EC Macro Dynamic Remains The Same, But The Calendar Gets Busy

The economic calendar and central bank meeting diaries are busier in the week ahead. The highlights include three G7 central bank meetings (the Bank of Japan, the Bank Canada, and the European Central Bank), Chinese Q2 GDP, and the first look at US July survey data (Empire and Philadelphia Fed). 

The US also reports June retail sales and industrial production figures. The Fed's Beige Book may offer some anecdotal insight into economic activity in areas where the virus has jumped and re-openings stalled or reversed.

The underlying macro backdrop is unchanged. Concerns about the pandemic's growth and the possibility that the antibodies offer only a short-lived reprieve from vulnerability encourage a cautious attitude by businesses and investors. 

On the other hand, officials in most major countries seem prepared to provide more assistance and for longer, which underpins the flow of savings into risk assets. Moreover, the convergence of real and nominal interest rates and the apparently lagging US response to the health crisis add to the dollar bear case that has been simmering for some time.

Let's begin with the central bank meetings. The Bank of Japan's two-day meeting ends on July 15, the same day as the Bank of Canada's. Neither one seems to have a strong sense of urgency. The markets have been stable.

Japanese stocks have underperformed over the past month, and it is interesting that the Topix, which is base for the ETFs the BOJ buys, has fallen by about 2.25% over the past month, while the narrower Nikkei is virtually flat. Over the same period, the MSCI Asia Pacific Index, excluding Japan, was up nearly 6.5%.

Interestingly, the Bank of Japan will provide updated economic forecasts. The BOJ estimated that the world's third-largest economy would contract by 3.0% to 5.0% in the fiscal year through next March.  Both consumption and exports remain weak, and that undermines the case for capex. There appears to be little upside momentum as the quarter wound down. More fiscal support may be needed, but might not be delivered until after the fiscal half-year in October.

The new Bank of Canada Governor Macklem can be content, too, with the monetary settings. Market rates are steady to lower over the past month.  Profit-taking in equities has been limited. The Canadian dollar is around 0.75% weaker against the US dollar since the last meeting, and is the only major currency not to have risen against the greenback.   

Implied currency volatility (three-month) is a little less than 6%, and the 200-day moving averages a little above 6%. Commodity prices, including oil, have continued to recover from the March-April plunge. The CRB Index, for example, has retraced roughly half of that drop.  Domestically, the labor market is improving (about a third more jobs - ~963K - than were expected in June after a 290k increase in May), and underlying measures of inflation (Canada has three) are holding up considerably better than the headline, which was below zero in May (according to the most recent data).

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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