Key points to watch out for:
- The ECB is not expected to cut in July, but will it make a note for the next meeting?
- Retail sales will be the focus of attention in the US.
- UK CPI will be key to the BoE’s August decision-making.
- Chinese GDP data to kick off a busy week.
European Central Bank Meets Amid Stagnating Inflation
The European Central Bank ends its two-day policy meeting on Thursday, 19 July, but interest rates are expected to remain unchanged after being cut by 25 basis points at last month’s meeting. The June decision proved controversial, as policymakers inadvertently locked in a rate cut before all the data was in. A pick-up in inflation along with wage growth just before the meeting was not something the Governing Council wanted to see, but not cutting rates could have resulted in an embarrassing situation.
The ECB justified its decision by pointing to the risk of missing its inflation target if it waited too long. Since then, inflation has receded slightly, and wage pressures appear to be cooling, even though wage growth remains at elevated levels.
Consequently, there seems to be a strong majority in favor of at least one more cut later this year, although opinions are shifting towards a possible third reduction. However, this is a debate for another time and it is almost certain that policymakers will keep rates on hold on Thursday and revisit the risks for the next meeting in September.
Markets are also not fully confident of a third cut, and if President Lagarde does not give any precise guidance, the euro could extend its most recent gains. However, if she commits to a cut in September, this would be negative for the euro.
This week, look out for the ZEW survey of German economic sentiment due on Tuesday 16 July and the final Eurozone CPI forecast, which will be released on Wednesday, 17 July.
Pound Bulls Face Up to CPI Test
Sterling was able to rally considerably during July, supported by a weaker US dollar and Labour’s landslide victory in the UK general election, ending years of turmoil while the Conservatives were in control. But that is not all. Although headline inflation fell and reached the 2% target level set by the Bank of England in June, services inflation remains too high for comfort at around 5.7%, something that Bank of England chief economist Huw Pill remarked a few weeks ago. In addition, given that the UK economy continues to register an upturn in growth, there is no urgency to lower rates immediately.
With markets currently split 50/50 on a rate cut in August and policymakers possibly equally undecided, this week’s updates on inflation, employment and retail sales could prove to be key.
On Wednesday, 17 July, June CPI will be released; on Thursday, 18 July, May labor market statistics will be released; and on Friday, 20 July, June retail sales data will be released.
Further moderation in core CPI and services, as well as wage growth, could seal the deal for a rate cut in August, which could send sterling lower. However, given the euro’s disadvantages alongside the yen, in addition to the improving UK economic outlook, further progress on inflation giving the Bank of England the green light to cut rates immediately might not be as catastrophic for sterling.
Are US Consumers Tightening Their Belts?
In the US, the Fed does not seem to be in a hurry to start cutting rates either, although investors are increasingly hopeful that this will happen in September. Inflation is falling again. Inflation is falling again after stagnating earlier in the year, and Fed Chairman Jerome Powell has indicated that the labor market has tightened recently. Consumer spending also appears to be showing signs of slowing, and retail sales figures on Tuesday, 16 July, could provide further evidence of this.
Retail sales are expected to have remained flat at 0.0% in June, after rising just 0.1% in May. A surprise rebound in retail sales could help to stem the dollar’s slide.
Investors will be watching for manufacturing indicators from the New York Fed along with Philadelphia on Monday, July 15 and Tuesday, July 16, in that order, while Wednesday, July 17, will feature several data releases such as building permits, industrial production and housing starts.
China’s Economy Slowed Throughout the Second Quarter
Despite numerous efforts to try to boost a sluggish economy, China’s government has been unable to correct course. While the property market slump has begun to ease, the crisis seems far from over, and the stock market is struggling to recover from a three-year slump.
Investor and consumer confidence remains low, weighing on both business and household spending. Industrial production has started to show signs of life this year, but retail sales have been weak. On Monday, 15 July, data for the two sectors will be released, providing an estimate for the second quarter.
The Chinese economy is likely to have grown by about 1.1% quarter-on-quarter in the three months to June, a slowdown from the 1.6% pace recorded in the first quarter of the year. The year-on-year rate is also estimated to have fallen from 5.3% to 5.1%.
While investors have become accustomed to lacklustre Chinese GDP figures in recent quarters, an eventual downside surprise could affect market sentiment at the start of the week, hurting regional equities and risk-exposed currencies including the Australian dollar.
Conversely, lackluster figures could prompt policymakers to take stronger action. Leaders of the country’s Communist Party meet from 15-18 July for the so-called Third Plenum, which is normally held every five years, usually in the autumn, but was delayed in 2023. The meeting focuses on long-term economic reforms and goals, but it is unclear whether it will be accompanied by immediate policy responses.
Elsewhere, Australian traders will pay attention to national employment figures on Thursday 18 July.
Canada, Japan, and New Zealand Await CPI Data
In Canada, inflation rose sharply in May, dampening hopes for a further rate cut in July. Unless the June report, due on Tuesday 16 July, signals some easing of price pressures, the Bank of Canada is likely to remain on hold until at least September. On the other hand, the weakening labor market is limiting the Canadian dollar’s rise amid a general sell-off in the US dollar.
The Bank of Canada’s survey of wage estimates on Monday, 15 July, along with retail data on Friday, 19 July, could provide further insight into the state of the economy, although the focus will be considerably on CPI readings.
In New Zealand, the release of quarterly CPI on Wednesday 17 July will be decisive for rate cut bets. At the previous meeting, the Reserve Bank of New Zealand (RBNZ) expressed pessimism but also optimism that inflation is likely to reach its 1-3% target in the second half of the year. The New Zealand dollar could come under selling pressure again if the second quarter CPI brings the RBNZ closer to its target range.
The week will end on Friday 19 July with Japanese CPI figures. Ahead of the BOJ meeting on July 31st, the CPI data will be closely scrutinized for concrete signals on a possible rate hike this month. The BOJ has suggested that the expected announcement on bond tapering at the next meeting should not be seen as a postponement of a rate hike decision. However, investors are still unsure whether there is a compelling case for further rate hikes, so any upside surprise in June’s CPI could send the yen higher.
