Weekly Market Outlook – This week will be dominated by central bank meetings, with the Reserve Bank of Australia (RBA), European Central Bank (ECB), and Bank of Canada (BoC) meeting this week. A series of S&P Global services and construction PMIs are expected to be released prior to the release of last week’s manufacturing PMIs, which also indicated that activity was slowing down and maybe even contracting. In addition, the market will be looking forward to Q2 GDP updates for the Eurozone and Canada. The ECB, BoC, and RBA will likely step on the brakes again this week as part of their efforts to curb price increases. The ECB is likely to grab the limelight since policymakers seem geared up to pull out all the stops in order to defend the sinking euro in the coming days.
Key Data to watch on the Economic Calendar this week
- OPEC-JMMC Meetings
- Global: Services PMI Final (AUG)
- Australia: RBA Interest Rate Decision
- US: ISM Non-Manufacturing PMI (AUG)
- Australia: GDP Growth Rate (Q2)
- Canada: BOC Interest Rate Decision
- Australia: RBA Governor Lowe speech
- EU: ECB Interest Rate Decision
- Canada: Employment Change (AUG)
Global – S&P worldwide services PMIs
In the wake of last week’s manufacturing data, which showed contractions in the UK, Eurozone, France, Germany and US, this week’s services PMI data will offer more insight into macroeconomic conditions. In a flash analysis of the data, it appears that the economy has slowed down in general, with some regions also registering outright declines. On Tuesday, we’ll watch the service PMIs with particular interest, but also keep an eye out for the construction and other detailed sectors PMIs midweek.
OPEC+ To discuss oil supply
After Saudi Arabia recently raised the possibility of production cuts, energy traders will be paying close attention to the meeting of the Organization of Petroleum Exporting Countries (OPEC) and allies, including Russia, on Monday.
As a result of Russia’s invasion of Ukraine, global economies have faced soaring energy costs. As central banks around the world raised interest rates to fight soaring inflation, oil prices have eased over the summer amid uncertainty over China’s COVID-19 curbs.
As a result of last week’s OPEC+ meeting, demand now lags supply by 400,000 barrels per day, instead of the previously forecast 900,000 barrels per day. It is estimated that the market deficit will be 300,000 barrels per day in 2023, according to the producer group.
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USD – ISM releases August services PMI
US markets will be closed on Monday due to a public holiday in America. Tuesday will bring the August ISM services index, the reading of which is expected to be 55.5 according to economists.
In anticipation of Jerome Powell’s speech at the Cato Institute conference on Thursday, investors will look out for any indications that the Fed might raise rates by 75 basis points or 50 basis points in September. Labor data for August showed the economy adding more jobs than expected, but wage growth moderated and the unemployment rate ticked higher, keeping the next Fed hike debate alive. Following Powell’s hawkish remarks at last month’s Jackson Hole conference, expectations have solidified for aggressive Fed action.
EURO – ECB to raise interest rates for the second time
The European Central Bank (ECB) is poised to hike interest rates once again at its upcoming meeting on Thursday, with inflation already near record levels and headed for double digits.
With energy bills soaring and CPI price pressures showing no signs of subsiding, eurozone inflation rose to 9.1% in August, well above the ECB’s 2% target. In spite of the looming prospect of a recession this winter, investors are wondering if the central bank will increase rates another 50 basis points, as it did in July, or if it will hike rates, even more, 75 basis points. Isabel Schnabel, an ECB board member, recently called on central banks to take action forcefully to curb inflation, even if it means recession.
There is now a general consensus that a 75-basis point increase will take place. In the meantime, the third quarter estimate of eurozone GDP is expected to reveal a slowdown in growth, with the annual rate forecast to moderate to 3.9%.
AUD – RBA is set to lift Rates again
On Tuesday, the Reserve Bank of Australia is expected to raise interest rates for the fourth time in a row, by a further 50 basis points. According to the committee’s latest meeting minutes, raising rates is not finished, and inflation is expected to reach 7.75% in 2022 and 4% in 2024. According to Governor Lowe, during a speech he gave on July 20th, the RBA is committed to gradually lowering rates until they reach neutral, which according to the board of directors is 2.5%. As of right now, the cash rate is set at 1.85%.
According to market participants, there is almost a 60% probability that a half-point rate increase will take place compared to 40% for a smaller, quarter-point increase, with almost a 60% probability that there will be no change at all. As far as domestically speaking is concerned, there is no real reason for the RBA to be cautious from a domestic standpoint. Inflation is on the rise, consumption is strong, and the unemployment rate is at a record low. Thus, half-point moves seem the best choice, boosting the Australian dollar as a result.
CAD – BOC to raise interest rates by 75bps
It is expected that the Bank of Canada will raise interest rates by 75 basis points on Wednesday. At its previous meeting, the Bank of Canada surprised the market when it hiked the benchmark interest rate by 100 basis points and noted in its April Monetary Report that inflation has become more persistent than members had expected. Compared to a previous reading of 8.1% YoY for the July CPI report from Canada, the rate for July was 7.6% YoY. As a result, there was a 6.1% YoY rise in the Core CPI in July compared to a 6.2% YoY growth in June.
Furthermore, the employment data and PMI data for July in Canada were both weaker than expected. This has resulted in the markets expecting “only” a 75bps rate hike (instead of the expectation of another 100bps in early August).
GBP – UK leadership contest
A new Conservative party leader and by extension a new prime minister will be announced today in the United Kingdom at 11:30 GMT. Betting sites indicate Liz Truss has a 10-1 advantage over former chancellor Rishi Sunak, making this decision a foregone conclusion. There is a high probability that the winner of the election will inherit a very difficult economic situation characterized by high inflation, strikes, sluggish growth, as well as extremely high energy bills.
As discussed by Truss, she is in favour of tax cuts as a way to reignite the economy and decrease the cost-of-living crisis in the United States. Since the Pound is currently trading near two-year lows (currently at 1.1525), it would appear that the markets are not convinced by the strategy that she has implemented. In spite of this, the end of the political uncertainty, and the information coming to light, could help put a floor under Sterling.
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