ECB to revise forward guidance on Thursday

Chris Scicluna

Risk off across most of Asia today following Friday’s losses on Wall Street
Wall Street ended last week on a negative note with the S&P500 closing down ¾% on a day when news of better-than-expected retail spending during June was countered by an unexpected pullback in the University of Michigan’s consumer sentiment index for July. The risk-off tone was also evident in the bond market, with the 10Y UST erasing early losses to close down 1bps at 1.29%, even as the University of Michigan’s survey reported the highest one-year ahead inflation expectation since 2008 (doubtless weighing on confidence). Equally, risk aversion delivered a modest bid to the greenback.

Markets have re-opened with a similar tone today. As we write, S&P minis are down around 0.3% and the 10Y UST is trading at 1.28% after being as low as 1.26% on the Asian open. With that background, it has been a difficult start to the week across the Asia-Pacific equity markets. In Japan, the TOPIX has closed down 1.3%, with rising coronavirus infections in Tokyo – including infections reported within the Olympic village – of concern ahead of Friday’s Olympic opening ceremony. This is surely also of concern to PM Suga, whose support for the Olympics in the face of public opposition has seen his approval rating hit a new low in the latest Kyodo and Mainichi polls. The major benchmark indexes in Hong Kong, South Korea and Singapore have also recorded losses of close to 1% or more, whereas in Mainland China stocks are broadly flat at present.

In Australia, the ASX200 closed down a little less than 1% and AGCB yields tracked USTs lower, with most headlines centred on the current virus outbreak. Unfortunately, new coronavirus cases have continued to average around 100 per day in Sydney despite the lockdown, already raising concerns that the restrictions will need to be extended again beyond 30 July. And while case numbers remain much smaller in Melbourne, Victoria’s Premier indicated today that the present five-day lockdown will be extended beyond tomorrow, with the exact details still to be worked out once the latest test results are received (a decision is expected to be made tomorrow).

BoJ survey points to weak corporate loan demand, even with easing credit standards; CPI and trade data the highlights of a holiday-shortened week
During an otherwise quiet day for economic reports, today the BoJ released its latest quarterly Senior Loan Officer Survey, which amongst other things provided information on how 50 of Japan’s largest banks currently view the demand and supply of credit. With respect to business lending, the diffusion index (DI) measuring changes in the demand for loans declined to -11 from 9 in the prior survey – the weakest result since 2010 – with lower demand reported for all sizes of firms and in both the manufacturing and non-manufacturing sectors. Banks indicated no overriding driver of decreased business loan demand, but contributing factors including customers’ lack of sales and fixed investment and the increased availability of internal funding. Looking ahead, the DI for business loan demand over the next three months was -1, indicating that on net banks are expecting no improvement. Meanwhile, in broadly similar numbers to the last survey, banks reported further easing credit standards on business loans over the past three months. This easing was due to banks’ own efforts to stimulate growth and ‘other’ unspecified factors (these factors might include direct encouragement provided by government and BoJ support measures). Looking ahead, respondents expect to ease credit standards further over the next three months.

With respect to lending to households, the DI measuring changes in demand for loans fell to 4 from 7 in the previous survey, with the DI measuring demand for housing loans declining to 6 from 8 previously. Demand for consumer loans picked up a little, with the DI increasing to 4 from -1 previously. Looking ahead, the forecast DI for the household loan demand over the next three months was 1, indicating that demand is expected to remain largely stable. As far as the supply of credit is concerned, as with the corporate sector, on balance banks eased their credit standards for household customers, albeit the DI declined slightly to 5 from 6 previously. The same proportion of banks indicated that they expect to ease their credit standards further over the next three months.

CPI and trade reports ahead in Japan before 2-day holiday begins on Thursday
Looking ahead, with Japanese markets closed for public holidays on both Thursday and Friday, this week’s remaining data flow is very sparse. Tomorrow will bring the national CPI for June. The advance report from the Tokyo area indicated a sizeable jump in prices for fresh food, and so the national headline index is likely to strengthen to 0.2%Y/Y from -0.1%Y/Y – if realized, marking the first time that annual headline inflation has been positive since last August. The Tokyo CPI indicated only small increases in core prices during the months, and so little improvement is expected in the BoJ’s preferred measure of core inflation (CPI ex fresh food and energy) which stood at -0.2%Y/Y in May. On Wednesday, the merchandise trade report for June will continue to report very flattering annual growth in both exports and imports due to base effects associated with the pandemic. The BoJ’s estimate of real exports and imports, published later in the day, will help analysts refine their estimates of net merchandise export performance in Q2 (growth in imports slightly outpaced growth exports over the first two months of the quarter).

A very quiet week ahead in China
Following last week’s significant data dump, the coming week is very quiet in China with no economic reports of note in the diary. Tomorrow the PBoC will announce the 1Y and 5Y prime lending rates for July, which provide the benchmark rates for mortgage and corporate lending. Notwithstanding the PBoC’s recent reduction in the RRR, these are likely to remain unchanged for a 15th consecutive month, especially after the 1Y MLF rate was retained at 2.95% last week.

ECB to revise forward guidance on Thursday most likely with a dovish emphasis; consumer confidence and flash PMIs due later in the week too
The main economic event in the euro area this week will be the conclusion of the ECB’s policy meeting on Thursday. This will revise the Governing Council’s forward policy guidance in light of the outcome of the strategic policy review, which most notably set a 2% symmetric inflation target. Unlike the agreement on the strategic review, the new policy guidance will not need to be unanimous, which should mean that the dovish majority will not need to make concessions to the hawks. Among other things, we would expect the new guidance to underscore the need for policy to remain “forceful” and “persistent” over the horizon.

Among other things, the Governing Council might be expected to state that the key ECB interest rates are expected to remain at their present or lower levels until it has seen the inflation outlook robustly converge to 2% within its projection horizon. And it might add guidance on the expected timeframe for that expectation, e.g. perhaps signalling the likelihood of no rate hikes before 2023 at the earliest. In addition, while the Governing Council will likely reaffirm that net PEPP purchases are expected to be maintained until at least the end of March 2022 and until it judges that the coronavirus crisis phase is over, it might give new guidance as to the nature of the net purchases to be conducted once the PEPP has concluded. In this context, a signal that the post-pandemic purchases would retain much of the flexibility of the PEPP to allow for continued mitigation of fragmentation risks would clearly benefit periphery bonds. With respect to the immediate path of policy, however, we expect the Governing Council to leave to the September meeting the decision as to whether to maintain the PEPP purchases at a significantly higher pace than at the start of the year.

The most notable economic data in the euro area will also come in the second half of the week, with the Commission’s preliminary euro area consumer confidence indicator for July due for release on Thursday and the flash PMIs for the same month due on Friday. These surveys are expected to suggest continued strengthening of recovery momentum thanks to the previous easing in lockdown measures and accelerated vaccination programmes. We note, however, the risks of a weakening in both surveys due to an increase in the number of new coronavirus cases in many member states (in particular Spain and the Netherlands) which has brought a tightening of restrictions in certain countries, as well as the extremely severe flooding currently impacting Germany, Belgium and the Netherlands. According to the BBG survey, the Commission’s flash consumer confidence index is expected to increase by 0.8pt to -2.5, which would be the highest in two decades. And thanks to an anticipated strengthening in services more than offsetting an expected softening in manufacturing, the euro area composite output PMI is expected to rise ½pt to 60.1, which would be the highest since June 2006. Euro area construction output data for May are due later this morning and – reflecting firm growth already reported in Germany and France – are bound to post a solid rebound following a drop of 2.2%M/M in April.

Haskel speech to be watched for further shift on BoE MPC today; flash PMIs and retail sales data to come later in the week
BoE-speak will be of interest this week given the sudden hawkish shift from MPC members Ramsden and Saunders last week. The thoughtful Jonathan Haskel will give a speech about the impact of Covid-19 on the UK economy today, while Deputy Governor Broadbent – whose view could be pivotal on the MPC – will be discussing the mismatch induced by the pandemic and outlook for inflation on Thursday. Data-wise, like in the euro area, the focus will be on survey data for July, including the CBI’s industrial trends survey (Thursday), and the preliminary PMIs and GfK consumer confidence survey (Friday). We expect these to be consistent with firm growth this month, although given the growing number of coronavirus cases, we may see some levelling off in business optimism. The composite PMI is expected to remain close to June’s record high of 62.2, thanks to robust conditions in both manufacturing and services. Also of interest on Friday are retail sales data for June, which are likely to reveal that spending received a boost from the European football championships, not least related to items such as televisions, food and drink. We expect to see growth of at least ½%M/M in retail sales excluding petrol, leaving sales up about 11% from the pre-pandemic level in February 2020 and up about 1.4%Q/Q in Q2.

NAHB housing survey ahead in the US today, with housing starts and existing homes sales to follow in an otherwise quiet week; no Fedspeak, but US corporate reporting season heats up
The week’s relatively sparse US economic diary begins today with the NAHB housing survey for July, which will set the tone for the housing-focus data released over the remainder of the week. That data includes tomorrow’s housing starts and building permits report for June, in which Daiwa America’s Mike Moran expects to see a modest decline in starts amidst the recent moderation of new home sales and an associated rise in inventories. However, Mike expects Thursday’s existing home sales report to be more robust – albeit well shy of last year’s highs – and is picking a 3.4%M/M rebound in in sales in June on the back of the already-published rebound in pending home sales in May. Thursday will also bring the release of the Conference Board’s leading index for June – likely posting another sizeable increase – and the Kansas Fed’s manufacturing data for July. The week concludes with the flash PMI readings for July, which seem certain to remain near the elevated levels seen in June. With the Fed’s next FOMC meeting looming on 28 July, there is no Fedspeak over the week ahead. However, the corporate reporting season will move up a gear, with 81 S&P500 companies scheduled to share their results this week.

Virus outbreak the likely focus in Australia this week; preliminary retail and trade data also due
There were no economic reports of note in Australia today. Looking ahead, we imagine that the focus for many investors will be whether Australia can make any progress in containing the virus outbreaks in Sydney and Melbourne. As far as economic events are concerned, tomorrow will bring the minutes from this month’s RBA Board meeting. While this was a meeting at which the Board made key decisions on its 3Y bond yield target and its QE programme, we suspect that the minutes won’t add much to the detailed comments and explanation given by Governor Lowe in a speech directly after the meeting. On Wednesday, the ABS will release its preliminary estimate of retail sales for June, which will be weighed down by impact of the previous lockdown in Melbourne. The preliminary merchandise trade report will follow on Thursday (to be discontinued after this report), together with the quarterly NAB Business Survey for Q2 (which provides more detail, including about expectations, than the regular monthly survey). The week will end with the flash PMI reports for July, after which investor attention will quickly turn to the following week’s CPI report.

Kiwi services PMI climbs in June; no market-moving data over the remainder of this week
In keeping with the generally upbeat tone of Kiwi data, the BNZ-Business NZ service sector PMI increased 2.3pts to 58.3 in June, marking the second highest reading seen over the past three years (second only to the record high seen back in April). In the detail, the activity/sales index increased 3.5pts to a very sturdy 62.5 and the new orders index increased 3.4pts to an even stronger 66.1. The positive outlook was reflected in the employment index, which increased a welcome 2.0pts to 56.5.


Looking ahead, following last week’s momentous RBNZ policy review and CPI report, the remainder of this week’s diary is exceptionally sparse with no entries that are likely to attract market attention. For investors the next key entry of note is the Q2 labour market report, which will be released on 4 August.

* Bunds followed USTs higher even as the Bundesbank predicted a return of German GDP to the pre-pandemic level this quarter, while euro area construction and French retail sales data posted growth.


* Gilts rallied as external MPC members Haskel and Mann argued against a pre-emptive tightening of BoE monetary policy.


* Tuesday will bring the ECB's bank lending survey and German producer price data for June. 


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