Key CPI reports for UK and CA, China data and FOMC minutes: The Week Ahead

Key CPI reports for UK and CA, China data and FOMC minutes: The Week Ahead

It may be the middle of the US summer, but economic data keeps coming thick and fast. A defiantly strong set of economic data from the UK piles the pressure on the Bank of England (BOE) to keep tightening, and makes next week's Consumer Price Index (CPI) report as relevant as ever. Canada's inflation report could also be a proxy hike for the Bank of Canada (BOC) if it remains too sticky, and we also have minutes from the Federal Open Market Committee (FOMC), the Reserve Bank of Australia (RBA), and key employment and wages data for Australia.

• The week that was:
• The week ahead (calendar):
• The week ahead (key events and themes):

 

The week that was:

 

The week ahead (calendar):

 

 

 

The week ahead (key events and themes):

• FOMC minutes
• China data
• UK inflation
• Canadian inflation
• Australian wage price index and employment reports

 

FOMC minutes

It’s debatable as to how relevant the FOMC minutes will be, given markets are pricing in an 89% probability of the Fed holding interest rates in September (and talk of peak cycle). But then that could also be a reason to pay attention to the minutes, because if anything unexpected is to surface then we’ll see quick market reaction as those odds change.

 

China data

If you cast your mind back to early January, thin markets were treated to a risk-on rally stemming from hopes of a great economic recovery form China. Needless to say, data from the first half of 2023 did not live up to (arguably unrealistic) expectations. This week’s trade data revealed imports and exports continued to plunge and at a faster rate than expected and consumer prices deflated for the first time since January 2022 – which points to a bleak start for Q3. However, the government are vowing to provide more economic stimulus so we’re now waiting to see if it shows up in the data.

New loans data is yet to be released, but economists expect it to fall sharply following the record levels set in H1. If that is the case, it shows lower demand from an economy that the government is trying to be driven by consumption over exports. This also means that retail sales data will be in focus, because if households aren’t spending then the governments growth objects will not be met. And that could weigh on sentiment as estimates for global growth are lowered, and weigh on oil prices in the process (and know it from its YTD perch).

Market to watch: USD/CNH, China A50, Hang Seng, Nikkei 225, USD/JPY, AUD/JPY

 

UK inflation

UK inflation data just become a lot more relevant following today’s definitely strong data set (not that it hasn’t been relevant for a while). There were hopes that core inflation in the UK had peaked last month’s inflation report, which saw traders scale back bets for another 50bp hike and trim expectations of a peak rate from above 6%. Yet preliminary data for Q2 GDP, industrial production, construction output and manufacturing output blew past expectations to show the economy really is not cooling at all. And if the economy is defying gravity, so can inflation. Even if core CPI ‘peaked’ at 7.1%, it’s still a long way down from 6.9% to the BOE’s 2% target. And today’s strong data suggests the disinflationary process will take longer to unfold. Bets for another 50bp are likely building.

Market to watch: GBP/USD, GBP/JPY, EUR/GBP, FTSE 100

 

Canadian inflation

The Bank of Canada (BOC) has raised its base rate 12 times this cycle, with a two-meeting pause ahead of the two most recent hikes to 5%. While the BOC said it debated holding rates steady at its July meeting and that it does not want to hike any more than necessary, it has kept the door open for further hikes if it feels it is required to tame inflation. The BOC has already had to come out of "pause mode" once to tackle persistently higher inflation than it had anticipated. This makes next week's inflation report a key data point for its next policy decision, and could be seen as a proxy hike if inflation is hotter than desired.

JP Morgan and Goldman Sachs estimate one more hike from the BOC to take rates to 5.25%, and bets would be on for that hike on September 6^th if trimmed mean or median inflation remain too sticky for the BOB’s liking.

Market to watch: USD/CAD, CAD/JPY, NZD/CAD

 

RBA minutes, Australian wage price index and employment report

Three things stand out on the calendar next week for Australia: the RBA minutes and wage price index (WPI) on Tuesday, and the labour force report on Thursday. With that said, it is difficult to see how the minutes will reveal any more than we already know. The RBA will hike if they need to and will continue to hold otherwise. But the statement can still manage to confuse markets with minor changes to their statement and prompt some volatility. And the fact that it is released alongside the quarterly wages report may make wages the bigger mover, if it comes in hot enough. But given that real wages remain near historical lows as wages lag inflation, it would take an almighty punchy number to warrant a hike next month. And that leaves Thursday's employment report as the biggest of the three, where wider cracks could cement calls for peak cycle and weigh on AUD.

Employment in Australia has remained robust throughout the RBA’s tightening cycle, barring a couple if negligible headline data misses along the way. Whilst that is clearly good news for the typical Australian household, it provides the RBA with a reason to keep their finger at least hovering over the hike button (even if they’d prefer to avoid using it, if at all possible).

 

Last month’s figures revealed that unemployment had fallen back to 3.5%, below the RBA’s own estimate for June and its own 12-month average. But employment data is lagging, and the RBA themselves acknowledge the delayed effect monetary policy has on the economy. Which means that if unemployment turns notably higher and job growth is negative, markets will likely assume rate cuts are coming sooner and weigh on AUD/USD. And if that becomes a trend of two or more data points, it might even knock the wind out of the sails of the ASX 200. But in all the time employment remains strong, the RBA will be forced to keep their finger over the hike but, just in case.

Market to watch: AUD/USD, NZD/USD, AUD/NZD, NZD/JPY, AUD/JPY, ASX 200

 

 

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge