- China Trade, UK RICS and BCC surveys to be digested ahead of BoE
credit surveys, US PPI, Claims more from Yellen and Franco-German
Summit; Italy, Ireland and US to auction debt; IEA oil market report
- Markets' dovish take on Yellen testimony understandable, but quite
possibly overdone
- Franco-German summit: Merkel caution on Macron proposals, in part due
to election, leaves scope for disappointment
- China Trade data offers encouraging signals, though leverage and credit
clampdown as well as seasonal pullback in commodity demand implies
deceleration in Q3
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** EVENTS PREVIEW **
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A varied calendar awaits markets today, with the overnight China Trade and UK RICS House Price survey to digest ahead of Swedish CPI and US PPI, while more Yellen testimony accompanies expected no change rate decisions in South Korea, Malaysia and Chile. The Bank of England's credit conditions & bank liabilities surveys will be watched very closely given the well documented concerns about unsecured Consumer Credit growth, and indeed concerns about the outlook for the property sector (residential and commercial), it will also be interesting to see what if anything is said about business investment lending, following on from the downbeat BCC survey, published overnight. The very choppy oil market has the IEA's monthly oil market report to contend with, and the focus will above all be on current overall production and any adjustments to demand expectations, which have thus far proved disappointing given the seemingly relentless rise in US output, not to mention the pick up in Libyan and Nigerian production. There will also be plenty of interest in today's Franco-German summit to see what Macron and Merkel can come up with in terms of plans to improve the workings of the Eurozone and the EU post-Brexit. For all the ostensible initial signs of greater Franco-German co-operation, Merkel with an eye clearly on the upcoming election, does appear to be rather cautious about many of Macron's proposals, and Macron has signalled that he believes that it is up to Germany to give some ground. Per se there is scope for disappointment, The bond auction schedule sees Italy sell upto EUR 7.5 Bln of medium and long-dated BTPs, Ireland offer a modest EUR 750 Mln of 10 & 30-yr, while the US closes out this week's refunding effort with $12 Bln of 30-yr.
China's Trade data were encouraging, with exports and imports easily beating expectations, suggesting that an overall stronger profile to Asian and EU growth is helping to boost exports, while imports suggest domestic demand is holding up rather better than many had expected. That said, the clampdown on credit and leverage, and the authorities drive to rein in the property sector and overcapacity in a number of industrial sectors suggest that the current strength of imports will fade through Q3, the more so given that the quarter typically sees a seasonal drop in commodity imports. The widening surplus with the US will eminently get plenty of attention, especially as it comes just ahead of the next US/China joint economic dialogue meeting.
US PPI is expected to be flat m/m, with energy prices and a number of commodity prices likely to act as a drag, which would see the y/y drop to 1.9% from May's 2.4%; core PPI is however expected to rise the 'usual' 0.2% m/m with the y/y dipping to 2.0% from 2.1%. Markets unsurprisingly saw Yellen's testimony as rather dovish, particularly the admission that the FOMC may be wrong on the current dip in inflation being transitory, though the following section of her prepared testimony advises some caution on putting too dovish a spin on her comments. "Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance. But because we also anticipate that the factors that are currently holding down the neutral rate will diminish somewhat over time, additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion and return inflation to our 2 percent goal." As for the Beige Book, this could at a push be constructed as signalling a slightly slower pace of activity, given the overall current pace of activity was effectively downgraded to 'slight to moderate' from 'modest to moderate', though the outlook for most sectors remained 'modest to moderate'. But otherwise it did not really signal any significant changes, with the labour market clearly continuing to tighten: "Wage pressures generally trended with employment conditions, and rising wage pressures were noted among both low- and high-skilled positions". However price pressures were described as continuing "to rise modestly in the majority of Districts, and a few Districts noted that price pressures had eased slightly."
from Marc Ostwald