Weekly Market Outlook

Weekly Market Outlook: US Inflation, BoC and RBNZ Rate Decisions in Focus

Weekly Market Outlook – The focus will turn to earning results this week as the US earnings season kicks off. Key data releases on the economic calendar include US inflation rate & retail sales, UK and China GDP growth. Central banks in Canada and New Zealand are widely expected to raise by 50 bp each as inflationary pressures keep hunting the local economies. Traders will be watching for more clues on how long banks are expected to continue their back-to-back rate increases and their implications on the economic performance.

USD – Earning Season and CPI in the Spotlight

The start of the earnings season and inflation rate will be the main focus for USD traders this week. JPMorgan Chase, Morgan Stanley, Wells Fargo, Citigroup and PNC Financial are scheduled to announce their Q2 earnings later this week. Second-quarter earnings for the S&P 500 are seen growing by 5.7%.

Meanwhile, annual inflation is expected to rise to 8.8%, the highest since December of 1981, pushed again by higher energy costs. Core inflation is expected to slow down for a third consecutive month from 6% to 5.8%. Retail sales are set for a rebound, growing by 0.9% in June after falling 0.3% in the previous month. Manufacturing production is likely to see mild growth in June and the consumer confidence may sink to a new record low this month.

The Federal Reserve will be meeting later this month and market consensus refers to a 50-75 bp rate hike. Aggressive tightening by the Fed has raised concerns about an imminent economic slowdown, and a potential recession. However, the board pleaded to do whatever it takes to bring inflation under control. A series of rate hikes is expected this year, bringing the Fed rates above 3% by the end of the year.

The Federal Reserve raised interest rates 75 bp, the biggest enacted increase since 1994. It is the most aggressive move yet to rein in high inflation that squeezes the economy. 

CAD – Will the BoC mirror Fed hike?

Following two back-to-back 50 bp rate hikes, swaps market is forecasting a potential 75 bp hike on July 13, which would bring the target rate to 2.25%. Canada’s interest rates are seen around 3.50% by the end of 2022.

Annual inflation in Canada accelerated to 7.7% in May, the highest since 1983 and above market expectations of 7.4%, while core inflation rose to a new record high of 6.3%.

Weekly Market Outlook: CAD Inflation
Source: Statistics Canada

The BoC will likely ignore the surprise loss of 43k jobs in June, as the main focus is to bring inflation near the 2% target. Also, when taking a closer look, we see that the drop in employment was driven by a 59k drop in self-employed while public sector employment was flat and private employment was up by around 17k. Meanwhile, wage growth is moving higher.

NZD – Another 50 bp Rate Hike

The Reserve Bank of New Zealand is widely expected to hike by another 50 bp for the third consecutive meeting, bringing the cash target rate to 2.50%. The market is pricing in another 140 bp hikes into the curve. New Zealand’s CPI is running near 7% and the New Zealand dollar is now one of the worst-performing currencies against the US dollar.

Economic data since the May statement have delivered a mixed picture for the monetary policy outlook. But as the near-term inflation is still running hot and the risks of a global slowdown have intensified, early signals of a slowing domestic economic performance have started to emerge.

However, the RBNZ may have to carry through with the interest rate hikes, or risk its credibility and reliability on bringing inflation under control. But at some point, it will be appropriate to signal an end to the tightening cycle in the coming months.

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