Events to Watch: BRIC Summit, SNB and Inflation

There has been much talk about reserve diversifications and de-dollarization in the past few weeks leading to the first BRIC summit in Russia. Dollar has been under much pressure and lacked decisive buying for sustained rebound. The announcements from BRIC summit will probably clear out recent hesitations in the forex markets which either reinforces the current down trend in dollar or provides the needed fuel for a reversal.

The SNB will meet to discuss about interest rate on Thursday. While we do not expect much change from the previous meeting, the central bank will likely restate the need to keep monetary policies expansionary as well as to prevent Swiss Franc from appreciation against the Euro.

Important economic data to be released this week include:

• US: TIC capital flow, NAHB housing market index and new residential construction, regional Fed survey from NY state and Philadelphia, industrial production, PPI and CPI,
• Eurozone: employment change, ZEW economic sentiment, trade balance
• UK: CPI, employment , retail sales
• Swiss: SNB rate decision, PPI, industrial production, retail sales, ZEW
• Japan: BoJ rate decision
• Canada: manufacturing shipments, CPI, retail sales
• Australia: RBA minutes

Some of the more important events are discussed below.

Jun 15

Treasury International Capital Flows (TICs) - April: Net foreign purchases of long term US securities should have increased to $60B in April from $55.8 B in March and $22B in February. Purchases of Treasuries were $55B while that for US equities exceeded $10B in March. We expect both categories would have risen further in April. However, net sales would have been recorded in agency debts and corporate bonds.

Jun 16

BRIC Summit: The leaders of the world's biggest emerging markets, Brazil, Russia, India and China will meet in the first BRIC summit in Russia to discuss issues including responses to the global financial crisis, reform of the global financial system, G20 policy etc. Forex market will be particular interested in discussion about alternatives to the U.S. dollar, and reserve currencies. Together the BRIC countries account for around 15% of the global economy with China alone accounts for around half of that. In terms of reserves, they account for around one-third of world’s currency reserves but again, China is the main contributor with nearly $2 trillion in reserves. China, Russia and Brazil has announced to invest in IMF bonds to seek larger say in IMF. But the moves were largely symbolic as Russia's $10b, as well as China's $50b, respresent around 2.5% of their reserves only.

UK CPI: Decline in inflation is seen in May on annual basis as both food and energy prices dropped during the month. CPI is expected to have eased to +1.9% from +2.3% in April while RPI should have contracted -1.5% after falling -1.2% in April. Moreover, lower gas/electricity bills should have dragged energy inflation lower. Inflation in the UK probably remains in downtrend in coming months.

Jun17

UK Employment: The number of claimants is expected to have risen 55K in May, a figure lower than 57.1K in April, 65.5K in March and 136.6K in February. Recent decline in the increase in claimant counts signaled the job market in the UK may have improved. However, unemployment rates remained on the rise with claimants count rate probably risen to 4.8% in May from 4.7% a month ago while ILO unemployment rate might have risen to 7.3% in April from 7.1% in the prior month.

Headline average earnings in April probably climbed to +0.3% in April from -0.4% in the previous month. The readings have been quite volatile recently as driven by bonus issues. Ex-bonus number is expected to have continued to slow down.

US CPI: US CPI is expected to have risen +0.3% mom (-0.9% yoy) in May as driven by rally in retail gasoline price. Gasoline price has surged 10.6% in May and after seasonal adjustment, the gasoline component of CPI should have risen 4%. Other components remained soft but the pace of decline probably slowed down. Core CPI is anticipated to have eased to +0.1% mom (+1.8% yoy) from +0.3% mom(+1.9%) in April as spike in the tobacco component which was boosted by federal excise tax disappeared. Moreover, new car prices should have declined. Over the past months, car prices were driven up by introduction of 2009 new models. We believed its effect have subdued. Although unit retail auto sales rose 15.6% mom in May, dollar retail auto sales only climbed +0.4%, suggesting  price discount is huge in auto sector.

Jun 18

SNB meeting: The 3-month Swiss Libor will continue to stay at 0.25% at June's meeting and we expect the central bank will give more details on the progress of the bond purchase program it announced in March.
Moreover, the central bank may reiterate its intention to prevent Swiss Franc from accelerating against the Euro and state intervention will be adopted in case necessary. Since the announcement of intervention in March, EURCHF has been trading above 1.5 and we believe SNB is satisfied with it and will strive to keep price above that level.

While SNB is still using very expansionary monetary policy, the central bank may opt for a return to normalization should there be risk of inflation overshooting the target level. However, recent CPI data indeed highlighted risk of deflation in Switzerland and we do not anticipate the need of reversing current policies any time soon.

Jun 19

Canada retail sales: After 3 consecutive months' of increases, retail sales probably pulled back in April with a -0.3% and -5.5% declines on monthly and yearly basis respectively. Weakness in auto sector probably outweighed higher gasoline sales and stronger spending at supermarkets.