Weekly Market Outlook

Weekly Market Outlook: Inflation Data and Chinese Growth in Focus

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This week is packed with key data releases and another CPI round in the United Kingdom, New Zealand and Canada. The annual GDP data for China is also a major release as power shortages, supply bottlenecks in addition to the resurgence of COVID-19 cases put pressure on the economy in the third-quarter. Flash PMI surveys for the US, Eurozone, Australia and UK will be watched closely. 

Highlights of the economic calendar this week:

  • Chinese GDP 
  • RBA’s Monetary Policy Meeting Minutes 
  • UK CPI 
  • Canadian CPI 
  • EUR Flash Manufacturing and Services PMIs
  • US Flash Manufacturing and Services PMIs

Will Inflation Keep the RBNZ on the Tapering Track? 

The Kiwi is trying to find a solid ground against the greenback supported by the tightening measure by the RBNZ. High inflation may push the market into pricing a faster policy tightening process. Quarterly CPI figures are expected to print a 1.5% rise in Q3, after recording 1.3% in the previous quarter. Annual inflation is anticipated at 4.1% from 3.3% earlier. That’s in line with RBNZ’s forecasts for a short term inflation path. 

The bank expect headline inflation to rise above 4% in the near term before returning to 2% over the medium term. The near-term rise in inflation is expected due to higher oil prices, rising transport costs, and the impact of supply shortfalls.

After it’s October meeting, The Reserve Bank of New Zealand raised its official cash rate by 25 basis points to 0.50%, matching market expectations, and marking the first rate hike since June 2014. Members stated that the decision was appropriate to maintain low inflation and support maximum employment. 

The 25 bp rate hike signals the start of a policy tightening cycle that was expected to begin in August. But the move was delayed by the recent outbreak of the Delta variant and the lockdown in Auckland, the biggest city in New Zealand. 

Chinese Disruptions Dim the Economic Recovery

Weekly Market Outlook - Chinese Yuan
Chinese Yuan

Chinese growth for the year has seen some notable downgrades as power shortages and supply bottlenecks hit the domestic economy. Many regions of China have been suffering from electricity shortages affected by local governmental decisions seeking emissions reduction. Meanwhile, the Evergrande crisis is still worrisome for the local economy, while clouding the outlook for the global economic recovery. 

Annual GDP growth is expected to slow down to 5.2% in the third quarter, from 7.9% growth printed in Q2. On a quarterly basis, growth may ease to 0.5% from 1.3% previously. 

RBA Meeting Minutes to Offer More Policy Clues

The Reserve Bank of Australia will publish the minutes for its October meeting. The minutes are expected to offer more clues about the bank’s future policy path after staying on hold after scaling down its monthly asset purchases. 

The Bank held interest rates at a record low of 0.10% during its October meeting, as widely expected, while continuing the purchases of government bonds at a trimmed pace of A$4 billion a week until at least mid-February 2022. Policymakers stated that the timing and pace of the economic rebound in Australia are uncertain and will depend much on the easing of restrictions. 

The board expressed its confidence in the economic conditions, expecting the economy to resume its rebound cycle in December. Also reaffirmed its commitment to keep the supportive monetary conditions and won’t raise rates until inflation sustainably stabilizes within the 2-3% target range, a condition that will not be met before 2024.

Inflation Data Eyed ahead of BoC’s Meeting

The Loonie traders will be watching closely inflation figures ahead of the BoC’s policy meeting next week. The annual inflation rate is anticipated to accelerate to 4.3% in September from the 4.1% rise printed in August, which marked the highest inflation rate since March 2003. Inflation pressures are expected to keep accumulating led by rebounding prices from last year’s low levels. 

The Bank of Canada will be meeting next week as market participants are curious about the bank’s vision of the latest surge in inflation rate. The central bank judged the inflationary pressures as transitory, but their persistence and magnitude are uncertain and will be monitored closely.

In its September’s meeting, the bank held its overnight interest rate at 0.25% in line with forecasts, and maintained its asset purchases at $2 billion per week, following a $1 billion cut in the previous meeting.

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