The G20 meeting over the weekend failed to have any dramatic impact on financial markets. The communique made it clear they are not all on the same page when it comes to climate change and trade, with the group issuing dissenting conclusions for the first time. Cracks between the US and the rest of the G20 could not be glossed over and the potential for a trade war on steel is certainly there. It looks like the US made very clear it’s concerns about the glut of Chinese steel and the final agreement mentioned “legitimate trade defence instruments”. It also demanded concrete policy solutions by November from a G20 sub-body set up last year to examine steel market imbalances. US employment data on Friday highlighted the conundrum many western economies have found themselves in recently.
That is that low unemployment hasn’t led to broad base wage gains, and as such, predictions of increasing inflation over the coming forecast horizon may well be optimistic. Central banks however are slowly starting to acknowledge the risks of overextended asset markets and we may find that becomes a key driver behind further interest rate hikes. Ultra-easy monetary policy settings, for what turned out to be much much longer than anyone originally thought, has likely sown the seeds for the next financial crises. It may not be just around the corner, but at some stage down the road increasing interest rates are going to put major pressure on extremely stretched valuations in bonds, equities, and real estate in many countries.
The Reserve Bank of Australia made it clear last week they remain very neutral and monetary policy is likely to remain on hold well into next year. Until recently there had been a big split in market expectations for the next move in interest rates, with some prediction a cut while other saw the next move as a hike. Recent economic data from Australia however is starting to see those who were predicting a cut in interest rates, re-asses their forecasts. Employment data has surprised on the strong side for three months in a row and last week’s key releases, those of retail sales and the trade balance, both came in better than forecast. The economic calendar is a lot lighter this week with only second tier data scheduled for release. Business confidence, consumer sentiment, and inflation expectations will hit the wires over the coming days but they are unlikely to elicit any significant market response.
There has been little data of significance from New Zealand over the past week. This coming week also looks very light on the economic calendar. It’s not so surprising then that the NZD remains largely range bound on many crosses at the moment. It’s starting to feel like Groundhog day with the NZDUSD trading in a sideways range for much of the past month. We’ve seen a little more volatility against the Australian dollar, but again overall prices are around the same level they were in early June. Against the GBP the NZD has been range bound for the past two weeks, while movements in the JPY, EUR and CAD have driven those particular crosses.
Non-farm payrolls data on Friday came in better than forecast at 222k. The market had been expecting a gain of around 175k. Tempering any potential positive impact on the USD was the unemployment rate which actually ticked up to 4.4%, and the fact that wage gains disappointed again. Creating jobs is all well and good, but if wages aren’t going up, it’s hard to imagine where all the expected inflation is going to come from down the road. Janet Yellen seems determined to continue tightening policy however with indications that the Fed is waking up to the risks of overvalued asset markets. Yellen is set to testify to the US Congress and Senate this week and we are likely to see her confirm that the gradual move higher in interest rates is set to continue. We also have inflation data and retails sales figures to digest later in the week.
The UK Pound is struggling for direction at the moment, caught between opposing forces. On the one hand we have the Bank of England (BOE) who have indicated a tightening bias while on the other hand recent economic data has been less than stellar. Last week saw disappointing results from the Manufacturing and Service sector PMI’s, along with declines in Manufacturing and Industrial Production numbers. There has also been whispers of discontent with PM May which are not surprising really given what was effectively a disaster for her in the UK election. We have a couple of BOE speakers this week along with employment data to draw focus. As has been the case in the US recently, the market will likely focus more on the earnings figures than the actual jobs numbers.
The European economy remains on the gradual improve and this is helping to support the EUR. Last week saw largely positive numbers from the manufacturing and service sectors as well as strong French and German industrial production data. It does seem however there is a lack of consensus within the European Central Bank about just how long they should continue with the ultra-loose monetary policy. Governing Council member Klaas Knot said over the weekend “if we carry on with this policy for too long, that is absolutely a potential danger”. He added “I think that we have gotten very close to that moment”. His concerns have been echoed by a number of German officials. On the other side of the coin we have Peter Praet who is the ECB’s chief economist and Executive Board Member. He has recently been quoted as saying “underlying inflationary pressure remains subdued” and “the process of reflation is a long one that remains highly dependent on accommodative monetary policy”. The economic calendar this week looks pretty light so the market will pay particular attention to any further comments from ECB officials.
The Japanese economy does seem to be in the improve, but the Bank of Japan (BOJ) are far from even considering winding back stimulus. The BOJ released their quarterly Regional Economic Report yesterday and in it they raised their economic assessment for 5 of the 9 regions. It’s their most optimistic report for the past 12 years with momentum seen gaining in exports and consumption. A speech from Governor Kuroda over the weekend however, made it clear the bank will continue to expand the monetary base until consumer inflation is stable above the 2% target. The commitment to continue the aggressive stimulus has seen the Japanese Yen weaken across the board over recent days.
The Canadian dollar has been the top performing currency over the past two weeks, driven largely by expectations that the Bank of Canada will lift interest rates when they meet on Wednesday. Economic data out of Canada recently has been better than forecast and that trend continued on Friday with the release of the employment figures. Canada gained 45.3k jobs last month with the unemployment rate dropping to 6.5% from 6.6% pior. The central bank is nearly certain to raise interest rates and that expectation has now been largely priced into the market. The reaction in the Canadian dollar after the event will come down to the tone of the statement and just what signals the BOC send out re future hikes.
• UK Services PMI 53.4 vs 53.6 expected
• Australian Trade Balance 2.47b vs 1.00b expected
• US ISM Non-Manufacturing PMI 57.4 vs 56.5 expected
• UK Manufacturing Production -0.2% vs 0.5% expected
• Canadian Employment Change 45.3k vs 11.4k expected
• Canadian Unemployment Rate 6.5% vs 6.6% expected
• US Non-Farm Payrolls Change 222k vs 175k expected
• US Unemployment Rate 6.5% vs 6.6% expected