the PM and Brexit minister David Davis who clashed last week on the wording around the time commitment to the Customs Union. Remember a day is a long time in UK politics and stances can change quickly with this week’s vote acting as a potential catalyst for further change.
Given the risks discussed, there is a litigate risk that political sentiment could worsen which may increase downside pressure on the GBP short-term. The key to whether this is realised may well be dependent on the economic data points weakening in tandem with a relatively upbeat FOMC to add further weight to the bearish argument.
ECB watchers looking for hints on QE timeline…
This week is a key one for the ECB as market participants await signals as to the timeline to winding down QE in the 2H of this year. Pre-blackout period a plethora of ECB members, in addition to news wire sources, indicated that the details on how and when QE will finish will be a “live” debate at Thursday’s meeting and the market’s reaction will be dependent on how detailed these discussions have been. An excellent overview of the key points of interest and how dovish or hawkish the subsequent reaction maybe can be seen below via ING.
Remember, the ECB announcement is a two-part event and although the press conference will be key I would keep an eye on any changes to the second paragraph in the initial statement released at 1245BT. This section of the policy decision is where the Bank specifies the parameters behind the QE purchase programme (see last month’s wording below).
Elsewhere, it’s worth noting that the Italian 2-yr yield has dropped significantly at the re-opening of trade following remarks from the finance minister that the country will remain committed to a common currency, alleviating any emerging fears about a potential Italexit. Despite this the political situation unfolding in Italy and Spain will likely form a large part of the Q&A session discussion in the press conference this Thursday afternoon.
Oil remains on the sidelines…
The chart for WTI crude (below) is in fact a repeat of the same one from last week. The belief here is that price action continues to consolidate after the aggressive fall that was seen through the end of May as market participants have now re-priced their expectations of a potential supply increase. Therefore, the recent range needs watching closely, as do OPEC comments, with the various oil ministers from OPEC and non-OPEC nations likely to intensify as the meeting draws near.