Take Five: Big or bigger?

Eurozone data, US jobs numbers and China’s property sector will keep markets busy

LONDON:

The Bank of England (BoE) is the last of the big central banks to meet before the summer break gets under way, but eurozone data, US jobs numbers and rumblings in the China property sector will keep markets busy as the earnings season winds down.

Here’s a look at the week ahead in Shanghai, London and New York.

Keep calm and bet on sterling

When the BoE meets on Aug 2, policymakers will finally have something to cheer about. Inflation hasn’t accelerated since February and there are signs that widespread price pressures are starting to abate.

But the BoE has been routinely accused of being behind the curve. It’s taken policymakers eight months to bring inflation down to 7.9%, from a peak of 11.1%. It took the ECB half that time to achieve the same rate of decline.

Money markets show traders think the odds are split on a 25-bp or a 50-bp hike. Investors are all too aware of how much more work the BoE has to do. After all, they’re holding the most valuable bullish bet on sterling since 2014.

Data-dependent

The Fed appears to have gone into data-dependent mode after hiking rates 25 bps on Wednesday to 5.25-5.50% - a level last seen just before the 2007 housing crash. Between now and its next meeting in September, the Fed gets two sets of jobs data – and inflation numbers – to pore over.

First up is July non-farm payrolls on Aug 4.

Resilient jobs growth has been a key factor in shaping investors’ benign outlook on the US economy, a view that – along with ebbing inflation – has helped drive rallies in stocks and other risk assets this year.

Signs of an overly robust labour market could spark worries that the Fed needs to keep tightening monetary policy to contain inflation. Conversely, a steep drop-off in employment might rekindle recession fears.

Megacaps Apple and Amazon meanwhile are expected to report earnings on Aug 3.

Gone till september

Markets are impatient. The ECB just hiked rates – as expected – again and the ‘will they’ or ‘won’t they’ lift rates in September debate is well under way.

So even as rate-setters head for a break, data will still push around rate bets, starting with Monday’s preliminary estimate of July eurozone inflation and second quarter GDP.

Overall inflation is now just half its October peak, but harder-to-break underlying price growth is hovering near historic highs and may have even accelerated again. Both measures remain above the ECB’s 2% inflation target.

Economists polled by Reuters forecast the euro zone economy grew 0.2% in Q2. GDP was flat in Q1 versus the previous quarter.

The data could strengthen the case for a September hike. Not so fast, ECB doves might argue. After all, forward-looking indicators such as PMIs are pointing decidedly lower.

Hoping to hsbc some improvement

HSBC on Tuesday closes out a mixed reporting season for big European banks, with investment banking revenues still dwindling as deal activity slumps, while rising rates lift more staid business lines such as corporate and retail banking.

Investors are hoping for a fresh share buyback after HSBC announced a $2 billion offer last quarter and resumed paying quarterly dividends for the first time since 2019. They will also look for an increase to the bank’s conservative-looking $34 billion net interest income forecast.

Not so hot property?

Hopes for stimulus from Beijing for China’s embattled property sector are well and alive, if property shares in Hong Kong and the mainland at multi-week highs are anything to go by. Removing the phrase “houses are for living, not for speculation” from a readout of the powerful politburo meeting fuelled those hopes, but there’s been a distinct lack of concrete detail.

 

Published in The Express Tribune, July 29^th, 2023.

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