Weekly Market & Currency Developments – From Our Bankers

Investor Signposts: Week Beginning July 22 2018

Australia: Will consumer and business prices lift?

• The focus of investors this week will be on consumer and business inflation. Trade (export/imports) prices are also released. Further information on the jobs market will be keenly observed.

• The week kicks-off on Tuesday with the regular weekly gauge on consumer confidence from Roy Morgan and ANZ.

• On Wednesday the Bureau of Statistics (ABS) releases the much-anticipated June quarter Consumer Price Index– the main measure of inflation in Australia.

• We expect that headline consumer prices lifted by 0.6 per cent in the June quarter to be up by 2.3 per cent over the year. But “underlying”measures of inflation are tipped to be more subdued, lifting by 0.5 per cent for the quarter and 1.9 per cent for the year.

• Significant contributions are forecast from rising petrol prices of around 0.2 percentage points and health (around 0.15 percentage points), while alcohol & tobacco prices are expected to lift too. Falling recreation, communications and fruit prices will keep overall prices in check. With core inflation tipped to remain anchored near the bottom of the Reserve Bank’s 2-3 per cent target band in the near term, an extended period of interest rate stability is likely for the remainder of this year.

• Also on Wednesday the latest skilled internet job vacancy index is issued by the Department of Jobs and Small Business. Vacancies fell by 0.9 per cent in May, but are up 5.8 per cent over the year.

• On Thursday trade prices are released for the June quarter. Both export (down 1.0 per cent) and import prices (down 2.0 per cent) are tipped to decline, but are up 4.9 per cent and 2.1 per cent annually.

• Also on Thursday the ABS issues detailed job data, including information on employment by industry.

• On Friday the Producer Price Indexes – measures that will provide a guide on inflation across the business sector – are issued. In the June quarter, the ‘final demand’ measure was up 0.5 per cent to stand 1.7 per cent higher over the year. According to the ABS “the past several quarters have shown significant inputprice pressures evident across a number of industries.”

Overseas: US economic growth and housing in the spotlight

• It is relatively quiet in China over the coming week in terms of new economic data. However, there will be data on industrial profits on Friday. In the US, housing market indicators and economic growth are of most interest.

• The week kicks off on Monday in the US with data on existing home sales to be released alongside the Chicago Federal Reserve National Activity index. After a 0.4 per cent fall in May, economists are tipping a 1.5 per cent lift in home sales in June. A chronic lack of stock on the market is constraining sales, but boosting prices.

• Also on Tuesday, the Markit organisation releases “flash” readings for activity in manufacturing and services sectors in the US, Europe and Japan. In terms of the US readings, an easing in services sector activity is expected to be offset by a small lift in manufacturing activity.

• On Tuesday, the influential Richmond Federal Reserve survey and the regular weekly data on chain store sales are both released, together with home prices. Home prices are tipped to edge up by 0.1 per cent for a second consecutive month in June. The annual growth rate was a healthy 6.4 per cent in May.

• On Wednesday weekly data on new mortgage applications are released, together with new home sales. Economists believe that new home sales may have fallen 2.8 per cent in June after surging by 6.7 per cent in May. Sales in the South, which accounts for the bulk of transactions, jumped to their highest level in 101⁄2 years.

• On Thursday the influential Kansas Fed Manufacturing Index for July is released alongside a key measure on business investment – orders for ‘durable goods’. Durable goods are generally described as items with lifespans longer than three years – like cars and aircraft. And economists believe that orders may have risen by 2.5 per cent in June following a 0.4 per cent decline in May.

• Also on Thursday the ‘advance’ June data on trade in goods is released. A deficit of US$64.9 billion was posted in May and the big trade deficits are ‘front of mind’ for investors given the Trump Administration’s tariff measures.

• And on Friday the ‘advance’ reading on US economic growth in the June quarter is released alongside the June quarter Employment Cost index (ECI). Economists expect that the US economy grew at a bumper 4.0 per cent annual pace in the quarter after 2.0 per cent annualised growth in the March quarter. The included data on prices will be watched carefully together with the ECI, which is tipped to increase by 0.7 per cent in the June quarter.

• Also on Friday, China is scheduled to release industrial profits for June. Total profits expanded slightly in May and annual growth was broadly stable. Revenue growth moderated on lower real sales growth in the industrial sector, despite higher producer prices.

Financial markets

• The US company earnings season continues for the June quarter.

• On Monday Alphabet, Kaiser Aluminium and Whirlpool report.

• On Tuesday, 3M, AT&T, Biogen, Harley-Davidson, Lockheed, and Verizon Communications are amongst those reporting.

• On Wednesday, Boeing, Coca-Cola, Facebook, Ford, Freeport- McMoRan & Qualcomm and Visa report.

• On Thursday, earnings are due from Allergan, Amazon, AmericanAirlines, ConocoPhillips, Intel and McDonald’s.

• On Friday, Chevron, Colgate-Palmolive, Exxon Mobil, Merck and Weyerhaeuser are all scheduled to report.

 Weekly Global Currency Outlook

• The weekend’s Buenos Aires G20 meeting expressed concern over heightened trade tensions. They remain a downside risk to global economic growth, but with comments on trade tensions turning more towards comments on currency and interest rate manipulation, we anticipate a pick in currency vol. will be this week’s major theme.

• Late last week President Trump complained “China, the EU and other have been manipulating their currencies and interest rates lower.” Ironically, Trump has questioned the Fed over the need to continue with gradual rises in interest rates. Fed President James Bullard then added “it is unnecessary to push monetary policy normalisation to such an extent that the yield curve inverts”.

• Meanwhile, US President Trump threatened again to slap tariffs on all US imports from China (which totalled US$523 billion in the year to May). On Wednesday, European Commission President Jean Claude Juncker will discuss trade with President Trump in Washington, and attempt to convince Trump not to move forward with threats to impose tariffs.

• Solid US economic activity can underpin the USD late this week. On Friday, we project US GDP to expand at a quarterly annualised rate of 3.6% driven by consumption and net exports. This will reinforce the case for two more 25bps Fed funds rate hikes this year (September & December) to a target range of 2.25‑2.50%.

• AUD/USD will partly be guided this week by Australia’s Q2 CPI report (Wed). CBA economists expect headline CPI inflation rate to rise by 0.6%/qtr (consensus: +0.5%/qtr), bringing the annual rate to 2.3% (consensus: 2.2%) and comfortably within the RBA’s 2 3% target range. But underlying inflation pressures are likely to remain soft, with a 0.5% rise in the quarter or 1.9%/yr. This would reinforce expectations that a RBA interest rate hike is still a fair way off limiting AUD upside.

• EUR/USD will remain range‑bound this week. On Thursday, the ECB is widely expected to make no monetary policy changes. In our view, the ECB will begin the protracted process of normalising interest rates in September 2019. We may also get some updated commentary on the ECB’s expectations to keep key interest rates at current levels “at least through the summer of 2019”.

• GBP will struggle to edge higher against USD and AUD because of ongoing Brexit related uncertainties. The UK House of Commons is in recess from 24 July to 4 September but the internal and external political hurdles Prime Minister (PM) Theresa May faces with respect to Brexit negotiations remains. It’s still unclear if PM May’s July 2018 White Paper proposals on the future relationship between the UK and EU will be accepted by European leaders. However, the EU’s chief negotiator, Michel Barnier, did note the UK’s White Paper allows for a constructive discussion. Barnier wants to wrap up the terms of Britain’s exit from the EU by October 2018. PM May then requires the UK parliament to vote upon it.



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