It is a light
week for economic data from the G7, and for the reports that are on tap are
unlikely to change the consensus scenario in the aftermath of major central
bank meetings in the first half of the month. Canada may be the chief exception to this
generalization. In the second half of the week, Canada will report retail
sales and CPI.
The
reports will show less consumption and price pressures. It may ease
concerns, prompted by Bank of Canada officials that the degree of accommodation
is worth reconsidering.
Consumption jumped in Q1 (2.4 percentage points to 3.7% GDP, the most since the
crisis, and appears to eased here in Q2. Retail sales rose 0.7% in March.
We know fall in auto sales in April will be
partially blunted by the rise in gasoline prices. The risk
seems to be on the downside in volume terms.
The
Bank of Canada recently suggested that the soft core inflation readings were the result of the lagged effect of excess
capacity. This implies that it expected higher inflation
readings in light of the strong growth over the past few quarters.
However, the pass-through from stronger growth to higher prices may take longer than the market may suspect, which
has increased the odds of a July rate hike to from about 5% at the end of May
to 45% at the end of last week. The base effect
and the electricity rebate (Ontario) warn of downside risks.
The
Reserve Bank of New Zealand and the Norway's Norges Bank hold policy-making meetings. Neither is
expected to change. Although
Q1 GDP disappointed, more recent data from New Zealand suggest the economy is
rebounding. We suspect the next move will be a change in the forward
guidance either now or the middle of Q3.
The recent regional survey by Norges Bank suggests the economy may be re-accelerating. The central bank
seems content with the economic progress and does not appear to be in a hurry
to change the monetary setting.
In terms of economic data, two reports stand out that may be market sensitive:
Japan's trade balance and the flash PMI for the eurozone. Over the
last 20 years, Japan's May trade surplus has improved over April one (2009). This week's report is expected
to be true to trend. The median guesstimate from the Bloomberg survey is
for a trade surplus of JPY43.3 bln down from JPY481 bln in April. A
recovery is likely in June. However, the balance is less important than
the performance of exports and imports. The former is expected to
accelerate and the latter to slow. Even though slowing of imports is often associated with economic weakness, in
Japan's case, the rise exports are positive for growth, as it underpins
industrial output and capex.
The
eurozone's solid and steady growth spurred talk that the ECB is too easy. Ironically, US growth was
slightly lower than the eurozone's last year, but US unemployment (speaks to
the output gap) is considerably lower and inflation considerably higher, and
yet many observers, including former Treasury Secretary Summers, have been
critical of the Fed for being too hawkish.
We
have been concerned that all the good
news from Europe has now been discounted. Unhedged European stocks,
alongside emerging markets, were among
the favored strategies in the first half. Macron's victory over Le Pen and the likely victory for Merkel in
September is widely recognized. The fear of a populist-nationalist wave
sweeping across Europe seemed to rise a
bit after Brexit but accelerated with
Trump's victory in the US. It was a distraction from the underlying
structural issues in Europe. These have not been addressed. ECB President Draghi continues to plea for
countries to implement structural reforms. The European Union itself has
structural issues and institutional challenges, with or without the
Britain.
We
suspect Europe is near a peak. The Dutch
don't have a government. The Finnish government nearly collapsed last
week. Catalonia is planning a referendum in early Q4 which puts it at
loggerheads with Madrid. In France, Macron is not the first French
president to be elected on a reformist agenda and promise labor reforms.
Sarkozy and Hollande promised reforms. A Merkel victory in
Germany means that, whether in partnership with the FDP or the SPD, the basic
thrust of German policy will not change. The chances of an early Italian
election have faded, and the Five-Star Movement has done poorly in the local
elections. However, it is not clear how closely a national election will
track the local results. There were some idiosyncratic problems.
There is still no agreement on the electoral law.
The
economy too cannot do much better. Some
confidence has shown the assessment of
current conditions remains elevated, but expectations have begun slipping.
The flash eurozone PMI is
expected to slip. It is expected to be small for both manufacturing (from
Germany) and services (France), which will result in a lower composite reading.
The magnitude is not significant; the
direction could be a forewarning of a new economic phase.
There
are five events that could overshadow the high frequency data and the stand pat central banks in the week ahead:
1.
Brexit negotiations The negotiations begin on Monday
and come at an awkward time for UK
politics. It is not clear that a majority favor leaving the EU anymore. In last June's non-binding
referendum, the decision to leave was carried
by the smallest of majorities (52%-48%). Polls (Survation and YouGov)
suggest that a growing majority do not want to leave the customs union, and an
increasing number want to priorities unrestricted trade over immigration
controls. Nevertheless, the Chancellor of the Exchequer Hammond, rumored
to be ousted if Prime Minister May won a resounding victory, as the early
pre-election polls pointed to, reaffirmed over the weekend that the UK would indeed leave the single market and
customs union. This dashes the
hopes that the election would spur a reconsideration of the government's
strategy instead of a doubling down.
2.
Queen's Speech June Mansion House Speech: The
Queen's Speech is delivered by the UK Prime Minister on June 21, and outlines
the legislative agenda for the parliamentary session. In an unusual
move, it was pre-announced that there will not be a Queen's Speech in 2018.
Instead, the parliamentary session will run two years. The announcement
was seen as another indications that May
does not intend to change the main approach to Brexit. Of note, after a couple of days of negotiations with the
Democrat Unionist Party (DUP), no formal agreement has been reached. May
decision to push ahead with the Queen's Speech without the agreement
illustrates her commitment to lead the UK even with a minority government.
Carney and Hammond will deliver their delayed (due to the Grenfell fire)
Mansion House speeches a day earlier. Recall that last week, the
BOE's decision to stand was decided by a 5-3 vote. Carney can be
expected to present the case of looking through
the increase in price pressures as primarily a transitory phenomenon related to
the past decline in sterling. It will
be gradually passing in the second half of the year. Meanwhile, the
slowing of the labor market, weaker earnings growth, and less consumption pose
greater near-term risks.
3. MSCI decision: On
June 20, MSCI announces it annual updates. Investors are focusing on
four countries: China, Saudi Arabia, Argentina, and South Korea. In
the fourth attempt to include China's A-shares, MSCI ha proposed a scaled-down
version of last year's proposal. It could include 169 Chinese companies' shares
down from 448 previously. The issues are accessible through the stock-connect link between Hong Kong and
Shanghai and Shenzhen. Large cap companies only are included. The
odds seem to have increased, but it remains a close call. Two issues may
not have been adequately addressed. They
involve the suspension of shares and market data. Chinese shares (that trade in HK, and in ADRs) account for about
25% of the MSCI emerging market equity index. The proposed A-share
inclusion would account for about 0.5% in the index; a modest step. Over time, the China's
shares may eventually account for 40% of the MSCI emerging market equity
index.
Argentina has seen foreign inflows into its equity market
amid speculation MSCI will include Argentina shares again in its Emerging
Market equity index. Some of the same firms that appear to
be lobbying for it may have also been buying the shares. Saudi Arabia has
implemented several reforms to that would make its
including into the MSCI Emerging Market equity index more likely, including introducing
short sales and T+2 settlement. Foreign investors have less than 5% stake
in the Saudi equity market, and there is
not a strong lobbying effort to include them. The issue with South Korea
is whether MSCI upgrades it to a developed market rather than an emerging
market. The increased weight of China in the emerging market index means
a smaller weight for South Korea. Being including the development market index would make it
accessible to a different category of
investors, with a larger pool of capital.
4. Italian Banks: A last minute attempt to get large Italian banks to provide over
a billion euros for two troubled regional banks failed. A precautionary
recapitalization by the government cannot take place. One of the banks (Veneto Banca) debt payment due this
coming week was postponed by the EC. The banks appear to be headed for one of the three outcomes of the
Bank Recovery and Resolution Directive (BRRD): liquidation, wind-down,
resolution. The BRRD offers several tools for the resolution, among which
is a bad bank-good bank arrangement. Initial press reports suggest
Italian officials, who had been suggesting an optimistic outcome much of last
week, seem to refer this latter course as the next best.
5. Special
election in Georgia's 6th Congressional District: On June 20,
there is a special election in Georgia to fill the seat of Price who after
winning the election in November was appointed
to the Secretary of Health and Human Services. That seat was previously held by Newt Gingrich. Price won the
election easily with a 23 percentage point margin. Trump carried the
congressional district by less than two percentage points. This election
is being watched closely as a bellwether. If the Democrats (Ossoff) can take the seat,
it will be seen as a sign of a backlash
against Trump, whose support in most opinion polls is below what it was in
November. It will embolden the Democrats for next year's mid-term
elections and be obstructionist in the
meantime. If the Republicans ( Handle) hold on to the seat, it will be seen as a sign that the Democrats are
overreaching. It will encourage Republican Representatives not to abandon
the President and his agenda. That, in
turn, may slow the unwind of what has been
dubbed the Trump trade.
Disclaimer
Events Not Data Key in Week Ahead
Reviewed by Marc Chandler
on
June 18, 2017
Rating: