Policy watchers awaiting signals from Fed, BoJ & BoE

Emily Nicol

Ahead of what could be an important few days for signalling from central banks – with policy announcements from the BoJ (tomorrow), Fed (Wednesday) and BoE (Thursday) – the resumption of trade talks between top US and Chinese officials, and a number of major corporate earnings releases, Asian markets started the week on the back foot. Admittedly, the losses in Japan and China were modest, with the main equity indices down just 0.2%. But amid ongoing protests in Hong Kong, that country’s main Hang Seng benchmark declined around 1½% on the day, while some weak Korean earnings figures saw the Kospi drop 1.8%.

In the bond markets, while Asian government bonds were a touch weaker – with 10Y JGBs up 1bp to -0.15% - euro area govvies on the whole opened a little stronger as markets await the outcome of Wednesday’s Fed meeting. Indeed, after the ECB last week signalled that an extensive easing package was forthcoming, the Fed is widely expected to announce a 25bps cut to its FFR target range. While the BoJ (tomorrow) and BoE (Thursday) will likely keep policy unchanged, we would expect updated economic forecasts to deliver downward revisions to their respective near-term GDP growth and inflation projections. And so we might also see amendments to forward guidance at both central banks.

Beyond the policy announcements, there are several key data due this week too, including the first estimates of euro area Q2 GDP and July inflation (Wednesday) and the US employment report (Friday).

When the BoJ’s policy-setting meeting concludes tomorrow, the Policy Board will likely maintain a ‘wait and see’ approach. Certainly, its economic forecasts to be published in the Outlook Report tomorrow, while likely to be nudged lower, are unlikely to prompt a change in its main policy parameters. Indeed, the BoJ remains concerned that negative side-effects of further rate cuts on the financial sector might more than negate any economic benefits. As such, we expect the -0.1% marginal rate on excess bank reserves will remain unchanged, as will the commitment to purchase JGBs so 10Y yields remain around zero per cent. Nevertheless, Kuroda will no doubt reiterate the BoJ’s readiness to act if required, and re-emphasise the flexibility already afforded by the current framework. Of course, we do not rule out (an appropriate) change to the BoJ’s forward guidance, which presently states that the current extremely low levels of short- and long-term interest rates will be maintained “for an extended period of time, at least through spring 2020”.

It will also be a busy one for Japanese economic releases, with the usual month-end top-tier spending and activity data for June. In particular, the overnight release of the latest retail sales figures came in a touch stronger than expected, albeit suggesting that sales were merely flat in June. This in part reflected a notable decline sales of motor vehicle (-3.2%M/M), while spending on general merchandise (1.3%M/M) and clothing (1.5%M/M) were stronger. But coming on the back of solid growth in May, retail sales were up 0.4%Q/Q over the second quarter as a whole, following a decline of more than 1%Q/Q in Q1. So although Japanese retail sales figures do not provide the most accurate guide to the national accounts measure of household consumption, today’s figures do suggest that private consumption was positive in Q2, having been a modest drag on GDP growth in Q1.

In contrast, tomorrow’s industrial production figures for June look set to disappoint, with an expected near-2%M/M decline to offset the rise in May. But this would leave output up more than 1%Q/Q in Q2, albeit reversing only half of the contraction in Q1. Tomorrow will also bring the latest labour market figures for June, followed on Wednesday by housing starts and construction orders numbers for the same month. That day will also bring the latest consumer confidence survey, followed on Thursday by the final manufacturing PMI for July. In the markets, the MoF will sell 10Y JGBs on Thursday.

Euro area:
After Draghi acknowledged last week that the euro area’s economic outlook had worsened, there will be particular focus on Wednesday’s release of the first estimates of Q2 GDP and July inflation. In particular, Q2 GDP in the euro area is expected to show that growth slowed to 0.2%Q/Q, half the pace seen in Q1. We expect growth in France (figures due tomorrow) to have moderated by 0.1ppt to 0.2%Q/Q, but this is a touch below the consensus forecast. While Spain’s economy likely continued to outperform other major member states, we also anticipate a slowdown in growth of 0.2ppt from Q1 to 0.5%Q/Q. And with Italy’s economy set to have moved sideways (at best), year-on-year GDP growth will have remained negative.

Wednesday will also bring the flash estimates of July inflation from the euro area, France and Italy, with the equivalent figures for Germany due tomorrow. So, having surprised on the upside in June, euro area headline and core CPI are expected to have edged lower in July by 0.1ppt to 1.1%Y/Y and 1.0%Y/Y respectively.

Ahead of this will bring the Commission’s business and consumer surveys – which arguably provide the best guide to GDP growth in the euro area – for July tomorrow. While the flash consumer confidence indicator unexpectedly improved at the start of the third quarter (rising 0.6pt in July to -6.6), business conditions are likely to have further deteriorated. So, the headline ESI is expected to have declined to a more-than three-year low. Certainly, the woes of the manufacturing sector will be evident in the final manufacturing PMIs (due Thursday), which are expected to show that the headline euro area index fell 1.2pts to 46.4, the lowest since 2012, suggesting that the contraction in the sector has deepened significantly. The following day will also bring euro area unemployment figures for June, followed on Friday by retail sales figures for the same month.

In the markets, Germany will sell 2Y bonds tomorrow and 10Y bonds on Wednesday. Meanwhile, Italy will sell 5Y and 10Y bonds tomorrow.

In the US, all eyes this week will of course be on the conclusion of the FOMC meeting on Wednesday, where the FFR target range is widely expected to be cut by 25bps to 2.00-2.25%. But attention will also be on the Fed’s accompanying policy statement and Chair Powell’s press conference for insights into the near-term policy path. Certainly, we would expect a relatively dovish assessment, underscoring the downside risks to the outlook from abroad and concerns that US inflation will remain below target for far longer than originally anticipated, therefore leaving the door open for further cuts this year.

It will be a busy week for economic data too, kicking off tomorrow with the monthly personal income and spending figures for June, including the closely watched deflators. That day will also bring the Conference Board’s consumer confidence survey for July, pending home sales figures for June and the S&P Corelogic home price indices for May. Wednesday, meanwhile, will see the release of the employment cost index for Q2 and the ADP employment report for July, followed on Thursday by July’s manufacturing ISM and June construction spending figures. All eyes on Friday will be on July’s employment report, with non-farm payrolls expected to have risen a healthy 164k, albeit down from the surge (224k) in June. So the unemployment rate is expected to remain unchanged at 3.7%. Friday will also bring the full trade report for June, as well as factory orders figures for the same month.

The main events in the UK will come on Thursday with the BoE to announce its latest monetary policy decision and publish its August Inflation Report. We expect no changes to policy, with Bank Rate set to be left at 0.75%. But with Carney having recently noted increased downside risks to global and UK GDP growth, we would expect the MPC to be more downbeat about the near-term outlook. And with Bank staff last month having revised down their Q2 GDP forecast from 0.2%Q/Q to 0.0%Q/Q, we expect the Inflation Report to reveal downward revisions to the Bank’s GDP growth forecasts and possibly its inflation projection too. Of course, with the appointment of Boris Johnson as Prime Minister increasing the risk of a no-deal Brexit on 31 October, the MPC’s assessment of the economic effects of Brexit uncertainty will be in the limelight too. Given heightened downside risks, domestic and overseas alike, it would seem appropriate for the MPC to tweak its forward guidance that “were the economy to develop broadly in line with [the] May Inflation Report projections that included an assumption of a smooth Brexit, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate”.

Thursday will also bring the most noteworthy data release of the week, with the July manufacturing PMI. In June, this survey was particularly disappointing, with the headline PMI declining for the third consecutive month and by 1.4pts to 48.0. The weakness in the output PMI was even more striking, down more than 3pts to 47.2. And we expect no improvement at the start of Q3, with the headline indices likely to signal ongoing marked contraction in the sector. This will be followed on Friday by the equivalent construction PMI, which, despite an anticipated improvement from the ten-year low of 43.1 in June, is likely to indicate another steep decline in activity. The first half of the week will bring the BoE’s bank lending figures for June later today, followed by the GfK’s consumer confidence and Lloyd’s business surveys for July on Wednesday. There are no Gilt auctions scheduled in the coming week.

While the resumption of trade talks between US and Chinese high-level officials will no doubt attract attention this week, Wednesday will also provide an update on economic activity at the start of Q3, with the release of the government’s official manufacturing and non-manufacturing PMI surveys for July. These will be followed by the Caixin manufacturing PMI on Thursday.

In Australia, ahead of next week’s RBA meeting where it will provide updated economic forecasts in its quarterly Monetary Policy Statement, the main focus this week will be on Wednesday’s Q2 CPI release. While headline inflation is expected to have ticked slightly higher after falling to a 2½-year low of 1.3%Y/Y in Q1, it will still remain well below the RBA’s 2-3% target. Moreover, the trimmed mean core inflation measure is expected to have edged lower in Q2, by 0.1ppt to 1.5%Y/Y, while the weighted mean core CPI is expected to have moved sideways at just 1.2%Y/Y.

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