LCG The Week Ahead: Investors will shift their attention to central bank policies next week. By Ipek Ozkardeskaya, Senior Market Analyst.

 

This is LCG’s look ahead to the week beginning July 8th, 2019

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Investors will shift their attention to central bank policies next week.

The Bank of Canada will give its policy verdict on Wednesday and is expected to maintain its policy rate unchanged at 0.75%.

But the focus will mostly be on the meeting minutes from the Federal Reserve (Fed) on Wednesday, the Bank of England (BoE) and the European Central Bank (ECB) on Thursday. These meeting accounts are important because they should give more clarity to investors about these major banks’ intentions to ease their monetary policies in the coming months.

FOMC minutes on Wednesday

Let’s start with the Fed. The FOMC minutes from the June 18-19 meeting will likely be the highlight on Wednesday, as investors will be looking for any detail regarding the Federal Reserve’s (Fed) plans to ease its monetary policy. The Fed is expected to lower its rates by 50-to-75 basis points over the next twelve months and the first rate cut could come as early as the July meeting. Of course, Fed’s economic and inflation outlook will be important to justify a rate action. In this context, the US consumer and producer price inflation data due Thursday and Friday respectively, could also confirm US policymakers’ shift toward a more accommodative policy. But it is worth noting that we are at a point where the economic data will certainly not challenge the Fed doves’ conviction on the rate cuts to come. The probability of a July rate is priced in at 100%, according to the activity on the US treasury markets. Also, we know that the Fed lost its ‘patience’ at its latest meeting, in face of the fruitless trade discussions between the US and China. Hence, dovishness is all we expect from the Fed minutes, but the market may have already factored in every single drop of it and there could be room for some correction, especially in the US yields.

Speaking of the trade war, investors will also be watching the new season of the US – China trade saga starting from next week. US and Chinese officials will talk on the phone to resume the trade negotiations that have abruptly halted in May. Though the probability of a deal remains slim, any progress could give an additional boost to the US equity markets which have renewed record in the first week of July.

German 10-year Bund auction on Wednesday and ECB minutes on Thursday

The Fed’s dovishness tainted on other major central banks and the ECB is certainly one of them, despite running on negative interest rates for five years already. The ECB, also concerned with the endless trade dispute between the US and China, the slowing global economic activity and all-time-low inflation expectations within the euro area, may also pull its policy rates lower. And the market prices in more than 80% probability for a 10-basis-point cut to -0.50% before the end of this year. Christine Lagarde, who is preparing to take the reins of the ECB, is also expected to carry on with a dovish monetary stance.

Here are some of the economic data that investors will be watching in Europe next week: German industrial production on Monday, Italian retail sales on Tuesday, French and Italian industrial production on Wednesday, German and French inflation on Thursday and Eurozone industrial production on Friday.

German 10-year Bund auction on Wednesday will also be interesting after the 10-year Bund yield declined to an all-time low of -0.40% in the first week of July.

UK GDP, industrial and manufacturing production on Wednesday, BoE minutes and Financial Stability Report on Thursday

Finally, the BoE’s FPC meeting minutes will reveal how accommodative the Bank could move to reassure the market that it will support the economy in case of a no-deal Brexit, which is increasingly priced in by investors. For now, Governor Carney seems more concerned with the global trade tensions than Brexit, or choses to seem this way to avoid being involved in UK’s complex politics, but he recognizes that a no-deal divorce could require a gentle push from the monetary policy end.

Wednesday will be loaded with UK’s GDP growth, industrial and manufacturing production data as well as the construction output, all expected to show some improvement. But even positive data could keep the sentiment dull after the composite PMI showed contraction in June for the first time since the immediate aftermath of the Brexit referendum.

On the political front, Boris Johnson and Jeremy Hunt will continue running for the leadership of the Conservative party and the role of Prime Minister. Some 160’000 Tories will receive their postal ballots between 6 and 8 July and will have until 21 July to decide who is the best candidate to take over the reins of the country and the Brexit negotiations.

Euro-sceptic Johnson is still the favorite candidate. Johnson says that he is ready to suspend parliament if needed, to drive the UK out of the union by the October 31st deadline.

The pound will likely remain under pressure, as investors will continue hedging against the increasing chances of a no-deal exit.

Japanese current account and trade balance, Chinese inflation

Elsewhere, investors will also watch the Chinese consumer and factory-gate inflation on Wednesday. While the CPI is expected unchanged at 2.7% y-o-y in June, the PPI may have eased from 0.6% y-o-y to 0.3% on weaker global demand.

Japanese trade balance, on the other hand, is expected to have widened from 98.2 billion yen to 788.1 billion yen in May, also due to global trade tensions and a stronger yen.

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Financial Markets and Political Commentary

 

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Jasper delivers regular commentary, seminars and webinars on market news, trading analysis, strategy and psychology. He is regularly interviewed by BBC News, Bloomberg, CNBC and Sky News, and has featured in The Times, Guardian and Daily Telegraph. Jasper hosts a weekly charting analysis webinar. He is qualified as a Chartered Market Technician (CMT) with the Market Technician Association, and has a degree in Finance and Economics.