On Monday, the Empire State manufacturing index for the U.S. will be released, and the focus will then shift to Fed Chair Powell, who will speak at the Economic Club of Washington DC, with audience questions expected.
Tuesday will bring inflation data for Canada and retail sales data for the U.S. while Wednesday's focus will be on inflation data from New Zealand and the U.K., as well as industrial production data for the U.S.
On Thursday, Australia will release the employment change and unemployment rate data. The U.K. will publish the claimant count change, the average earnings index 3m/y and the unemployment rate. The eurozone will have the ECB monetary policy announcement, and the U.S. will release unemployment claims.
Friday will feature Japan's national core CPI y/y data and retail sales data for the U.K. and Canada. Throughout the week, some FOMC members are expected to deliver their remarks.
Last week, during his testimony to Congress, Fed Chair Jerome Powell emphasized that the Fed's concerns extend beyond inflation to include the potential softening of the economy. He noted that there is a risk that inflation could stall or even reverse progress if policy restraint is reduced too soon or too much. Conversely, he mentioned that reducing policy restraint too late or too little will put pressure on economic activity and employment. Although the markets have started to price in two rate cuts this year, with the first potentially in September, this will remain data-dependent.
The inflation data in Canada is highly anticipated to determine if the BoC will cut rates again at its July meeting, which is next week. Overall, Canada has made some progress on inflation, but the May data came in above expectations, causing the BoC to pause further rate cuts. There are still concerns, particularly regarding services inflation and wage growth, which continue to run hot.
The consensus for the y/y headline inflation is a drop to 2.8%, with core inflation also expected to decline slightly. If this week’s data exceeds expectations, it is likely that the BoC will hold off on delivering another rate cut. However, if the data falls significantly below the consensus, it will increase expectations for a 25 bps rate cut.
The consensus for U.S. retail sales is -0.2%, compared to the previous 0.1%, and for core retail sales m/m, it is 0.1% vs. -0.1% prior. Some softening is expected in retail sales data as markets anticipate a moderation in consumer activity. If realized this would suggest that demand is weakening, taking off pressure from services prices and increasing the likelihood of rate cuts later this year.
According to ING, lower gasoline prices and falling auto sales also point to a monthly decline in retail sales, while weaker consumer confidence suggests downside risks. That said, more data will be needed to accurately assess retail sales softening.
The consensus for the CPI q/q in New Zealand is 0.5%, compared to the previous 0.6%. Annual inflation is expected to drop from 4.0% to 3.5% in the March quarter. Inflation remains high, but there are some signs that it will start to drop in the near future like the softness in tradables prices. Another component to watch for is the services sector, which had been rising but is now showing signs of cooling down.
In the U.K. inflation dropped more than expected lately, to under 2% in June, but analysts believe this is likely the bottom for the near future. Some analysts expect inflation will be between 2-2.5% in the second half of the year. The BoE will pay special attention to services inflation which has proved to be more stubborn lately.
The consensus for the U.S. industrial production m/m is 0.4% vs prior 0.9%. Over the past decade, manufacturing production, which accounts for around 3/4 of all industrial production has seen a decrease of 1.3%. Heavy investments are currently being made in high-tech manufacturing capacity and this will show their effects down the road, analysts from Wells Fargo noted.
In Australia, the consensus for the employment change is 20.2K, compared to the previous 39.7K, and the unemployment rate is likely to rise from 4.0% to 4.1%.
In May, the participation rate was at 66.8% and is expected to remain at the same level for this week's data. The rise in the labor force helped the unemployment rate print at 4.0%. The RBA will closely monitor the labor market data, particularly focusing on underemployment and youth employment.
At this week's ECB meeting, the focus will be on whether the Bank will provide more clues about future rate cuts. As a reminder, at the last meeting, the ECB delivered a 25 bps rate cut, and the market is expecting another one at the September meeting. For this week's meeting, however, the ECB is likely to keep its monetary policy unchanged and take a cautious stance towards future rate cuts.
There has been progress regarding inflation data, but there are some risks, especially with services inflation and wage growth, which printed at 5% y/y in Q1-2024 and could put further pressure. The Bank is likely to wait until September to see some cooling in wage data and a sustained progress in dropping inflation.
Wish you a profitable trading week.
