If you believe in the ‘synchronised growth’ story (like I do) this week’s full docket should answer a few questions around this theory.
However, before I get to this week’s data deluge I must point out what happened over the weekend at the G7 or should I say G6 plus the guest that no wants there. That is exactly how the President behaved over the weekend (that guest you don’t want at your party) and what’s more it was the synchronised attacks from his inner most circle towards Canada and the EU post the G7 meeting that was even more damning.
Peter Navarro, John Bolton and Mike Pompeo all trotted out the ‘fairness for the US’ and ‘no longer the world ATM’ lines. It certainly has ramped up the ‘trade war’ issue.
At time of writing; I am waiting to see the market reactions to this ever-increasing isolation rhetoric – it’s not looking positive to start the week.
Now to the week ahead – these are the events on the events calendar for the week ahead……
The Trump-Kim meeting, UK trade balance, Chinese new loans, Australian home loan growth, NAB’s business confidence and conditions survey, UK average wage earnings, US CPI, German Business conditions and sentiment, Westpac’s consumer confidence, China GDP, industrial production numbers from the majority of EU nations, UK CPI, European employment change, Fed interest rate decision, Australian consumer inflation expectations, Australian employment numbers, Chinese retail sale, industrial production and fixed asset investment, German CPI, ECB policy meeting, BoJ policy meeting, European CPI, US industrial production plus the World Cup begins this week. It is well known how disruptive it is to global output.
From an AUD and USD perspective will drill into two pieces.
The reasoning behind the strength in the AUD has been two-fold, one is USD weakness but the second is economic outputs – the GDP figures last week where solid no doubt but the better than expected business indicators are good leads for the remainder of the year adding extra upside.
The other part of the economic story that is supporting the AUD has been Australia’s employment growth over the past 18 months which hit the strongest level of growth since the mid-noughties at the start of this year.
The 420,000 odd jobs added has been impressive however there is still slack in the employment market left over from the GFC. Underutilisation still sits are around 14% compare this to the US where underutilisation sits at 7.5% – aka full employment. So there is room to move.
Below is the latest Bloomberg survey for this Thursday – clearly economists still believe things will power on.
The Federal Open Market Committee (FOMC)
The June meeting looks like a forgone conclusion around the movement in the Fed Funds rate – in fact it would astounding if the FOMC was to abstain from raising the Target rate.
The past quarter has shown further acceleration in the Fed’s two mandates: full employment and inflation.
Recapping the non-farm payrolls from 2 weeks ago – unemployment hit 3.8% the lowest it’s been in 18 years and inflation is fast approaching the Committee’s 2% objective and is likely to pass this target level tonight
Even the FOMC’s most dovish members Neel Kashkari and Lael Brainard are moving to ‘neutral’ footings and despite some turbulence in bond and equity markets from geo-political environment they too see rates heading higher over the near term.
This begs the question; has the economic momentum seen in the first five months of 2018 caused the board to shift in the FOMC’s dot plots to now include a fourth-rate rise for 2018? I believe it has.
Consensus estimates on US Q2 GDP, employment and inflation has accelerated meaning the committee is likely to move from a ‘gradual’ a ‘moderate’ pace of hikes.
(Source: Bloomberg – The March Dot Plots, with my predictions post Thursday’s press conference in red)
If this scenario does play out it could lead to some disorderly trading post the meeting as the market still does not believe the Fed’s forecast – it will have to match up sooner or later.