27 Jul 2015
Weekend events and the week ahead, FOMC in spotlight
FXStreet (Guatemala) - The weekend did not bring in anything too significant of a catalysts for markets opening this week, asides that the Trokia and Greek talks will commence on Tuesday in respect of a third bailout package now that a Grexit has been averted for now.
Also, the UK's PM David Cameron has called for an early referendum on their EU membership for June 2016, closer than before the end of 2017 and satisfying UK manufactures who would be otherwise concerned for the uncertainty for business and industry. The actual date will be announced in the October conference. EUR/GBP has opened 10 pips higher at 0.7078.
Meanwhile, for the week ahead, we have a number of key releases for the UK and else where, bringing the US FOMC and interest rate decision. Analysts at TD Securities highlighted the key events as follows:
Key Quotes:
"UK
1. Q2 GDP (Tue 28 July): Our nowcasts for UK Q2 GDP have barely budged from 0.6% q/q since April and the release of Q1 GDP at 0.4%. Overall, this suggests the Q1 deceleration was indeed temporary and Q2 is back to trend—if not slightly above—what should be trend going forward. This leaves ample scope for the MPC to be more secure in hiking rates in February as we expect.
2. Mortgage approvals and credit (Wed 29 July): Outside of GDP, it is otherwise a very quiet and light data week heading into the set up for the BoE August Inflation Report. The consensus expects mortgage approvals to remain largely unchanged at 66.3K in June, but similar data from the British Bankers Association diverged last month to show that some momentum was returning to the UK housing market.
3. Set up for the August Inflation Report (Tue 21 July): In the wake of the July MPC minutes, we think the August Inflation Report will leave a strong impression that a broad consensus is emerging that the need for crisis-level rates has past. Broad disagreement remains, however, on exactly how much tightening will be needed and at what pace it should be delivered. This leaves us comfortable with our forecast for February 2016 to be the first of two 25bps hikes next year.
Rest of Europe
1. Flash Eurozone PMIs (Fri 24 July): The flash PMIs are likely to provide further confirmation that the Greece debacle saw limited pass-through to the regional economy. We see decent upside risks to both German manufacturing and French services PMIs. While the market looks for a flat reading in Germany and small decline in France, we see at least a half point increase in both. This should keep the EUR supported as markets await further clarity from the Federal Reserve.
2. Flash Eurozone HICP (Thu/Fri 30/31 July): Overall, the recent fall in energy prices looks likely to have been enough to keep most base effects at bay one last month. This should delay slightly the inevitable reflation we should see into year-end. Overall, we see German HICP likely remaining unchanged at 0.1% y/y, though the risk is a slight tick higher to 0.2%. This implies a similar setup for the Eurozone figure on Friday. We expect that to remain unchanged at 0.2% y/y with a slight upside risk. Overall, this may be a slight disappointment to those expecting more immediate evidence of reflation, but in the end it means little for ECB policy.
3. Swedish GDP (Thu 30 July): Swedish GDP disappointed in Q1 at 0.4% q/q, but the potential for a rebound in Q2 is quite favourable. While surveys generally tailed off into June, the hard data sets upside risks. Strong retail sales gains from March provide decent base effects for consumers while production data suggests a gain above 1% q/q is not out of the question. Inventory and trade dynamics will be the key swing factors, therefore.
Rest of World
1. FOMC (Wed 29 July): We believe the Fed may well use the July FOMC statement to set up the September hike, by nudging the market further with tweaks to the language. Most likely is this comes from the upgrades to economic conditions in the first paragraph. But it is also possible the Fed removes “nearly” from the “nearly balanced” characterization of the economic risks, which would be a clear sign of a September hike, though even in 2004, the Fed saw risks are “roughly equal” still in the meeting before hiking so keeping this unchanged will not rule out September. And even stronger though less likely change would be suggesting policy accommodation is removed “gradually.” Overall, the risk within this FOMC meeting is that it sets up to be a more hawkish outcome than most expect .
2. US Q2 GDP (Thu 30 July): The US economic recovery is back on track. After essentially stalling in Q1 amid a trifecta of headwinds, we expect growth momentum to rebound meaningfully in Q2. The economy should boast a relatively decent 2.5% Q/Q advance, as the recovery moves beyond the soft patch earlier this year. The risks to this forecast are tilted to the upside. The rebound in GDP growth should be underpinned by continued buoyancy in consumer spending activity, which has been boosted by strong income gains and the oil dividend. And as the headwinds from the strong dollar abate, net trade is also expected to add to the top-line GDP growth this quarter after the massive 1.9ppt drag last quarter. At the same time, government spending also likely made a modest contribution to growth. Investment activity will be key to the rebound in economic growth momentum, as the pick-up in residential and intellectual property investment should more than compensate for weakness in business capital investment and the expected drag from an inventories drawdown.
3. Canada May GDP (Fri 31 July): Industry-level real GDP is forecast to have remained unchanged in May. This print extends the weakness observed in recent months for the Canadian economy and is driven by observed contractions in a range of industries including extraction and manufacturing. We would also note a downside risk to this print given the wildfires across Northern Alberta that shuttered activity in the oil sands. A flat print for industry-level real GDP in May creates an exceptionally high bar for June if the Bank of Canada's -0.5% annualized growth forecast is to be realized. Our own tracking is for growth to fall by around 1.0% which at this stage is not large enough to motivate the Bank to cut its overnight rate in September. We do think that the risk remains tilted in that direction at a higher probability than what is currently priced into the market. We view developments in the price of oil and in Canadian exports are the more important inputs."
Also, the UK's PM David Cameron has called for an early referendum on their EU membership for June 2016, closer than before the end of 2017 and satisfying UK manufactures who would be otherwise concerned for the uncertainty for business and industry. The actual date will be announced in the October conference. EUR/GBP has opened 10 pips higher at 0.7078.
Meanwhile, for the week ahead, we have a number of key releases for the UK and else where, bringing the US FOMC and interest rate decision. Analysts at TD Securities highlighted the key events as follows:
Key Quotes:
"UK
1. Q2 GDP (Tue 28 July): Our nowcasts for UK Q2 GDP have barely budged from 0.6% q/q since April and the release of Q1 GDP at 0.4%. Overall, this suggests the Q1 deceleration was indeed temporary and Q2 is back to trend—if not slightly above—what should be trend going forward. This leaves ample scope for the MPC to be more secure in hiking rates in February as we expect.
2. Mortgage approvals and credit (Wed 29 July): Outside of GDP, it is otherwise a very quiet and light data week heading into the set up for the BoE August Inflation Report. The consensus expects mortgage approvals to remain largely unchanged at 66.3K in June, but similar data from the British Bankers Association diverged last month to show that some momentum was returning to the UK housing market.
3. Set up for the August Inflation Report (Tue 21 July): In the wake of the July MPC minutes, we think the August Inflation Report will leave a strong impression that a broad consensus is emerging that the need for crisis-level rates has past. Broad disagreement remains, however, on exactly how much tightening will be needed and at what pace it should be delivered. This leaves us comfortable with our forecast for February 2016 to be the first of two 25bps hikes next year.
Rest of Europe
1. Flash Eurozone PMIs (Fri 24 July): The flash PMIs are likely to provide further confirmation that the Greece debacle saw limited pass-through to the regional economy. We see decent upside risks to both German manufacturing and French services PMIs. While the market looks for a flat reading in Germany and small decline in France, we see at least a half point increase in both. This should keep the EUR supported as markets await further clarity from the Federal Reserve.
2. Flash Eurozone HICP (Thu/Fri 30/31 July): Overall, the recent fall in energy prices looks likely to have been enough to keep most base effects at bay one last month. This should delay slightly the inevitable reflation we should see into year-end. Overall, we see German HICP likely remaining unchanged at 0.1% y/y, though the risk is a slight tick higher to 0.2%. This implies a similar setup for the Eurozone figure on Friday. We expect that to remain unchanged at 0.2% y/y with a slight upside risk. Overall, this may be a slight disappointment to those expecting more immediate evidence of reflation, but in the end it means little for ECB policy.
3. Swedish GDP (Thu 30 July): Swedish GDP disappointed in Q1 at 0.4% q/q, but the potential for a rebound in Q2 is quite favourable. While surveys generally tailed off into June, the hard data sets upside risks. Strong retail sales gains from March provide decent base effects for consumers while production data suggests a gain above 1% q/q is not out of the question. Inventory and trade dynamics will be the key swing factors, therefore.
Rest of World
1. FOMC (Wed 29 July): We believe the Fed may well use the July FOMC statement to set up the September hike, by nudging the market further with tweaks to the language. Most likely is this comes from the upgrades to economic conditions in the first paragraph. But it is also possible the Fed removes “nearly” from the “nearly balanced” characterization of the economic risks, which would be a clear sign of a September hike, though even in 2004, the Fed saw risks are “roughly equal” still in the meeting before hiking so keeping this unchanged will not rule out September. And even stronger though less likely change would be suggesting policy accommodation is removed “gradually.” Overall, the risk within this FOMC meeting is that it sets up to be a more hawkish outcome than most expect .
2. US Q2 GDP (Thu 30 July): The US economic recovery is back on track. After essentially stalling in Q1 amid a trifecta of headwinds, we expect growth momentum to rebound meaningfully in Q2. The economy should boast a relatively decent 2.5% Q/Q advance, as the recovery moves beyond the soft patch earlier this year. The risks to this forecast are tilted to the upside. The rebound in GDP growth should be underpinned by continued buoyancy in consumer spending activity, which has been boosted by strong income gains and the oil dividend. And as the headwinds from the strong dollar abate, net trade is also expected to add to the top-line GDP growth this quarter after the massive 1.9ppt drag last quarter. At the same time, government spending also likely made a modest contribution to growth. Investment activity will be key to the rebound in economic growth momentum, as the pick-up in residential and intellectual property investment should more than compensate for weakness in business capital investment and the expected drag from an inventories drawdown.
3. Canada May GDP (Fri 31 July): Industry-level real GDP is forecast to have remained unchanged in May. This print extends the weakness observed in recent months for the Canadian economy and is driven by observed contractions in a range of industries including extraction and manufacturing. We would also note a downside risk to this print given the wildfires across Northern Alberta that shuttered activity in the oil sands. A flat print for industry-level real GDP in May creates an exceptionally high bar for June if the Bank of Canada's -0.5% annualized growth forecast is to be realized. Our own tracking is for growth to fall by around 1.0% which at this stage is not large enough to motivate the Bank to cut its overnight rate in September. We do think that the risk remains tilted in that direction at a higher probability than what is currently priced into the market. We view developments in the price of oil and in Canadian exports are the more important inputs."