FX Weekly: Trive’s Week Ahead Insights

Highlights for the week ahead include an ECB policy announcement, global inflation data, and Apple's awaited event

CHINESE INFLATION (MON)

There are currently no expectations for the Chinese inflation metrics, but the data will be keenly watched for a prognosis of China’s economic health. Using the Caixin PMI release as a proxy, the commentary suggested “On the price front, while input costs increased across both sectors, prices charged by manufacturers and service providers declined by various degrees, further increasing pressure on businesses’ profitability”. In last month’s release, CPI rose 0.5% Y/Y (prev. 0.2% in June), partly due to weather disruptions affecting food supplies. While food prices increased, overall domestic demand remained weak, with core inflation (ex-food and fuel) slipping to 0.4% from 0.6% in June. Despite stimulus efforts by Beijing, challenges persist, including a prolonged housing downturn and weak auto sales. PPI in July remained deflationary. Analysts expect inflation to stay low (although some expect food inflation to turn positive for the first time in over a year), with further stimulus needed to support economic growth targets. This sentiment has also been reinforced after the latest PMI data in which NBS Manufacturing and Caixin Services painted bleak pictures – “There is still room for fiscal and monetary policy adjustments. There is an increasingly urgent need for China to enhance policy support and ensure the effective implementation of earlier policies”, the commentary from the Caixin PMI suggested.

UK EMPLOYMENT/WAGES (TUE)

The last employment report sparked a hawkish reaction, driven by a sizeable drop in the unemployment rate (4.2% from 4.4%, exp. 4.5%) and marked upside in the employment change figure (97k from 19k, exp. 3k) which served to more than offset the as expected/slightly softer than forecast wage numbers; ‘dovish’ figures which were subject to caveats as the comparison period was affected by NHS bonus payments. This time, the average earnings metrics will be for July and that month’s renewed hiring trend, evidenced in that and subsequent periods PMIs, could add to pay pressures and by extension filter through into inflation stickiness, i.e. work in favour of those who expect the BoE to maintain the policy rate at the next gathering. However, Pantheon points out that base effects will continue to suppress wages and look for the ex-bonus metric to fall to 5.1% (prev. 5.4%); though, they judge that wages at this level are too strong for rapid Bank Rate cuts. The narrative of a renewed hiring trend points to another set of hawkish unemployment rate and employment change figures as well, specifically, Pantheon looks for the unemployment rate to drop to 4.1% or possibly 4.0%.

CHINESE TRADE BALANCE (TUE)

There are currently no expectations for the August Trade Balance figures, but markets are keeping a close eye on Chinese economic data against the backdrop of sluggish growth fears. Desks suggest a focus on auto exports which has seen weakness. Analysts at ING “anticipate August’s trade data continued to slow, with export growth around 5% year-on-year and imports around 3% YoY… If auto exports shift from being a tailwind to a headwind, it could negatively impact China’s overall export strength.”

UK GDP ESTIMATE (WED)

June’s M/M came in at 0.0%, as expected, with the 3M also in-line at 0.6%; though, the Y/Y printed slightly shy of forecasts at 0.7% vs exp. 0.8%. The release did not have much impact on BoE pricing. The most recent PMIs for August were indicative of the “economy expanding at a reasonably solid quarterly rate of c. 0.3%.”. Similarly, the periods retail data saw a rebound and public sector strike action occurred for only the first two days of July, Investec reminds and looks for a pick up to 0.3% M/M in July. Overall, the July GDP release is likely to be a robust one but probably won’t have too much impact on BoE pricing, with the focus on inflation stickiness; though, at the margin, firmer readings reduce the need for timely policy adjustments and factor in favour of those who expect the BoE to leave rates unchanged at the September meeting.

US CPI (WED)

The consensus looks for US consumer prices to rise +0.2% M/M in August (prev. +0.2%), and the core rate is expected to also rise +0.2% M/M (prev. +0.2%). Wells Fargo says the rise in CPI is a reminder that the road to restoring price stability will still have some bumps along the way. Wells itself is slightly above consensus, and looks for core CPI to rise +0.25% M/M (which would round to 0.3%, but would leave the annual rate at 3.2% Y/Y). It says that "a rate reduction at the FOMC's upcoming meeting on September 18th looks all but certain, but the upcoming CPI report could serve as a tiebreaker between a 25bps or 50bps cut if the August jobs report lands in the grey zone between clearly weak and clearly strong." The August labour market data itself did not offer any explicit clarity: the headline came in beneath expectations at 142k (vs an expected 160k), though the jobless rate declined to 4.2% from 4.3%; that said, the underemployment rate rose to 7.9% from 7.8%, and average hourly earnings rose +0.4% M/M (exp. +0.3%), pushing the annual rate up to 3.8% Y/Y from 3.6%. Speaking after the jobs data, Fed voter Williams said the jobs market was in better balance, but was not the main source of inflation. Williams himself sees inflation at 2.25% this year (vs the Fed's June forecasts of 2.6%; those forecasts are now judged to be somewhat stale, and will be updated on September 18th) and sees jobless rate at 4.25% by the end of this year (vs Fed forecasts of 4.0%), though also added that he sees the longer run unemployment rate at around 3.75% (vs the Fed's June forecast of 4.2%). He did not offer any insight into whether he preferred a 25bps rate cut or a larger 50bps move in September.

ECB ANNOUNCEMENT (THU)

Expected to cut by 25bps, taking the Deposit Rate to 3.50%, after commencing the easing process at June’s forecast meeting, skipping July and thereafter placing the emphasis on September for the next policy move. Market pricing has the odds of a 25bps cut occurring at around the 99% mark. Conviction for a cut has come from the ongoing progress of inflation, the easing of wage pressures (i.e. Q2 negotiated wage survey) and downbeat growth outlook for much of the bloc; however, the stickiness of some components of inflation (i.e. services) means that hawkish voices are still present on the council. As such, the focus for the meeting will be on any guidance towards the next cut. Recently, a Reuters sources piece outlined that decisions are expected to be more complicated after September with the debate being over how weak growth/potential recession will impact the inflation outlook. Interestingly, the piece concluded that the ECB will provide no commitment around October, however, the doves want Lagarde to signal that back-to-back moves are not excluded. As a reminder, the ECB is set to reduce the MRO and DFR spread to 15bps (prev. 50bps) from September 18th (the effective date of this month’s meeting), a tweak which was announced in March.

Disclaimer

This material is provided for informational purposes only and does not constitute financial, investment, or other advice. The opinions expressed in this material are those of the author and do not necessarily reflect the views of Trive International. No opinion contained in this material constitutes a recommendation by Trive International or its author regarding any particular investment, transaction, or investment strategy. This material should not be relied upon in making any investment decision.

The information provided does not consider the individual investment objectives, financial situation, or needs of any specific investor. Investors should seek independent financial advice tailored to their individual circumstances before making any investment decisions. Trive International shall not be liable for any loss, damage, or injury arising directly or indirectly from the use of this information or from any action or decision taken as a result of using this material.

Trive International may or may not have a financial interest in the companies or securities mentioned. The value of investments may fluctuate, and investors may not get back the amount they originally invested. Past performance is not indicative of future results.

For more information about Trive International, please visit http://trive.com/int

Additional Information

Investing involves risk, including the potential loss of principal. Diversification and asset allocation strategies do not ensure a profit or guarantee against loss. The content in this material is subject to change without notice and may become outdated or inaccurate over time. Trive International does not undertake any obligation to update the information in this material.

By accessing this material, you acknowledge and agree to the terms of this disclaimer. If you do not agree with these terms, please refrain from using this information.