Sweden’s general election Sunday threatens to set the stage for a second EU exit referendum. The anti-immigration party polling in second place have threatened to hold an election on EU membership. Latest opinion polls suggest they currently hold 20% of the vote and the other parties have pledged not to cooperate with them, making the prospect of a “Swexit” vote unlikely. The UK had the misfortune of playing the bad example for EU nations, with EU taking a hard line in Brexit negotiations to dissuade other EU nations who have increasingly shifted to the political right and grumbled over high immigration. If the threat of a second EU referendum is safely avoided, the EU’s Brexit stance may soften, especially as they face a gruelling schedule of EU parliamentary election campaigning and politicking to agree the EU budget.
Japan’s July Current Account will be released overnight in the Asian session. Japan’s external balances remain relatively unscathed from the US trade war. The trend of increasing exports should continue to keep Japan in a trade surplus. The UK’s July Trade Balance will of course remain in deficit territory in July. Sterling’s post-Brexit devaluation was an instant boost to exports, but unfortunately imports increased by almost as much. US Consumer Credit will be released in the afternoon session and the Federal Reserve’s Bostic speaks on the economic outlook. Considering the market was updated on his moderately hawkish views last Thursday, we don’t expect to be caught off guard.
Australia’s August NAB Business Confidence index and Japan August Machine Tool Orders will be released overnight. The UK’s July Unemployment rate and wage data are likely to confirm the UK’s mature recovery and that if it wasn’t for the elephant in the room, aka Brexit, the market would price in more aggressive Bank of England tightening. Last week’s UK PMI releases reported skill shortages across all sectors. Limited labour supply which should translate into wage growth. The US August NFIB Small Business Optimism index should continue to show that the US expansion continues without any signs of a slow down. The index hit its second highest level in its 45-year history in July.
US Sep. 7 MBA Mortgage Application will continue to show signs of a housing market slowdown, as the sector grapples with higher interest rates and a lack of affordable homes for sale. US August PPI will provide the latest word on whether the robust US expansions risks stoking inflationary pressures. The index surged from the first half of 2016 on a recovery in food and energy prices. Ultra-dove Bullard will speak of the US economy and monetary policy. He recently warned that more hiking could unnecessarily raise recession risk and is concerned about unconventional shifts in the US Treasury market. Later in the session, Fed’s Brainard will provided a more centrist view.
Europe steals the spotlight for trading Thursday, with its two biggest central banks announcing their rate decisions. The Bank of England is in the dark along with the rest of the business community on a potential Brexit deal. With a no deal Brexit a possibility, the BoE are likely to ignore all its traditional indicators that are flashing red – the UK is hitting its supply capacity and risks overheating- and keep policy unchanged. The risk to Sterling are to the upside with the market pricing in only a 55% chance of a rate hike in the next year and market short sterling bets extended.
Predictable but not pre-committed will be the mantra of the ECB’s policy decision Thursday. The ECB will likely maintain its guidance that interest rates will remain at current levels until the end of summer 2019 and that asset purchases are set to end in December. However, the ECB will emphasise its prerogative to change its mind. Downside risks to the Eurozone have risen. The German economic engine is sputtering under the impact of the US trade war. Italian politics remain a market concern. Will Italian yields spike without the ECB’s bond purchases? A stronger trade-weighted currency and Brexit add to the pile of risks. The Eurozone still lacks a common bond market and asset purchases are tangled up in politics. The stack of risks and the ECB’s limited ammunition are behind our call that they will delay policy normalisation.
US CPI will be watched to see if it corroborates evidence of inflationary pressure in the US economy, especially after a nine year high in average annual earnings growth. US Initial Jobless Claims and the Monthly Budget Statement will also be released.
The main release Friday will be US Retail Sales. The strength of wage growth and recent spending data suggest that US consumer has the means and the inclination to see a strong print. Expectations for US Industrial Production are high after the strongest ISM Manufacturing print in 3 decades. The University of Michigan Consumer Sentiment index will end the data release for the week. With political instability in the White House and escalating trade wars this will be an interesting read on America’s view of the economy.