Week Ahead
 | 16/06/2017

June 19th – 23rd | RBNZ & Norges Bank policy meetings, UK Queen’s Speech, key data in focus

Next week’s market movers

• In New Zealand, the RBNZ is expected to take no action. We think that the tone of the meeting statement may be slightly more cautious than previously.

• The Norges Bank is also forecast to stand pat. We see the case for policymakers to communicate a somewhat more upbeat message.

• In the UK, the beginning of the Brexit negotiations and the Queen’s Speech are likely to attract market attention.

• We also get key economic releases from Australia, the Eurozone and Canada.

On Monday, we have a relatively quiet day, with no major indicators due to be released. Given the absence of economic events, traders may turn their attention to political developments and specifically to the EU-UK divorce. The first round of Brexit negotiations is expected to start on this day, according to statements by both sides. Having said that, we think that until the UK sorts out its new government, these talks could attract less attention than one would expect, as it is not certain yet which UK officials will be attending these talks in a few weeks, and most importantly, with what mandate. The situation is likely to clear up once Parliament votes on the Queen’s Speech (see below).

On Tuesday, the RBA will release the minutes of its June policy gathering, where the Bank kept its policy unchanged, and maintained a balanced tone overall. Even though policymakers offered very little new information regarding the next move in interest rates, they did appear slightly more upbeat on the labor market, a sector of the economy they had previously expressed concerns about. We think that market focus will revolve mainly around their views on this topic again, considering that the last two employment reports from Australia have been stellar. Even though this may not be reflected in these minutes, as the latest jobs report was released after the RBA meeting, we think that the Bank is likely to sound more upbeat with regards to the labor market when it meets again, on the 4th of July.

On Wednesday, market focus will probably turn back to the UK, where the Queen’s Speech takes place. The Queen will outline a list of laws that the government wants to get approved over the coming year. Parliament will spend the following six days debating these plans, before holding a vote. Thus, we will probably know the outcome the week after. It will be particularly interesting to see whether lawmakers approve it or not. If Theresa May secures the support of the DUP lawmakers, or if other parties support her policies, she keeps her place as Prime Minister and she is the one to carry out the Brexit negotiations. However, if May is unable to establish a majority that votes for the Speech, then Labour leader Jeremy Corbyn would be invited to attempt to form a government.

On Thursday, during the Asian morning, the RBNZ rate decision will be in the spotlight and the forecast is for the Bank to keep its policy steady. At its latest policy meeting, the Bank kept the door for further easing open, indicating that much of the recent progress in inflation was transitory. Meanwhile, policymakers noted that growth was soft in H2 2016, but the growth outlook remained positive. With regards to the Kiwi, they indicated that its 5% decline since February was encouraging, and if sustained, this would help to rebalance the growth outlook. However, ever since, developments on the latter two fronts have been quite discouraging. GDP data for Q1 showed that growth was only +0.5% qoq, far below the RBNZ’s forecast of +0.9% qoq. Meanwhile, the NZD recovered notably, and is now trading at levels similar to those in February, when officials had noted that “a decline in the exchange rate is needed”. Bearing all these in mind, we think that the Bank is likely leave the prospect for further easing on the table, and may also reintroduce its prior concerns regarding the exchange rate.

During the European day, the Norges Bank will announce its rate decision too. At its latest gathering, the Bank was quite cryptic, offering almost no new information on policy. It basically noted that the outlook for the economy had not changed much since its March assessment. Back in March, the Bank indicated there is a slightly higher probability of a rate cut rather than a rate hike in the coming period. Recent developments have been mixed, on balance. On the bright side, GDP growth for mainland Norway came +0.6% qoq in Q1, above the NB’s March forecast of +0.4% qoq, and the unemployment rate declined to 2.6% in May, better than the Bank’s expectations of 2.9%. On the downside, the core CPI rate declined to +1.6% yoy in May, notably below policymakers’ forecast of +1.9% yoy. However, having said that, the recent decline in NOK argues in favor of a higher inflation rate in coming months, so the NB could incorporate into its forecasts a higher inflation path moving forward. In this case, we would not exclude the scenario of a more optimistic tone by policymakers, considering that the slowdown in inflation is the only dark spot in Norway’s economic picture at the moment.

On Friday, we get preliminary manufacturing and services PMIs for June from several European nations and the Eurozone as a whole. The manufacturing indices are expected to have declined slightly, while the services figures are forecast to have ticked up. In any case, all of these indices are anticipated to remain at elevated levels, consistent with solid economic growth in the Eurozone. Such prints would also be in line with the ECB’s assessment that the risks to Euro area’s growth outlook are now “broadly balanced”, and could enhance our own view that the Bank will probably continue to shift towards a more sanguine tone at its upcoming meetings.

In Canada, CPI data for May will be in focus, though no forecast is available yet. Given that the yearly change in oil prices has turned negative, we believe that the headline rate is likely to slide, even if the core print stays unchanged. In order to see the headline rate turning up, we need a strong rebound in the core rate, which appears unlikely in our view. On Monday, BoC Deputy Governor Carolyn Wilkins indicated that the Bank will assess whether all the monetary stimulus currently in place is still needed, which raised speculation that the Bank may start considering raising interest rates in the not-too-distant future. Therefore, further slowdown in inflation may pour cold water on expectations with regards to a more hawkish BoC at the upcoming meetings.