As we move into the summer months, there’s a jam-packed calendar of market impacting events over the week.
Arguably the week's – or perhaps the month's – highlight is the EU summit on Friday, where leaders will gather to discuss the recovery fund. We’ll also hear from the ECB, the Bank of Japan, and others as they make their latest monetary policy decisions. Meanwhile, earnings season begins to kick off next week, including many US financials reporting, and economic data includes China's Q2 GDP reading, plus several June releases out from the US.
As for the summit itself, the guideline expectations are that there’ll be a deal on the recovery fund at this meeting, but with the EURUSD only sitting perched at 1.1300 it remains a close call. There’s much to be ironed out around the ratio of grants to loan to appease the so-called "frugal four" of the Netherlands, Austria, Sweden and Denmark who are only showing support for loans, not grants. Their support for the fund will be necessary as it requires the unanimous approval of member states.
Ahead of that, the central banks will capture the limelight, starting with the ECB on Thursday.
It’s universally expected that the ECB policy statement remains unchanged, following the decision at the last meeting to expand the comfort blanket for their Pandemic Emergency Purchase Programme by a further €600bn which brought the total up to €1.35tn, though recent comments from the ECB's François Villeroy de Galhau that the central bank should examine targeting inflation were extremely dovish when they came from the French central banker on the policy meeting's cusp.
As noted, we can also expect a decision from the BoJ on Wednesday. Similar to the ECB, they’ll be maintaining their present monetary policy stance, but of note will be the release of their quarterly Outlook Report, where a significant downgrade's expectations are already in the price.
In addition to the ECB and the BoJ, three other G20 central banks will be making decisions on monetary policy next week.
First is the Bank of Canada on Wednesday, where the consensus expectation is they'll leave their policy interest rate on hold at 0.25%. On Thursday the Bank of Korea is expected by economists to keep their policy rate at 0.5% amidst a rebound in domestic demand and rising house prices. And, later that day, investors expect a 25bps policy rate cut from Bank Indonesia, after their earlier announcement of QE. Finally, on the central bank front, the Federal Reserve will be releasing their Beige Book on Wednesday; as well as the expected press conferences, speakers next week include BoE Governor Bailey and New York Fed President Williams.
Moving on to data releases, this week's economic calendar will provide more information on the pace of economic recovery, particularly consumer spending. Thursday's retail sales report for June will likely garner significant attention, given the robust rebound in May.
Worrisome for risk is the fate of government income support which faces potential "benefits cliffs" and will be critical to the outlook. The $600 per week in Federal Pandemic Unemployment Compensation (FPUC) is set to expire at the end of July. Though the market expects Congress to pass further stimulus to address these cliffs, the two parties remain far apart on the next phase of federal government support.
With the US now experiencing record daily coronavirus case growth and most US states showing deteriorating trends, effectively containing this initial wave – and preventing a second wave – relies on how willing the public is to adhere to strict social distancing and other mitigation strategies. Lately, three of the most populous states have rolled back many stay-at-home orders, while roughly 80% of small businesses operating before the pandemic have since reopened. However, there’s evidence across the huge GDP contributing states where the virus is raging that it's causing a more widespread plateauing of reopening.
Indeed, aside from the retail sales report this week, virus trends and high-frequency data such as jobless claims remain the primary focus on mobility data tracking, a new tool that traders have adopted as a fundamental signpost.
Small business activity and restaurant seating are leveling off, with states experiencing faster case growth underperforming. Consumers and businesses indicate a high level of sensitivity to the recent pickup in Covid-19 cases and they’ll scale back their behavior if they’re not confident the virus will be contained. Hence the need for a vaccine or effective therapeutic is key to controlling the fear factor.
Finally, the main highlight in Asia, if not globally on the data front, is likely to be China's Q2 GDP release on Thursday.
Deutsche Bank economists expect a notable rebound in GDP growth to +3% year-on-year in Q2, following the -6.8% contraction in Q1. At the same time, there'll also be the release of retail sales and industrial production for June, with economists expecting an expansion in retail sales of +0.7% yoy in June (versus -2.8% in May) and IP growth of +4.5% (versus +4.4% in May).
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