We argue there are three major disruptive forces that are shaping the investment climate: the US policy mix in relative and absolute terms, the escalation of trade tensions, and immigration. In the week ahead, trade issues may eclipse the US policy mix, and immigration will compete with the economic and financial agenda at the European heads of state summit at the end of the week.
The People’s Bank of China made good on its recent signal and announced a 0.5% targeted cut in the reserves requirement ratio, effective July 5. The funds freed up will stay in the banking system and will likely be used to repay MLF borrowings. It appears that despite the economic slowdown, officials remain committed to the deleveraging reform and facilitating the integration of shadow banking assets on to bank balance sheets. At the same time, the roughly CNY700 bln that is freed up is also designed to help support small businesses
The late-month data schedule includes US personal income and consumption, along with the Fed’s preferred inflation measure, the core PCE deflator. US income is steadily increasing as employment growth is strong and average weekly earnings are rising faster than headline inflation. In turn this support consumption. The personal consumption expenditure rose 0.5% a month in H2 17 before slowing to a 0.2% average in Q1. The Bloomberg consensus of a 0.4% gain in May would be the weakest since February but would put the three-month average back at 0.5%.
The third estimate of Q1 GDP that will be reported is of little interest to investors. The Atlanta and St. Louis Fed’s GDP trackers see the US economy tracking about a 4.7% annualized pace in Q2, while the NY Fed’s model is at 2.9%. The median private sector forecast is around 2.5%.
The headline deflator is expected to edge up 0.2% and lift the year-over-year rate to 2.2%. That would match the highest level since 2013. The core rate, which the Fed targets is also expected to rise 0.2%. This would allow the year-over-year rate to edge up to 1.9% from 1.8% and for all practical purposes reaching the Fed’s target of 2.0%.
The eurozone’s flash CPI is the most important European report. The headline rate will likely be lifted by the rise in energy prices. The median Bloomberg survey forecast looks for 2.0% from 1.9%. The core rate, which the ECB may not target, but seems to use it or some derivative to shed light on the sustainability of the headline rate may soften to 1.0% from 1.1%.
Japan’s reports industrial output figures for May. METIs’s survey warned so a 1.3% decline after April’s 0.5% increase. The market thinks it can come in a bit better than that, though real exports declined. Even if the METI survey is correct, it would still be consistent with a modest acceleration of the year-over-year pace for a third month. The 1.6% pace seen in February was the slowest since October 2016. The 3.4% the median forecast calls for would be the best this year.
That said the broader outlook is cautious. US industrial output expectedly contracted in May and the June manufacturing PMI slowed further. China’s industrial production slowed more than expected in May. German and French industrial output fell in April, and the May and June PMIs warn that the slowing in the manufacturing sector likely continued.
