● Markets are busy in the week ahead
● The economic calendar features a variety of key events such as the central bank, CPI, and retail sales data
● The Kiwi will be eyeing the RBNZ monetary statement
● Technical outlook
The markets are set to be quite off to start a busy week filled with economic events, the investors will continue to assess the rising number of Covid-19 cases from over the weekend as China, the U.K, and the USA experience the impact of the delta variant.
On the economic calendar, the China retail sales data will be the key focus and could influence the Aussie due to the export/import relation between Australia and China. We expect the impact on retail sales to be more pronounced than on manufacturing activity, as the latter continues to be supported by strong export demand. At the same time, the government requires companies to transform investment plans into concrete actions, which should accelerate the growth of a fixed investment. The Market expects the figures to come out at 11.5% slightly lower than the previous data.
The markets are expected to be busy as the economic calendar features key events that could cause market volatility. The RBA meeting minutes, Eurozone GDP data, U.K jobs report, and the US retail sales.
The minutes of the Reserve Bank of Australia meeting will not be surprising, as the latter stated that interest rates will remain low until at least 2024, and they may consider cutting interest rates by then. We hope that this meeting will reveal more about the optimistic outlook of the Reserve Bank of Australia. With the outbreak of New South Wales, these numbers are rising every week, and this optimistic outlook seems to be increasingly unsustainable. Sydney is in a state of increasingly serious lockdown, and financial support is no longer what it was when the epidemic broke out in 2020. Sydney is Australia’s largest city and a powerful country in Australia’s national economy.
The sterling pounds will pay attention to the U.K jobs report. The reopening has led to a sharp increase in job postings, and recent wage data indicate that there has been a good rebound in employment in recent months. The unemployment rate is expected to fall again slightly, although unlike the Bank of England, we still believe that when the wage support ends, the unemployment rate may rise slightly later this year. The UK unemployment rate has improved rapidly in recent months, a trend best illustrated by the sharp decline in the number of applicants since March when it was 7.2%. Since then, we have seen a sharp drop to 5.8% in June. The ILO unemployment rate rose slightly to 4.8% in May, which may be the result of some employees being laid off on leave, although the plan still covers the full impact of the pandemic. Now that the vacation plan is gradually starting to end, we should continue to see more convergence between the number of monthly jobless claims and the ILO unemployment indicator.
The European markets will pay close attention to the Eurozone GDP data and could have some surprises after the recent poor figures especially in Germany.
As for the United States, the market will focus on retail sales and industrial production. Overall sales may be dragged down by another sharp decline in car sales. This reflects that supply chain pressures are hurting car production, not car demand, and car demand is still very strong there are many disappointed potential buyers. Outside of automobiles, we expect retail sales growth to be flat, but we must remember that reopening means that people now have more opportunities to spend on travel, leisure, and services. Therefore, we are increasingly expecting a structural change in the way people spend money, which may cause retail sales to underperform overall consumer spending after a reversal during the pandemic.
The markets are expected to be busy, the KiWi is faced with the reserve bank decision, the Loonie, and the Sterling pound focus on the inflation data. The US markets will finish the day as the US Dollar focus on the FOMC.
Before the RBNZ decides on interest rates, the question investors should ask themselves is whether it will raise interest rates or not and if they will, by how much?
The RBNZ will become the first major central bank to raise interest rates after the COVID19 pandemic. The strong economic data received in recent weeks is almost certain to raise interest rates, and the question now remains the rate of interest rate hikes.
After facing a double-dip recession in 2020, the New Zealand economy has embarked on a very strong recovery path in 2021. As of now, most indicators indicate that the New Zealand economy is no longer negatively affected by the pandemic, as shown in the table below, but is facing higher-than-target inflation like many other countries.
In our view, the release of employment data for the second quarter is the last piece of information the RBNZ needs to start the upward cycle. As the unemployment rate drops to the pre-pandemic level (4.0%), inflationary pressures may be more persistent risks than the recent central bank communications implied.
In our view, another crucial factor is the real estate industry, which has experienced bubble-like inflation in the past two years. Despite the government’s efforts to prevent speculative investment in real estate, recent data indicate that housing prices continue to rise. In July, the housing inflation rate remained at 25% per year.
Given the economic development highlighted above, we expect the Bank of New Zealand to raise interest rates by 25 basis points on August 18, and we predict that there will be at least one same number at the end of the year (most likely in November instead of October) because The data should continue to show signs of overheating in New Zealand’s economy. We doubt whether the recent outbreak of Covid19 cases in the Asia-Pacific region (where vaccination rates are generally lower than in North America and Europe) and the associated risks of the economic slowdown affecting New Zealand are sufficiently obvious at this stage that the Bank of New Zealand should not raise interest rates from the beginning.
As for the New Zealand Dollar, the initial answer will depend on whether we see a single or double increase in the interest rate. Most likely it is only one. The two interest rate hikes can hurt the economy and also put enormous upward pressure on the exchange rate, which the Bank of New Zealand hopes to avoid. Furthermore, the global environment remains very fragile.
The sterling pound will focus on the inflation data. The overall CPI will rebound this summer, and July data may be no exception. The reopening in the same period last year increased prices, which may not match that of July, which means that the annual inflation rate is low. Next month we will compare it with the “dining out” in August last year, which drastically reduced restaurant prices, so, as expected, when this data arrives, we will see a strong rebound in CPI. Of course, most of it is noise, but the core story is that by the end of this year, the headline inflation rate will reach 3.54%, the highest level since 2012. But for the Bank of England, a more relevant question is what will happen to it in 2022 and beyond. We suspect that CPI will return to the target around this time next year.
The focus will then shift to the loonie as traders wait for direction from the inflation data. The focus will be on Canada’s July inflation data. We believe that the slight deviation from the June reading of 3.1% (especially if the headline inflation rate remains above 3.0%) will not have a significant impact on the market. After all, although there is no consensus, the July employment report showed more gains in employment, which we believe is enough for the Bank of Canada to complete its asset purchase plan by the end of the year. As long as oil prices continue to show some resistance, USD/CAD may explore levels below 1.2500 again next week.
Inflation data once again confirmed our view that price pressures are increasing and will remain in this state for many quarters to come. As rising housing costs and strong price pressures from pipeline companies will offset the decline in some important components such as second-hand car and hotel prices, we suspect that the headline inflation rate will fall to 5% before the end of this year. Following the strong July employment report, we are now hearing from more Fed officials presenting reasons for reducing quantitative easing asset purchases in advance, and we look forward to hearing more relevant information at the Jackson Hole seminar in August. We now increasingly believe that we can announce in September that we will slow down monthly asset purchases from the current $ 120 billion and begin in October. We suspect this will be much faster than what we saw last time, and it may end at the end of the first quarter or the beginning of the second quarter of 2022.
No major Fed spokesperson will be scheduled for next week (Fed Chairman Jerome Powell shows up but does not discuss monetary policy). We have the minutes of the July FOMC meeting, which may discuss some aspects of the possible reduction plan. The latest employment and inflation data have accelerated the debate, so the focus will be more on any reduced composition than it is now. The FOMC could spike serious volatility in the markets if the statement reveals tapering and rate hike details.
The markets feature fewer economic events but the Australia jobs report will be the key focus for the day. When the country entered a strict lockdown to combat the delta epidemic, the Australian dollar was recently devalued. The economy will be hit hard, which may be reflected in upcoming employment data.
The markets expect the unemployment rate to come out at 5%. However, another small drop in the unemployment rate may not help the Australian dollar much, considering the substantial deterioration of the Covid19 situation in Australia in August, both of which are considered obsolete.
The markets are set for a quiet session as the economic calendar features fewer economic events that could spike volatility in the markets. The PBoC interest will be the news for the Chinese Yen and the Canada retail sales data will follow during the day.
The Canada retail data is expected to show a slight rebound as the economy reopens and more activities taking place. The market projects to see an increase of 4.4% and should the figures come out in line with expectations could lift the Loonie.
The U.K retail sales data will be another key event for the sterling pound on Friday and the numbers could show the impact of reopening the economy and how retailers have been behaving. Many retailers may raise prices as they try to make up for the lost revenue due to various closures. This is likely to hinder retail sales growth in July, which has been uneven in the past month or so. In May, we saw a drop of 1.3%, although this was due to three consecutive months of gains. Our view on June spending was slightly better, with an increase of 0.5%, while other retail sales surveys showed resistance and weakness in other areas. Corresponding BRC retail surveys tend to give fairly good correlations, although they sometimes diverge. In June, according to a BRC survey, the British retail industry had its best quarter on record, with spending increasing by 13.1%, while in June 2019 it fell by 1.9%. With school holidays starting in July, people are encouraged to stay home Holiday delays As more and more people book national holidays, the removal of travel restrictions may play a role as well. BRC’s recent retail sales data is a bit mixed, but still shows that UK consumers are quite resilient.
The NZDCAD has been on an upside movement throughout the beginning of Auguts and the price declined in recent days as the pair forms a triangle pattern. The price has broken the area today and has been flirting at the support level. With the RBNZ expected to increase rates we could see the price move higher the resistance at 0.88897.
Lulama Msungwa – Financial Market Analyst
Dear Valued Client,There are some important changes coming to SM-INVEST.As of 27th September 2021, SM-Invest will rebrand…
Keynotes: Trudeau wins Federal electionCanadian dollar advance against a basket of G10 currenciesGold price eye…
Markets are busy in the week aheadKey central banks are in focus including the most…
Key points The performance of the aviation stocksAirlines have not had a great run since…