Events to Watch: G8 Could Trigger Big Moves, RBA & BOE to Hold
Leaders of the Group of Eight will in Italy to discuss economic outlook. There are rumors that China will raise discussions about using a new 'super-sovereign' currency to replace USD as the dominant reserve currency and any official comments will trigger big moves in the forex market. RBA and BOE will meet this week and we believe both meetings will be non-events as both central banks have recently taken a 'wait-and-see' approach after reducing policy rates to unprecedentedly low levels. Moreover, Australia and Canada will release employment report for June. While unemployment rates probably increased further, we expect the pace of increases have slowed down.
Important economic data to be released this week include:
- US: ISM non manufacturing survey, international trade, consumer sentiment
- Eurozone: German industrial production, Germany manufacturing orders, Eurozone finalized CPI for June
- UK: BOE rate decision, industrial production, Halifax house price index
- Japan: Machinery orders, corporate goods price index
- Canada: Employment, housing starts
- Australia: RBA rate decisions, employment
Some of the more important events are discussed below.
July 6
US ISM non-manufacturing - Jun: The headline reading is expected to have risen for the third consecutive month to 46 in June as driven by new orders and business activity components. Last week, manufacturing index increased to 44.8 in June from 42.8 in the previous month. We believe similar up trend will be seen in service sectors as recent data have shown improvement. For instance, retail sales stabilized while consumer confidence also improved over the past few months.
July 7
Australia RBA Meeting - July: The RBA will leave the cash rate unchanged at 3% for the third months, citing facts that both domestic and global economic conditions have shown signs of improvement. 1Q09 GDP surprisingly grew +0.4% qoq, after contraction of -0.6% in the previous quarterly help the nation avoid recession technically. Retail sales in May also surged +1%, higher than consensus of +0.5% and +0.3% in April. These gave policymakers much room to wait and see how the situation evolves.
In the accompanying statement, we believe Governor Glenn Stevens will reiterate the central bank's stance to monitor the impact of previous rate cuts and government cash handouts on the economy.
Commonwealth Bank of Australia raised its variable mortgage rate by 10 bps recently and has become the first of the nation's 4 biggest banks to do so since the RBA began the easing cycle. This move may lead to rate hike by other banks and will offset part of the effects of the central bank rate reductions. However, further rate cut by RBA because of this is not likely.
The more crucial that will trigger RBA's rate decision is employment. Unemployment rate rose to 5.7% in May following an unanticipated decline to 5.5% in April. Despite the increase, the number of job loss, at -1700, was lower than expected, suggesting economy may recover faster than other developed countries. June's employment condition will be released next Thursday. Continual surge in unemployment rate in coming months may trigger the central bank to modestly cut rates again.
July 8
G8 Meeting - Leaders of the Group of Eight will meet in Italy to discuss economic outlook Wednesday. We expect they will give more optimistic messages such as the worst of recession has been behind us and recovery is coming soon. Moreover, the leaders may also discuss about the 'exit strategies' of the enormous and aggressive stimulus plans adopted since last 2008 to revive growth.
Another focus will be on USD. News have reported that China will raise discussions about using a new 'super-sovereign' currency to replace USD as the dominant reserve currency. Although Chinese officials replied that they are not aware of such talks, any related discussions will definitely cause big moves in the currency market.
July 9
Australia Employment - June: Unemployment rate is expected to have soared to 6% in June after rising to 5.7% in May and a surprising drop to 5.5% in April. We will also see sharper decline in payrolls of around -30K during the month (May: -1.7K) as employers, particularly small firms, might have cut headcounts ahead of change in workplace laws in July 1.
Bank of England Meeting - July: We believe the MPC members will keep interest rates unchanged at 0.5% Thursday while maintaining the current 125B pound asset purchase program.
The asset buying program will end in late July but we think the probability for further extension is low unless there's large downward revision of 1Q09 GDP (to be released next Tuesday), report indicating previous capital injection failed to pass to the market or inflation report suggested significant undershoot of the 3% target level.
July 10
Canada Employment Report - June: Payrolls are expected to have reduced by 30K in June, following a 41.8K contraction in the prior month. With total labor force staying unchanged at around 18.4, unemployment rate likely rose to 8.6% from 8.4% in May.
Pace of contraction in job loss should continue to slow down in coming months as economy in Canada seemed to have stabilized with decline. That said, the view that the nation's unemployment rate will rise to 9% by the end of the year remains intact.
US Trade Balance - May: Trade deficit should have widened to $30B in May from $29.2B in the prior month as increase in imports in goods should have offset the increase exports. Despite continued contraction in trade balance, the pace has moderated.
Indices for both exports and imports probably climbed modestly after falling sharply for many months. Trade flow data released earlier also pointed to the positive side. In June's ISM manufacturing survey, the exports orders index rose to 49.5 while the import index climbed to 46.
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