Week ahead: September 5 th 9 th

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1 Week ahead: September 5 th 9 th ECB, BoC, RBA & Riksbank policy meetings, key data in focus Next week s market movers We expect the ECB to hold off from introducing any fresh stimulus. The focus will likely be on the updated economic projections as well as Draghi s press conference. In Australia, the RBA is expected to stand pat following last meeting s rate cut. The Bank of Canada is likely to remain on hold too, but we could see a dovish shift in language. The Riksbank may hold its fire as well, amid improvements in Swedish data and a weaker SEK. We also get key data from the UK, Australia, China, Norway and Canada. On Monday, the main event will be the release of the UK services PMI for August. The index is expect to have risen to 50.0 from 47.4 previously, which would indicate that the sector stagnated in the month. Following the positive surprises in both the manufacturing and construction PMIs for the month, we see a high likelihood for this index to follow suit and rise sharply, perhaps enough to enter the expansionary territory. We believe that the BoE s August easing measures, as well as the possible restart of postponed projects, are likely to have boosted sentiment among service providers. Markets will remain closed in the US and Canada, in celebration of Labor Day holidays. On Tuesday, during the Asian morning, the Reserve Bank of Australia will announce its policy decision. The forecast is for the Bank to remain on hold, following a rate cut at the latest meeting in August, when officials noted that the prospects for growth and inflation would be improved by reducing rates. This is also supported by market pricing, which at the time of writing indicates roughly a 95% probability for officials to take the sidelines. Indeed, it seems very unlikely to us that RBA policymakers would rush into another rate cut without examining fresh data first. Thus, considering that a very limited amount of data have been released since the last gathering, the focus will be on the language of the meeting statement, which we expect to be more or less on the same page as the previous one.

2 On Wednesday, we have two major central bank meetings: Sweden s Riksbank and the Bank of Canada. We kick the day off with the Riksbank gathering, where expectations are for officials to stand pat. We share this view, mainly due to the calmer-thanexpected market reaction to Brexit as well as the strength of recent domestic data. Even though GDP growth disappointed somewhat in Q2, employment remained resilient since the Bank s latest meeting, while both the headline and the underlying CPI rates moved higher overall. These suggest that inflationary pressures may have picked up somewhat. In addition, both EUR/SEK and USD/SEK continued to move higher after the initial positive reaction to the Brexit vote, implying that imported inflation may also pick up in coming months and boost the nation s CPI rates further. Bearing all these in mind, we believe that the Bank is going to keep its policy unchanged, but it is unlikely to tone down its dovish language until more progress has been made towards achieving the inflation goal. As for the BoC decision, even though no forecast is available, we consider it a safe assumption that officials will keep their fingers off the easing trigger. However, we see the possibility for a slightly dovish shift in the tone of the meeting statement. The latest BoC rate decision showed that despite the Alberta wildfires and the Brexit vote, officials maintained a relatively sanguine view of the economy, suggesting that the risks to the profile for inflation are roughly balanced. Since that meeting, economic indicators have disappointed. The headline CPI rate dropped in July, while the contraction in Q2 GDP was much worse than the Bank anticipated. On an even worse note, the labor market deteriorated notably in July. The unemployment rate rose, the labor force participation rate fell, and a lot of full time jobs were replaced with part time employment. Overall, considering that oil prices are now trading at around the same levels as they were at the last meeting, and that it is too early to judge whether this softness in the data will persist, we do not expect any action from the BoC now. In the UK, BoE Governor Mark Carney will testify before Parliament. We expect the discussion to focus around the easing measures the BoE unveiled in August and to what extent they were necessary, given that the only data that had shown deterioration at the time were PMI surveys. Lawmakers are also likely to roast the BoE chief on whether the Bank will proceed with the rate cut it penciled in at the August meeting, especially in light of the better-than-expected retail sales for July and the rebound in August s PMIs.

3 As for the UK indicators, industrial production for July is due out. The forecast is for industrial production to have fallen modestly, following a slight increase in June. The forecast is supported by the manufacturing PMI for the month, which declined to its lowest level since 2013 and indicated that falls in output and new orders battered the sector. In Australia, GDP data for Q2 will be released. GDP is expected to have slowed to +0.4% qoq, following a remarkable +1.1% qoq in Q1. The forecast is supported by the fact that iron ore prices were relatively flat in Q2, whereas they were rising throughout Q1. Also, retail sales were softer than the first quarter. Nevertheless, we doubt that a slowdown will be much of a surprise to RBA officials, who expected growth to moderate in Q2, according to the minutes of the latest RBA meeting. On Thursday, the highlight of the day will be the ECB policy decision, followed by a press conference from ECB President Draghi. The ECB held off from announcing any new stimulus measures in July despite the Brexit outcome, and instead noted that it prefers to wait until September when it will have the new staff economic projections. We don t expect any fresh stimulus measures from the Bank at this meeting either, for a variety of reasons. The European markets responded to Brexit with encouraging resilience, as Draghi noted at the July press conference. The bloc s July data confirmed this and showed that Brexit risks have not materialized as feared, at least not yet. These combined with the fact that the Bank s previous easing measures are still making their way into the real economy make a strong case for the Governing Council to take the sidelines for now and wait for more data before deciding on any new stimulus. Even though an extension of the QE program is possible, we do not consider that as an easing measure that will shock investors given that the Bank has repeatedly signaled QE will run as long as necessary, at least until there is a sustained adjustment in the path of inflation. Thus, the focus of this meeting is likely to fall on Draghi s press conference and the updated economic forecasts. We expect downward revisions to the GDP forecasts, in line with Draghi s post-brexit remarks that the vote may hit Eurozone s growth by a cumulative 0.3% to 0.5% yoy over the next three years. As for his comments, we expect him to highlight once again that Brexit risks have not materialized yet. However, he is likely to reiterate that continued low inflation could provide scope for further easing of policy, something that we consider likely to happen by year-end, considering the bloc s muted inflationary pressures and its very low 5- year inflation expectations. From China, the trade balance for August is coming out, but no forecast is available yet.

4 Finally on Friday, Norway s CPI data for August are likely to attract attention. The CPI rate unexpectedly skyrocketed to +4.4% yoy in July, from +3.7% yoy previously. No forecast is available yet, so we expect the CPI to slow somewhat following the latest strong acceleration. In its June Monetary Policy Report forecasts, the Norges Bank assumed that it would cut rates by another 25bps until the end of the year, mainly in order to support growth and investment in an economy hit by lower oil prices. As a result, this speed-up in inflation could be an obstacle to a potential rate cut in September, given that more easing is likely to cause the CPI rate to overshoot the Bank s target of 2.5% even further. From Canada, we get employment data for August. As we mentioned in our BoC preview, the labor market deteriorated notably in July, as the unemployment rate rose, the labor force participation rate dropped, and a lot of full time jobs were replaced with part time ones. Although oil prices rose during the month, the RBC manufacturing PMI indicated that the employment outlook worsened, so it would be interesting to see whether the labor market continued softening. From China we get the CPI and PPI, both for August, though no forecast is available for either figure.

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