A snapshot view of calendar events next week with breakdown of potential catalysts for FX markets. THE WEEK AHEAD: 18th May 2017
USD: Regional PMI data has been mixed this week, with Empire State Manufacturing falling sharply lower whilst Richmond PMI rebounded strongly. Markit PMI, which is the national read has seen both manufacturing and services soften. Whilst they continue to expand this is not a good sign for growth projections further out, especially when we see ISM data is also dipping. Furthermore, the CESI index (City Economic Sentiment Index) shows the economy has been underperforming consensus projections to show potential for further soft data ahead. This all ties into growth this may not please the Trump administration, or Fed hawks later this year. Whist we do not expect this just yet, if we are to see Markit or ISM PMI reads get close to or cross beneath 50, then this may cause turmoil in the markets call for US recession ramp up.
FOMC minutes may not provide a decent view of the Fed’s thinking. Since the May statement, which remained confident in growth projections and for inflation to stabilise around 2%, data has remained soft with Core and Broad CPI also missing expectations (along with Core PCE, which softened prior to the meeting). However, there may be further talk on the balance sheet reduction. Some analysts have started to doubt their ability to trim the balance sheet as early as Q1 ’18, so this may calm or increase such concerns.
GDP was softer than expected at 0.7% for Q1, according to the advanced release. The revised edition may shed more light on this disappointment, although Q1 has tended to be the most variable. Fed Atlanta’s GDP now currently estimates Q2 to be 4.1% which is pretty decent considering some of the soft data which has had traders concerned in recent weeks.
CAD: We expect no change of policy from BoC, who pretty much annulled any hopes of a rise and conclude the “it is too soon to conclude the economy is on a stable path”. Currently they expect the output gap to close in H1 2018, so any early signs of this being achieved may help a case for rising rates.
EUR: PMI’s are expected to move higher still, per economic consensus. PMI data has remained firm and point higher to denote industry expansion which, in turn, points to higher growth potential. ECB overnight said they want firm evidence that growth leads to sustainable inflation. Whilst the soft survey’s such as PMI’s are not evidence (as they are forward looking) this is where any growth potential starts. Germany, France and Eurozone manufacturing PMI’s now sits at their highest levels since 2011.
GBP: Quarterly GDP dipped to 0.3% and on Thursday it can be revised higher. Or perhaps not. Analysts have expressed scepticism over the BoE growth projections recently and, whilst they refer to targets much further out, may still be sceptical of growth as we head towards the negotiations over Brexit. PMI data remains firm for manufacturing which has accelerated to 57.3. Services has also tracked it higher, yet at a moderate pace of expansion/ Construction is the weaker link but remains above the 12-month average and the expansionary level of 50.
JPY: Imports have been outstripping exports compared with the same period last year, although gross exports continue to keep the trade balance in surplus. Whether that is going to help with bilateral trade talks with the US is another question, although there has already been reports that PM Abe fully expects Trump to return to the revised version of the TPP.
Japan’s PMI’s are faring better than that of US and China, although not as impressive as Europe. Still, it is positive stuff for the BoJ who continue to revise higher their growth expectations. Whilst this is a good start, inflation remains the Achilles heel for the central bank, government and economy, which is also released next week.
Consensus forecasts expect Core Nationwide CPI to rise to 0.4% YoY which, if correct would be its highest level since March 2015 (when it was in a steep decline). It would also be welcomed by the BoJ who have now enjoyed 5 quarters of growth – yet inflationary pressures are still too low to anticipate any tightening this year.
AUD: Construction work done has contracted for 5 consecutive months and backs up the weaker reads for the construction PMI’s over the same period. This is a headwind for GDP, and although the PMI has expanded for 3 months now it is at very low levels of expansion and the longer-term trend remains subdued. If we are to see a pick-up here it would be a start whilst also a help the RBA (but we have low hopes of that just yet).
Building approvals dropped sharply to -13.4% and by -19.9% YoY. The underlying index has topped and this could be a concern for the RBA for two reasons; Fewer properties means lower supply and potential for higher prices; lower growth potential. So this is a trend to keep an eye on over the coming months.
Matt Simpson | Senior Market Analyst
A certified technical analyst, combining macro themes, monetary policy and business cycles to generate Forex and commodity trade ideas.
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