Sample Category Title

Monday, Jul 10, 2017

[php_everywhere] [/php_everywhere]

Tuesday, Jul 11, 2017

[php_everywhere] [/php_everywhere]

Wednesday, Jul 12, 2017

[php_everywhere] [/php_everywhere]

Thursday, Jul 13, 2017

[php_everywhere] [/php_everywhere]

Friday, Jul 14, 2017

[php_everywhere] [/php_everywhere].

U.S. Review

Economic Data Suggest Stronger Growth in Q2

• The ISM manufacturing index kicked off the fireworks a day early on Monday with its highest reading since August 2014. The ISM non-manufacturing index also topped expectations.
• The FOMC minutes from the June meeting showed that the Fed appeared split on when to initiate the beginning of its balance sheet reduction program. We anticipate the reductions will begin at the start of Q4, with the next rate hike occurring in December.
• Nonfarm payrolls capped the strong week with a 222,000 increase in employment. Despite the job gains, wage growth remained stuck in neutral.

Economic Data Suggest Stronger Growth in Q2

Economic data in the United States this week were supportive of stronger economic growth. The ISM manufacturing index kicked off the fireworks a day early on Monday, climbing to 57.8 in June. This was the best print for the index since August 2014 when oil was still nearly $100 a barrel.

The details of the report were broadly encouraging for both current and future activity. The production subcomponent rose to 62.4 from 57.1, and only two industries (apparel, leather & allied products and textile mills) indicated that production declined last month. In addition, the employment subcomponent rose to a three-month high of 57.2. The new orders, backlog of orders and new export orders subcomponents all increased in the month, which bodes well for momentum in the factory sector headed into Q3. The ISM's services counterpart also topped expectations in June, albeit in a less dramatic fashion. The non-manufacturing index climbed to 57.4 from 56.9 in May, spurred by a pick-up in new orders. Taken together, these survey-based measures of economic activity are near multi-year highs, which bode well for economic growth in the near-term (top chart).

The U.S. trade deficit narrowed in May, reflecting an $855 million increase in exports and a $223 million decline in imports. Taking a longer term view, export growth has returned to positive territory after dipping into negative territory last year (middle chart). The collapse in commodity prices depressed the value of industrial exports while deceleration in global economic activity last year weighed on other categories of exports. The stabilization in commodity prices and stronger economic growth in many of the nation's major trading partners are giving a boost to the value of American exports this year.

The minutes from the June FOMC meeting painted the picture of a Fed that continues to hold its cards close to its chest. There continued to be little clarity around the timing of changes to the Fed's reinvestment policy, with some participants preferring to start the process within a couple months, whereas others supported holding off until later in the year. The reaction to the FOMC minutes was generally mild, with the selloff in U.S. Treasuries this week driven more by the economic data and foreign developments (see the Topic of the Week on page 7). We are of the view that the next fed funds increase will occur in December. At the September meeting, we expect the Fed to refrain from raising rates as it officially announces its balance sheet reduction program, which, in our view, will begin a few weeks later at the start of Q4.

Employers added 222,000 net new jobs in June, the second strongest print of 2017. Job gains were broad-based, with healthy hiring in construction, government and leisure & hospitality. The unemployment rate rose a tick to 4.4 percent amid a 361,000 person surge in the labor force. The major weak spot in the report was another sideways print for average hourly earnings growth (bottom chart). The lack of a marked acceleration in earnings reinforces our belief that the Fed will maintain its slow and steady approach to tightening policy in the months ahead.

U.S. Outlook

CPI • Friday

Inflation measures have come in below expectations in recent months, and prices declined in May in both the CPI and the PCE deflator. Year-over-year comparisons continue to drift lower from the Fed's 2 percent target. Transitory factors are certainly at play, including lower gasoline prices and wireless cell phone plans, though weakness has broadened into core price categories as well. Apparel, transportation and medical care all posted lower readings in May. The weakness in the core CPI trend is evident in the three-month annualized pace, which fell to zero in May.

Continued misses from incoming inflation data prompted us to reevaluate our outlook for monetary policy moves through the end of the year. We moved our call for the next funds rate hike from September to December, and expect the FOMC to initiate balance sheet reductions in September.

Previous: -0.1 % Wells Fargo: 0.1% Consensus: 0.1 % (Month-over-Month)

Retail Sales • Friday

After a disappointing showing in the first quarter of the year, we are looking to retail sales for hints of a strong rebound for consumer spending in Q2. The strength of said resurgence was challenged by the May retail sales report, which showed a decline of 0.3 percent on the month. Lower gasoline prices were a contributor to the soft read, though not the only culprit. Auto sales continued to weigh on retailers, and paltry performances in other sectors were unable to compensate. Sales were down at electronics and sporting goods stores, department stores and eating & drinking places. These categories tend to reflect consumers' discretionary spending, so continued weakness here may be a red flag that consumers are pulling back.

Control group sales, which go into GDP calculations, were flat in May but up strongly in April. We will look closely at this category in June to gauge the strength of the Q2 rebound in personal spending.

Previous: -0.3 % Wells Fargo: 0.1% Consensus: 0.2 % (Month-over-Month)

Industrial Production • Friday

A flat reading for industrial production in May was the result of increased production in utilities and mining offsetting a 0.4 percent dip in manufacturing output. Manufacturing output declined in two of the past three months, bringing the sector's three-month annualized growth rate to zero. The slowdown in auto production was only partially at play, as factory output still declined 0.2 percent when motor vehicles and parts were excluded.

The May manufacturing production report was another hard data point suggesting that the factory sector is expanding at a much slower pace than indicated by recent survey measures. Orders and shipments data releases in recent weeks reiterated that story. The ISM manufacturing survey, however, again suggested a more robust pace of expansion in June. Our forecast contains a healthy degree of skepticism for the factory sector, but we expect a gradual lift in activity, as the hard data continue to suggest.

Previous: 0.0 % Wells Fargo: 0.4% Consensus: 0.3 % (Month-over-Month)

Global Review

Solid Growth in Many Foreign Economies in Q2

• The Tankan survey of Japanese business sentiment corroborated other recent data that suggest the Japanese economy continues to grind along. Real GDP growth in the second quarter appears to have been solid as well in the Eurozone and in Canada.
• In contrast, economic growth in the United Kingdom appears to be lackluster at present. Although there are a number of reasons behind the recent slowdown in the U.K. economy, uncertainties related to the Brexit process undoubtedly are playing a role.

Solid Growth in Many Foreign Economies in Q2

We reported in this space last week that incoming data show that the Japanese economy continues to grind along at a modest pace. The Tankan survey of Japanese business sentiment, which was released early this week, corroborated the message from these previous data releases. As shown in the graph on the front page, the "headline" index, which measures sentiment among large manufacturers, rose in the second quarter to its highest level in more than three years. Other details within the survey were also generally encouraging. Analysts scrutinize the survey data because the "headline" index has a fair degree of correlation with Japanese GDP growth. Bottom line: the Japanese economy continues to grind along at a modest pace.

As measured by the U.K. purchasing managers' indices, the British economy appears to be grinding higher as well at present. Both the manufacturing and service sectors PMIs remain above the demarcation line separating expansion from contraction (top chart). Yet neither index is at a level that would suggest the economy is "booming." Indeed, hard data that were released this week showed that growth in the British economy remains lackluster. In May, industrial production (IP) fell 0.1 percent relative to the previous month, pulling the year-over-year growth rate down to -0.2 percent. The construction sector was also weak as output dropped 1.2 percent on a sequential basis in May. Although there are a number of reasons behind the recent slowdown in the U.K. economy, uncertainties related to the Brexit process undoubtedly are playing a role.

In contrast to the slowdown that is underway in the United Kingdom, economic activity in the Eurozone appears to be strengthening. IP in Germany jumped 1.2 percent in May. On a year-ago basis, IP growth rose to 6-year high of 5.0 percent (middle chart). French IP was also much stronger than expected, rising 1.9 percent on a sequential basis in May. As we discuss in the Topic of the Week (page 7), the recent run of stronger-thanexpected economic data in the Eurozone has contributed to the recent surge in government bond yields in the euro area.

The Canadian economy also appears to have a fair amount of momentum behind it. Payrolls in Canada rose by 45,300 in June (bottom chart). Not only was the outturn significantly stronger than the consensus forecast, but it follows on the heels of the 54,400 jobs that were created in May. Over the past six months, payrolls have risen by 31,000 per month, on average. (This is equivalent to over 300,000 per month in the United States.) The strong rise in employment pushed the unemployment rate down to 6.5 percent in June from 6.6 percent in May.

At 1.3 percent in May, CPI inflation in Canada is well below the midpoint of the Bank of Canada's (BoC) target range of 1 percent to 3 percent. Nevertheless, we look for the BoC to hike its main policy rate by 25 bps at its policy meeting on July 12. Real GDP in Canada has accelerated in recent quarters, and all indications are that growth in the second quarter was solid. Furthermore, BoC policymakers have been signaling in recent comments that higher rates are on the way.

Global Outlook

Eurozone Ind. Production • Wednesday

The Eurozone industrial production index has not delivered three consecutive positive month-on-month growth rates since the second half of 2013. The index will have an opportunity next week of matching such a streak when it is released on Wednesday. As we know, the Eurozone industrial production index is highly dependent on what is happening in Germany, the largest economy of the Eurozone. With the strong showing for Germany's industrial production index released today, up a strong 1.2 percent, month on month, and the also strong, up 1.9 percent, for France's industrial production index, the expectation is for the Eurozone industrial production index to come in strong in May also.

Consensus is expecting a strong, 1.0 percent increase in the index, with a clear risk to the upside given the strong showings for the largest economies of the region.

Previous: 0.5% Consensus: 1.0% (Month-over-Month)

Mexico Ind. Production • Wednesday

The Mexican economy, so far, has surprised on the upside this year. However, some data points, especially on gross fixed investment and confidence, have disappointed. Thus, a good industrial production number for May, which is going to be released on Wednesday, will help to dispel current doubts regarding the performance of the economy.

Special attention should be given to the performance of manufacturing production after the seasonal weakness recorded in April. If the weakness remains this will add to the concerns for the rest of the year. We have already seen some weakness for automobile demand in the United States further weakness in Mexican manufacturing production could be a reflection of such a weakening demand environment north of the border.

Previous: -4.4% (Year-over-Year)

Brazil Economic Activity Index • Friday

The recent political noise in Brazil has soured an already weak expected economic performance by the largest economy in South America in 2017. Thus, the release of May's economic activity index, a proxy for overall GDP growth in the country, will have important implications for the rest of the year after several volatile readings during the first four months.

From looking at trade data it is clear that exports have been helping economic activity during the first half of the year. However, the weakness in imports point to a still weak production and consumption environment domestically. Furthermore, the recent escalation in political tensions with the recent prosecution of the president will put further pressure on the economy, even if the process doesn't end with any serious terminal crisis for President Michel Temer.

Previous: 0.3% (Month-over-Month)

Point of View

Interest Rate Watch

Business Credit: A Demand Side View

As illustrated in the top graph, the pace of C&I lending at domestically chartered banks has certainly slowed over the past year. Yet the story is not of tighter credit standards but one of weaker demand. This weaker demand reflects the steadiness of final sales and the continued weakness in profit margins.

Slower C&I Lending: Why?

Growth in C&I lending has slowed over the last year. In fact, the current pace of lending would be consistent with prior periods of economic weakness in 1990, 2001, 2008-2009 s0 this pace is of concern to the economic outlook.

What makes this period particularly interesting is that the slowdown is not associated with a tightening of credit standards. The middle graph provides visual evidence that the net percentage of banks tightening standards for C&I loans to large and medium firms actually is a touch on the easy side. A similar graph for small firms provides the same result. So what is the story?

Lack of Demand

Slower loan growth is a demand, not supply side, story. Three factors are at play. First, the expected pace of final sales in the economy has come to reflect the steadiness of two percent economic growth over the last five years. As a result, firms already have the capacity to produce the current pace of economic output so there is no need to accelerate business equipment spending. In 2016, business equipment spending fell 0.5 percent after a gain of just 2.1 percent in 2015. Second, firms face the problem that profit margins have declined (bottom graph) and so there is less profit incentive to add to capacity going forward. Finally, control of inventories has been tight and so there is little need to borrow funds since both the real quantity of inventories has been low and little incentive exists to borrow in anticipation of higher inflation prices for inventoried goods. Inventories were a drag of 0.4 percent on growth in 2016 and are expected to add just 0.1 percent this year.

Weaker lending is often associated with tighter lending, but the pattern over the last year has been weaker demand—not supply.

Credit Market Insights

Detailed Loan Data Provide Insight

Bank loan performance has improved dramatically since the Great Recession, and new data from the New York Fed's "Quarterly Trends for Consolidated U.S. Banking Organizations" report provide a more nuanced look at delinquencies. In aggregate, the nonperforming loan ratio for U.S. commercial banks fell to 1.5 percent in Q4, from a recession peak of 5.7 percent. The new data, however, provide a more granular look at loan performance within the Commercial Real Estate (CRE) sector, which has been under scrutiny of late due to elevated prices.

A closer look at CRE loan performance reveals differences in lending risk within the sector. For example, loans backed by income-producing properties and properties still under construction have both receded to less than 1 percent delinquent from their recession peaks. However, the former peaked at 6 percent delinquent while the latter peaked at 17 percent.

Construction loans present higher lending risks, as they are backed by properties that have yet to produce any cash flows. Furthermore, the value of the properties is hard to forecast, particularly if CRE properties are appreciating. Indeed, CRE prices are up a steep 90 percent since 2010, and the Fed has identified this as an area of "growing concern." We will continue to monitor these metrics for signs of risk, particularly as we enter a later stage of the business cycle.

Topic of the Week

European "Taper Tantrum?"

Yields on government bonds in many European countries have risen noticeably in recent days. For example, the yield on the 10-year German Bund is up more than 30 bps over the last two weeks (top chart). Yields on comparable government securities in other European economies have risen by similar amounts, and the rise in European bonds yields has exerted upward pressure on U.S. Treasury yields. What is going on?

The meltdown in the European bond market reflects expectations that the European Central Bank may soon dial back its quantitative easing (QE) program further. These expectations have been fueled by the recent run of economic data out of the euro area, which generally have been stronger than expected, and by comments by ECB policymakers. This episode reminds us of the "taper tantrum" that occurred in mid-2013 when then-Fed Chairman Bernanke stated that the Fed would eventually begin to "taper" its bond purchases. As shown in the bottom chart, the yield on the 10-year Treasury security shot up by 140 bps between May 2013 and September 2013. Is there anything that can be learned from this earlier "taper tantrum"?

One lesson is that once bond yields start to move, they can do so quickly and for some time. So yields in Europe clearly could move significantly higher in coming months. But another lesson from the U.S. experience is that the backup in bond yields that the "taper tantrum" engendered was not sustained. Indeed, the yield on the 10-year Treasury security returned to its pre-taper level in early 2015.

The ECB is currently buying €60 billion worth of government bonds per month. We look for it to announce a reduction in this monthly pace this autumn, probably in September. But we also believe that the ECB will take its time in raising its traditional policy rates. Although government bond yields in Europe could possibly move higher in coming weeks, we believe the fallout will largely remain contained as long as the ECB does not move quickly to hike its policy rates.

U.S. Highlights

• Global bond yields moved higher this week following cautiously hawkish statements by central bankers last week.
• Above-trend economic growth in advanced economies is expected to persist. But, inflation is expected to lag owing to a number of structural factors working to suppress price growth.
• Altogether, model simulations of shocks to inflation and the unemployment rate supports the FOMC's cautious pace of monetary policy normalization. The last thing the Fed or other global central banks would want to do is to have to reverse course several quarters from now, and risk impairing their credibility.

Canadian Highlights

• The Bank of Canada will meet next week to decide on interest rates. A continuing trend of strong economic data this week makes it likely that the Bank will announce an increase in the overnight rate, removing one of the two emergency rate cuts it made in 2015 as cushion against falling oil prices.
• Despite strong economic growth, there is little urgency on the inflation front. Indeed, inflation has been moving away from the Bank of Canada's 2% target over the past several months. Given an inflation target that is intended to be symmetric

U.S. - Fed is Right to be Concerned with Low Inflation

Although a short week, the bond sell-off resumed on global financial markets, taking yields higher following cautiously hawkish statements by central bankers last week (Chart 1). Selling pressures intensified domestically and across the pond, with European markets reacting in advance of the tapering of ECB asset purchases expected to begin early next year.

Curiously, this repricing episode has little to do with a material change in underlying economic fundamentals. Indeed, economic growth in advanced economies has exceeded trend for a number of quarters and is expected to continue to do so through next year. Similarly, labor markets continue to tighten. This morning's payrolls report shows that U.S. labor demand remains very healthy. The economy added 222k jobs in June - well above the estimated 80-100k jobs necessary to hold the unemployment rate constant. Furthermore, wage growth is encouraging, but still historically subdued given estimated tightness of the labor market.

Instead, markets had been caught overly discounting future inflation and rate guidance by central banks, and for good reason. Subdued inflation is a key concern of global policymakers, including the Fed, as the minutes of June's FOMC minutes revealed this week. Participants are clearly concerned about the persistence of weak underlying inflation, even while they deemed risks to the near-term inflation outlook as broadly balanced.

Unlike in the past, monetary tightening this time around is likely to be more a leap of faith. Economists and monetary policymakers alike continue to believe that the relationship between economic slack and prices will eventually reassert itself, leading to sufficient price pressures to overcome some of the structural issues that are suppressing prices. Indeed, there is evidence that permanently weaker energy prices, changes in global supply chains, the expansion of the world's effective labor force, and the persistence of global excess capacity are factors partly responsible for weakness in underlying inflation in the U.S. and abroad.

Worryingly, these structural factors are not expected to recede anytime soon. As such, the question remains of how inflation-targeting central banks plan to respond to a world of rising demand but weak inflation. Historically, this combination has signaled a positive global supply shock, requiring a more accommodative stance of monetary policy, the exact opposite of what has been communicated by some central banks recently. This is because low interest rates are less stimulative to the real economy if price growth is more subdued.

Model simulations utilizing the Fed's FRB/US model highlights the need for a more accommodative monetary policy stance (Chart 2). The persistence of a -0.5 ppt shock to underlying inflation in the U.S. implies that the fed funds rate should fall by up to 60bps a year from now. In stark contrast, further labor market tightening, in which the unemployment rate persists 50 bps below the natural rate, would imply an immediate 50bps increase in the fed funds rate. Altogether, this simulation justifies the FOMC's cautious pace of monetary policy normalization. The last thing the Fed or other global central banks would want to do is to have to reverse course several quarters from now and risk impairing their credibility.

Chart 1: Hawkish central bank Rhetoric Has Helped to Reprice Bonds Globally

Chart 2: Model Simulations Reaffirms need for Caution By the Fed

Canada - Strong Growth and Weak Inflation

Next week, on July 12, the Bank of Canada will announce its policy for the overnight rate. The hawkish turn in central bank communications over the past several weeks has led financial markets to anticipate a rate hike. The justification cited is simple: past rate cuts put in place to cushion the Canadian economy against falling oil prices "have done their job." This is evidenced in robust economic growth that has continued well into the second quarter. The most recent economic data out this week confirm the story, with strong gains in exports in April and another blockbuster job report in June.

With consistently above-trend growth, the economy has made considerable strides in reducing excess capacity. The unemployment rate currently sits at 6.5%, the lowest level in over eight years. The Bank of Canada's measure of the output gap, which it previously estimated would be closed by the first half of 2018, is either already closed or will be closed before the end of this year.

The missing ingredient is inflation. Rather than moving higher, inflation has decelerated in recent months. Both the headline rate - at 1.3% - and the Bank of Canada's three preferred core inflation measures - averaging between 1.2% and 1.5% - have been moving away from the Bank of Canada's target. What is more, the same weakness observed in the price data can be seen in wages. Average hourly wages of permanent employees were up just 1.0% over the past year in June.

Governor Poloz commented on this seeming contradiction in his most-recent interview, noting that the current weakness in inflation is a result of past (oil-induced) weakness in economic growth. The current strong rate of economic growth is anticipated to gradually feed through to higher inflation over the next 18 to 24 months.

Still, there is room for caution. Inflation has been weak globally and is also low and decelerating in regions such as the United States and Europe where economic growth has been more consistent over the past two years. The relationship between economic slack and inflation appears to have diminished to the point where there is little reason to expect a rapid turn higher in inflation.

The risk is that by raising rates in an environment of decelerating inflation, the Bank could tighten financial conditions in a way that makes achieving a return to 2% inflation more difficult. The recent moves higher in the Canadian dollar will not be helpful in supporting the rotation in growth towards exports. Furthermore, it risks anchoring inflation expectations below 2%. There is already evidence that this is occurring. The Bank's Business Outlook Survey shows the vast majority of businesses (70%) expect inflation to be between 1% and 2%, while less than a quarter expect it to run between 2% and 3%.

Given an inflation target that is intended to be symmetric around 2.0% (with undershoots treated equally to overshoots), and given the heightened level of uncertainty around the outlook for future growth (with upcoming NAFTA negotiations and macroprudential measures slowing housing markets in Ontario), a pause to confirm that inflation is indeed moving in the right direction, would not be out of the question.

Chart 1: Little in the Way of Economic Slack

Chart 2: Inflation Moving Lower, Not Higher

U.S.: Upcoming Key Economic Releases

U.S. Consumer Price Index - June

Release Date: July 14, 2017
Previous Result: -0.1% m/m, core 0.1% m/m
TD Forecast: 0.0% m/m, core 0.1% m/m
Consensus: 0.1% m/m, core 0.2% m/m

Headline CPI inflation is expected to slip to 1.7% y/y in June, with prices flat on the month. We look for energy prices to drive the deceleration, with declines across the board in fuels, electricity and natural gas. Offsetting are further gains in food prices, which are expected to recover further on a y/y basis. We look for another relatively modest 0.1% gain in the core, keeping the core inflation rate stable at 1.8% y/y. While the drag from wireless services prices is likely to dissipate, negative contributions from vehicle prices should continue into June.

U.S. Retail Sales - June

Release Date: July 14, 2017
Previous Result: -0.3%, ex-auto -0.3%
TD Forecast: 0.1%, ex-auto 0.2%
Consensus: 0.1%, ex-auto 0.2%

We expect retail sales post a 0.1% increase in June, as drags from lower auto and gasoline station sales are more than offset by a solid pickup in core sales figures. Motor vehicle sales disappointed for the fifth straight month and eased to a 16.4m unit annual rate vs 16.6m in May, and another sizeable decline in gasoline prices suggests lower gasoline station sales receipts. Core sales - excluding food services, building materials and the above categories - are expected to partially offset these declines with a solid 0.4% increase. These projections would be consistent with Q2 real PCE near a healthy 3% pace.

Canada: Upcoming Key Economic Releases

Canadian Housing Starts - June

Release Date: July 11, 2017
March Result: 195k
TD Forecast: 205k
Consensus: 200k

Housing starts are forecast to post a moderate rebound to a 205k pace in June after two months of deceleration. While data from the Toronto Real Estate Board indicates that the market is still adjusting to new macroprudential measures through June, building permit data suggests that a soft resale market is not yet dissuading development in the region. Building permits also showed a sharp pickup for single and multi-unit projects, suggesting that both could see greater construction activity in June. We do not expect housing starts to recover fully to the six month trend of 215k.

Bank of Canada Rate Decision

Release Date: July 12, 2017
Previous Result: 0.50%
TD Forecast: 0.50%
Consensus: 0.75%

We expect the Bank of Canada to leave rates unchanged at the July decision but acknowledge it is a very close call. Despite the current market pricing, we believe that the Bank's risk management framework favours an October liftoff over July. Conditions in the wider economy are still largely consistent with April MPR projections and such a rapid shift in tone over such a short period absent of a major shock risks damaging the Bank's forward looking credibility. Moreover, inflation is weaker than in the April MPR. Looking past the Bank's decision to leave rates unchanged, the rest of the statement and MPR should confirm a hawkish tone conveyed in Wilkins' speech, citing the strength of the labour market and domestic demand while playing down soft levels of inflation as a lagged symptom of prior excess slack. In the press conference, Poloz will likely acknowledge that removing accommodation was discussed and that future rate hikes will be gradual and consistent with the evolution of economic data, particularly inflation.

NFP report added 222,000 new positions to US economy

The US dollar is higher against most major pairs after another jobs report that added more than 200,000 positions. The Canadian dollar was the outlier making gains against the greenback on the back of a similar strong jobs report that validates the hawkish comments from the Bank of Canada (BoC) in the last three weeks.

The Bank of Canada surprised the market on June 11 when senior policy makers at the central bank started signalling that the end of an easing monetary policy was near. The last change in interest rates were the two rate hikes in 2015, a proactive measure ahead of the eventual drop in oil prices. The BoC will publish its rate statement on Wednesday, July 12 at 10:00 am EDT with the BoC Governor Stephen Poloz giving a press conference at 11L15 am EDT.

Fed Chair Janet Yellen will be giving her semiannual monetary policy report to the US House Financial Services Committee on Wednesday, July 12 at 10:00 am EDT and to the Senate Banking Committee on Thursday, July 13 at 10:00 am EDT. FOMC members will be speaking during the week reiterating the high probability of another rate hike and the imminent start of the central bank's balance sheet reduction sooner rather than later. US economic indicators to note are the release of the Producer Price Index on Thursday, at 8:30 am EDT, US retail sales and inflation data on Friday, July 14 at 8:30 as a potential obstacle for dollar gains as inflation has been subdued as evidenced by the wage component of the jobs report.

The EUR/USD lost 0.271 percent in the last five days. The single currency is trading at 1.1385 after the U.S. non farm payrolls (NFP) report added more jobs to the economy than what forecasts called for. The USD rose against the euro as strong employment validates the path of rate hikes that the Fed has embarked upon. The inflation component of the jobs report was softer, with a 0.2 percent gain in wages on a monthly basis but the central bank has agreed to move ahead without much inflationary pressure.

The G20 summit got under way in Hamburg Germany with little for markets to trade on outside of the usual pleasantries from world leaders. Political risk has been significantly reduced after the summer elections in the UK and France. It won't be until September when Germans head to the polls, but Merkel's position is far more solid at the helm of Germany.

US retail sales and the CPI indicators to be released on Friday have proven to be a pain on the side of the US dollar on a regular basis. Consumers remain confident when surveyed, but they are opting to save more. The US economy depends on consumer spending which is now in a paradox of confident but frugal consumers. Weak inflation has been deemed a temporary condition by the U.S. Federal Reserve as it has opted to move on its path of gradual tightening despite being below the 2 percent target. Forecasts call for an improvement on retail sales and the CPI, but the PPI is expected to remain flat as producers keep prices without change putting little pressure on higher prices for consumers.

The USD/CAD lost 0.751 in the last five trading sessions. The currency pair is trading at 1.2871 after the release of employment reports in the US and Canada. The U.S. non farm payrolls (NFP) report showed the US added 220,000 new positions in June, but wage growth remains slow with a 0.2 percent monthly gain. The strong NFP will keep the Fed on target as it looks to raise rates at least once more before the end of the year and start reducing the balance sheet it accumulated during its quantitative easing program.

Canadian jobs surprised to the upside with another strong gain. Canada added 45,000 jobs in June, although less full-time positions than in May but a strong showing that dropped the unemployment rate to 6.5 percent. The loonie appreciated after the release as it adds further speculation that the Bank of Canada (BoC) will hike rates on July 12 after several comments from senior central bank members. The Canadian central bank changed its tune on June 11 and started signalling an upcoming rate hike after the two rate cuts in 2015 and the government's fiscal stimulus seemed to have done their job. The BoC was not forecasted to hike rates until 2018 as there are still major question marks with oil prices and the NAFTA negotiations in the fall, but the pace of growth in the Canadian economy is giving the central bank the confidence to make a move sooner rather than later and keep up with the Federal Reserve.

The Bank of Canada (BoC) monetary policy meeting will be the highlight of the week. Central bank rhetoric in the developed economies has now taken hawkish tone as the European Central Bank (ECB), Bank of England (BoE) and the Bank of Japan (BOJ) have seen improvement in economic growth. The BoC is ahead of the pack and slightly behind the pack as it carries no quantitative easing program to taper and its benchmark rate is 50 basis points. A 25 basis points in the next meeting would keep it close to the 100–125 basis points of the Fed funds rate.

Oil prices tumbled 3.917 percent this week. The West Texas Intermediate is trading at $44.10 in a volatile week for energy, with prices oscillating between the weekly high of $47.18 and dropping as low as $43.67 as inventories in the US pointed to a larger drawdown than expected but global supply rumoured to be on the rise despite the Organization of the Petroleum Exporting Countries (OPEC) production cut agreement put more pressure on the downside. OPEC members will meet in Russia with other producers that have agreed to cut production to normalize the market. Russia does not appear to want to increase the amount of the cuts, and other producers are asking for the exemptions given to Nigeria and Libya to be finalized.

Oil rigs in the US have started to increase as shale operations take advantage of stable prices at current levels. The diplomatic disagreement between Qatar and other Arab nations leaves in question the unified front of the OPEC as Saudi Arabia's leadership in the group will be questioned. Weekly inventories regain their normal publication date with US crude stocks to be reported on Wednesday, July 12 at 10:30 am EDT.

The USD/JPY gained 1.361 in the last five days. The currency pair is trading at 114.00, near the weekly highs of 114.18 after a strong NFP report in the US and the pledge of the Bank of Japan (BOJ) to buy an unlimited number of bonds to keep domestic rates. The BOJ had started to taper its bond buying but caved against internal pressure and are once again laggards in the move to a tightening monetary policy.

The Fed has hike rates twice in 2017 and is looking to reduce the balance sheet it accumulated during the massive QE program and hike rates at least once more before the end of the year. The USD has been held back by political risk as the Trump administration has struggled to come out strong out of the gate despite enjoying a majority of republicans at the House and Senate. The US central bank has been optimistic that the economy will continue to expand with the policies currently in place, so the pro-growth policies promised by Trump are not part of the forecast guiding the Fed's actions.

Market events to watch this week:

Wednesday, July 12

• 4:30am GBP Average Earnings Index 3m/y
• 10:00am CAD BOC Monetary Policy Report
• 10:00am CAD BOC Rate Statement
• 10:00am USD Fed Chair Yellen Testifies
• 10:30am USD Crude Oil Inventories
• 11:15am CAD BOC Press Conference

Thursday, July 13

• 8:30am USD PPI m/m
• 8:30am USD Unemployment Claims
• 10:00am USD Fed Chair Yellen Testifies

Friday, July 14

• 8:30am USD CPI m/m
• 8:30am USD Core CPI m/m
• 8:30am USD Core Retail Sales m/m
• 8:30am USD Retail Sales m/m

*All times EDT

USD/CHF - 0.9642

Most recent candlesticks pattern : N/A

Trend                                    : Near term down

Tenkan-Sen level                  : 0.9631

Kijun-Sen level                    : 0.9626

Ichimoku cloud top                 : 0.9657

Ichimoku cloud bottom              : 0.9648

Original strategy :

Buy at 0.9555, Target: 0.9655, Stop: 0.9520

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 0.9555, Target: 0.9655, Stop: 0.9520

Position : -

Target :  -

Stop : -

Remark: Due to holidays, update will resume on 19 July 2017.

Although the greenback has rebounded in NY morning, reckon upside would be limited to 0.9675-80 and risk of another retreat cannot be ruled out, below support at 0.9598 would bring weakness to 0.9560-65, however, reckon last week’s low at 0.9552 would limit downside and bring another rebound later to resistance at 0.9688, break there would signal low has been formed at 0.9552, bring retracement of early decline to 0.9700 and later towards resistance area at 0.9738-43.

In view of this, we are inclined to buy dollar on subsequent fall. Below said support at 0.9552 would signal recent decline has resumed instead, then weakness to 0.9520-25 would follow but reckon 0.9500 would hold on first testing. 

GBP/USD - 1.2883

Most recent candlesticks pattern   : N/A

Trend                                 : Near term up

Tenkan-Sen level                 : 1.2912

Kijun-Sen level                    : 1.2922

Ichimoku cloud top              : 1.2949

Ichimoku cloud bottom        : 1.2939

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

Remark: Due to holidays, update will resume on 19 July 2017.

The British pound has slipped again after meeting renewed selling interest at 1.2984 and broke below previous support at 1.2893, suggesting top has been formed at 1.3030, hence consolidation with downside bias remains for retracement of recent upmove and weakness to 1.2850, then 1.2830-35 (50% Fibonacci retracement of 1.2640-1.3030) but reckon 1.2789-94 (61.8% Fibonacci retracement and previous support) would hold from here.

In view of this, would not chase this fall here and would be prudent to stand aside for now. Above 1.2920-25 would brig recovery to 1.2950 but only break of 1.2984 would signal the pullback from 1.3030 has ended, bring subsequent retest of this level possibly next week.

EUR/USD - 1.1401

Most recent candlesticks pattern   : N/A

Trend                      : Near term up

Tenkan-Sen level              : 1.1410

Kijun-Sen level                  : 1.1410

Ichimoku cloud top             : 1.1365

Ichimoku cloud bottom      : 1.1359

Original strategy  :

Buy at 1.1335, Target: 1.1440, Stop: 1.1300

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.1335, Target: 1.1440, Stop: 1.1300

Position : -

Target :  -

Stop : -

 

Remark: Due to holidays, update will resume on 19 July 2017.

As the single currency has retreated after faltering below resistance at 1.1446, suggesting consolidation below this level would be seen and pullback to 1.1355-60 cannot be ruled out, however, reckon support at 1.1312 would limit downside and bring another rise later, above said last week’s high at 1.1446 would confirm recent upmove has resumed for headway to 1.1475-80 but price should falter below 1.1500.

In view of this, we are looking to buy euro on dips but one should exit on subsequent rally. Below said support at 1.1312 would abort and signal top has been formed at 1.1446, bring retracement of recent rise to 1.1292 (previous support as well as 50% Fibonacci retracement of 1.1139-1.1446), then towards 1.1270.

USD/JPY - 113.89

Most recent candlesticks pattern   : N/A

Trend                      : Near term up

Tenkan-Sen level              : 113.73

Kijun-Sen level                  : 113.49

Ichimoku cloud top             : 113.26

Ichimoku cloud bottom      : 113.23

New strategy  :

Stand aside

Position :  -

Target :  -

Stop : -

 

Remark: Due to holidays, update will resume on 19 July 2017.

Although the greenback has risen again and broke above resistance at 113.69 and initial upside risk remains for recent upmove to extend gain to 114.00, loss of momentum should prevent sharp move beyond 114.25-30 and reckon 114.50-55 would hold from here, risk from there has increased for a retreat to take place later.

In view of this, would not chase this rise here and would be prudent to stand aside in the meantime. Below the Kijun-Sen (now at 113.49) would bring pullback to 113.10-15 but only break of support at 112.74-88 would signal top is formed, bring correction of recent rise to 112.60, then 112.40.

Next week's market movers

• In the US, we have Fed Chair Yellen's semi-annual testimony before Congress. Market participants may look for hints with regards to B/S normalization and the timing of the next rate increase.
• We expect the BoC to remain on hold, despite the latest hawkish remarks that a hike may come sooner than previously anticipated.
• We also get key economic data from China, Norway, Sweden, the UK, and the US.

On Monday, during the Asian morning, China's CPI and PPI for June are due to be released. The forecast is for both rates to have remained unchanged. Our own view is that there is the possibility for upside surprises in both prints. We base this on the nation's official manufacturing PMI for the month, the price components of which both increased for the first time since December.

During the European day, we get Norway's CPI data for June, though no forecast is available yet. Despite the steep slowdown in inflation, at its latest meeting the Norges Bank removed its easing bias and noted that it now expects the key policy rate to remain at the current level, while it revised slightly higher its expected rate path for 2017 and 2018. What's more, the Bank noted that inflation is lower than expected and may continue to drift lower in the months ahead, but increased activity and receding unemployment suggest that inflation will pick up. Therefore, even if inflation slows again, it may not be particularly worrisome for policymakers, as it would still be in line with the Bank's outlook.

On Tuesday, we don't have any major events or indicators on the agenda.

On Wednesday, the market will turn its attention to the Bank of Canada rate decision. At its latest meeting, the Bank kept its policy unchanged, while the tone of the meeting was neutral overall, indicating that although uncertainties continue to cloud the Canadian outlook, the economy's adjustment to lower oil prices is almost complete and recent economic data such as business investment have been encouraging. A few weeks after that gathering, BoC Deputy Governor Wilkins indicated that the Bank will start assessing whether all of the monetary stimulus currently in place is still required, while at last week's ECB forum on Central Banking, Governor Poloz said that low interest rates have "done their job".

Although the Governor did not comment on future policy plans, the market has started recalibrating its expectations with regards to the Bank's next move. Before we get any comments from these two key officials, the implied probability for a hike at the July meeting was resting near 0%. However, at the time of writing, - according to Canada's Overnight Index Swaps - more than half of market participants expect the Bank to lift interest rates for the first time in 7 years next week.

Indeed, recent economic data have been encouraging. Economic growth was impressive in Q1, while April's mom data showed that the economy entered Q2 on a decent footing. The stellar retail sales for April and the strong employment reports for April, May and June enhance that view. Having said that though, we don't share the view of those who expect a rate increase next week. Yes, we have strong signals that a hike may come sooner than previously anticipated, but given how fast the core CPI rate has been falling in recent months, we doubt that this will happen next week. Conditional upon further improvement in economic data and a rebound in underlying inflationary pressures, we believe that policymakers may choose the last quarter of the year for raising borrowing costs.

In the US, the main event will be Fed Chair Yellen's semi-annual testimony on monetary policy before the House of Representatives Financial Services Committee of Congress. She will address the same testimony before the Senate Banking Committee on Thursday. Usually the Fed's semi-annual monetary policy report is released on the day Yellen testifies, but this time around the report will be published a few days earlier, specifically later today. As such, we don't expect any major market reaction as she presents the report. Nevertheless, market participants may pay extra attention to the Q&A session. In particular, they may be on the lookout for any fresh signals with regards to balance sheet normalization and the timing of the next rate increase. Having said that though, we believe that what will play the biggest role in market expectations with regards to the Fed's future plans are the nation's CPIs due out on Friday.

As for the indicators, we get UK employment data for May, though no forecast is available yet. Our own view is that the unemployment rate likely remained unchanged, while average weekly earnings may have risen at the same pace as previously, with risks skewed towards an acceleration. The nation's services PMI for May indicated that the rate of employment growth across the sector was little changed since April, and that the reported rise in input prices was partly attributed to higher staff salaries. Considering that the service-sector accounts for roughly 80% of the nation's GDP, we consider it a decent gauge of the overall economy. However, we see it very unlikely for the wage growth rate to overcome May's inflation rate of 2.9%, so the UK is likely to experience negative real wages for the 4th consecutive month. In fact, real wages are accelerating to the downside, something that raises concerns over household spending.

On Thursday, during the Asian morning, China's trade balance for June is due to be released and expectations are for the nation's trade surplus to have increased. Exports are forecast to have risen at the same pace as the previous month, while imports are expected to have slowed. Our own view is that the risks surrounding both figures are tilted to the upside. The official manufacturing PMI suggested stronger foreign demand during the month, with new export orders increasing by a larger margin than overall new orders, while the import index rose to a four-month high.

During the European session, we have Sweden's CPIs for June, but no forecast is available yet. At its latest policy meeting, the Bank noted that inflation has recently been slightly higher than expected and that the risks of setbacks abroad are thought to have decreased, which makes it less likely than before for the repo rate to be cut in the near term. Nevertheless, officials clearly pointed out that this does not rule out any further cuts in the period ahead. The Executive Board remains prepared to implement further monetary policy easing if necessary to stabilize inflation and safeguard its target. Having all these in mind, we believe that CPI data could be of major importance for investors as an increase in underlying inflation pressures may revive speculation that the Riksbank is likely to remove its interest rate easing bias soon, following in the footsteps of the Norges Bank and the ECB.

Finally on Friday, we get US CPI and retail sales data, both for June. Getting the ball rolling with the CPIs, the headline rate is expected to have slid for the 4th consecutive month, while the core rate is anticipated to have held steady after falling for four months in a row as well. Given the latest tumble in the yearly change of oil prices, we do not expect the decline in the headline rate to be particularly worrisome. We believe that investors will have their gaze locked on the core rate. The price sub-index of the ISM manufacturing PMI showed that prices continued to increase, but at a slower pace than the previous month, while the respective sub-index of the non-manufacturing PMI showed a rebound in prices after recording a decline in May. These mixed signals support somewhat the case of an unchanged core CPI rate, which is unlikely to clear the picture with regards to the Fed's future plans. A decent rebound is needed to increase the probability for another rate increase by the end of this year.

As for the US retail sales, the forecast is for both the headline and core rates to have rebounded from the previous month. The consensus for a rebound is supported by both the Conference Board and U of M consumer sentiment indices for the month, both of which rose. A rebound in sales combined with the better-than-expected ISM PMIs and the decent employment report, all for June, may be early signals that the US economy ended the second quarter on a solid footing. This may confirm those who viewed the latest softness in US data as transitory.

• Global bond rally threatens EM - Peter Rosenstreich
• Fed Minutes Leave Markets Hopeless - Arnaud Masset
• Switzerland Retail Sales Declined Less Than Expected - Yann Quelenn
• "Vice" Stocks

Economics - Global Bond Rally Threatens EM

Developed markets bond yields continue to rally, slowing investors rush into EM assets. Banks and data from ETFs are reporting the slowest EM inflows since the start of 2017. With rates driving currencies, last week saw steady depreciation in most EM currencies against G10. High beta currencies like TRY, RUB and ZAR lost over 2% as yields differentials widened. The root cause is the growing expectations of policy regime shift in central banks. Led by the Fed, ECB and BoE investors can finally see a light, abet distant, at the end of the ultra-accommodating monetary policy tunnel which dominated the last 10 years. In the FOMC meeting minutes members continued to highlight that a combination of interest rate hikes and reduction of balance sheet will utilized to prevent the economy from overheating. At the ECB Draghi attempted to back track from his hawkish comments, yet optimistic economic outlook suggests that the days of emergency measures in Europe are numbered. So far, the shift out of EM has been orderly yet as we have seen with the taper tantrum, sentiment can change in a moment.

Lower oil prices and protectionisms Trump behaviors towards China has once again put the spotlight on Mexico. Banxico meeting minutes signaled a cautious stance towards policy setting. Inflation outlook remains skewed to the upside, which is problematic for the central bank that would like to pause hiking cycle with overnight rate at 7.00%. With the Mexican economy mired down in weak oil prices, soft consumer demand and stalled industrial production, higher funding cost would not help. Annual consumer price inflations has gone ballistic now standing at 6.15% from 2% in December. Markets are already expecting a reversal and have two cuts priced in for the end of 2018. Yet in the short term this feel optimistic. Baring orderly rise in US yields, break down in Pena Nieto & Trump communication or a panic exodus from EM, MXN should continue to rally.

USDMXN bearish monument should continue with a test of near term support at 17.80.

Economics - Fed Minutes Leave Markets Hopeless

Beside the start of the G20 meeting in Hamburg, the release of the June FOMC meeting minutes was the highlight of last week. Investors were impatiently waiting for clues about the Fed's thinking and expectations were quite high. There was considerable disappointment when they realised that the minutes showed a highly-divided committee, increasing the overall uncertainty about the timing of the next interest rate hike and the beginning of balance sheet unwinding programme.

The committee noticed that the labour market continued to strengthen together with the economic activity, the latter improving at a moderate pace though. FOMC members acknowledged both headline and core inflation measures came in below their anticipation but "viewed the recent softness in these price data as largely reflecting idiosyncratic factors" and added that it will have little bearing effect on the mediumterm. However, some participants appeared quite concerned about the downside risk in inflation and raised doubts about reaching the 2% target, suggesting that dissent started to appear within Fed presidents.

Regarding the asset-reduction plan, the minutes did provide clarity regarding the game plan and the timing of the announcement, revealing that several participants prefer to announce the start of the process within a couple of months, which puts the September meeting right in target. Indeed, we do not believe the Fed will do this at its July meeting.

We reiterate our view that the weakness in inflationary pressures that has emerged at the beginning of the year will force the Fed to slow down the pace of monetary tightening. Therefore, we expect only one other rate hike this year, most likely in December. We also anticipate that the Fed will wait until at least until September to announce the timing of the balance sheet reduction, which will most likely start at the earliest in the second half of 2018. However, given the disappointing reading in average hourly earnings last Friday (2.5%y/y versus 2.6% exp. and a downwardly revised figure of 2.4% in the previous month), we won't be surprise should the Fed delay further the announcement.

Given the lack of new information provided by the minutes, the USD extended losses starting on Thursday. On Friday, EUR/USD was on its way to test the 1.1445 resistance.

Economics - Switzerland Retail Sales Declined Less Than Expected

The CHF is still trading below 1.10 against the single currency despite short-term bullish pressures on the pair. We believe that there are at the moment two major reasons that are pushing the euro against the Helvetic currency.

The French Presidential election and the start of the "Brexit" negotiations have removed - at least reduced - the political and geopolitical uncertainties, markets are clearly shifting towards risk-on and which is why we see the EURCHF pair moving up.

In addition, Mario Draghi's recent comments pushed the euro higher by stating that the Eurozone recovery is progressing and that the ECB monetary policy stance must accompany this recovery. Markets interpreted those declarations from the ECB as hawkish.

Overall, we may judge that the economic fundamentals of Switzerland are now better than what could have been expected after January 2015 despite the constant overvaluation of the CHF pushed by the extreme monetary policy of the European Central Bank. It has been now two years and a half since the removal from the floor and upside pressures on the Swiss franc are still strong.

For the time being, the situation looks under control. The trade balance remains largely positive, unemployment rate is still very low (3%) and the GDP growth, even though low is decent (Q1 at 0.3% q/q). The one major issue is inflation which is not picking up and this should, at some point, have a negative impact on growth. Hence, we may assess that the Swiss economy still has some room to resist, in case larger weaknesses of the single currency drive the CHF higher.

It is worth noting the CHF is valued under its political and economic stability rather than on its economic data. By the way markets barely reacted on the release of retail sales growth which came in negative for the 2nd month in a row at -0.3% y/y. Swiss safe haven status is what makes the country attractive and we see the EURCHF pair showing a short-term continued bullish move towards 1.1000.

The SNB must still hold tight to defend the Swiss franc but we are concerned about the level of FX reserves which continues their massive increase. This has enabled the Swiss central bank to become the eighth most important investor in the world with $80 billion dollar invested In the US market.

Themes Trading - "Vice" Stocks

Investing in vice (or "sin") companies isn't for everyone. But it has been shown to significantly outperform more conventional stocks. The economic rationale for investing in socially irresponsible companies is clear. "Politically incorrect" industries --such as alcohol, tobacco, gambling and military (heck, we'll even throw in fast food and big oil for good measure) --generally outperform in bull markets and are more resilient in bear markets. That's because earnings growth and dividend yields tend to remain stable, no matter what the state of the economy.

Many vice stocks even exhibit countercyclical behaviour, performing better as the economy worsens. Some people find this type of investment questionable for moral reasons. But make no mistake: this is big business with big opportunities. The US alcoholic-beverage market was worth a whopping $211.6 billion in 2016, with a growth rate of 7% between 2000 and 2016. This Theme will focus on companies that generate most of their revenue from alcohol, tobacco, guns, fast food, adult entertainment and gambling.