HIGHLIGHTS OF THE WEEK
- It was a light domestic data week with investors focused on politics, central banks, and international data. U.S. equities set new records with the S&P 500 a mere 25 points from 2,500. while the dollar weakened broadly.
- China’s economy grew by 6.9% y/y in Q2 with broad-based gains. The robust headline, alongside consensus-beating details helped shore up confidence in the evolving and decelerating economy.
- Despite the unchanged policies and dovish tone from the BoJ and ECB both the yen and euro strengthened.
- U.S. data was robust but not market-moving, with investors looking forward to FOMC and Q2 GDP next week.
More Growth…. Less Inflation
It was a light week for domestic economic data with investor focus primarily on political events, G7 central banks, and international data. China kicked off the week with the release of economic growth estimates for the second quarter. The world’s second largest economy grew by 6.9% in Q2 with gains broad-based. The robust headline, alongside consensus-beating details helped shore up confidence in an evolving and slowing economy with the strength of the largest consumer of materials providing some support to commodity prices.
Oil got a further lift from a bullish U.S. inventory report, with a brief recovery developing before petering out on Friday morning. Still, commodity-exposed currencies did fairly well (see Chart 1). The Norwegian krone and Brazilian real were up about 2% vis-à-vis the greenback, while the antipodes gained half that. Equity markets also fared well. U.S. indices, helped by strong earnings and a pullback in the dollar to a one-year low, reached record peaks by mid-week. Tech and health care stocks led, with the latter boosted by diminishing prospects for ACA repeal. Equities in Hong Kong and China also did well, with U.K. indices boosted by the recent pound depreciation. On the other hand, Japanese and European equities suffered losses as their currencies strengthened by 0.9% and 1.5% relative to the U.S. dollar on the week.
Paradoxically, the yen and euro appreciated despite the dovish stance communicated on Thursday by both the Bank of Japan (BoJ) and the European Central Bank (ECB). The BoJ left the policy rate unchanged and will continue to buy assets for some time still. The BoJ upgraded the growth forecast for the Japanese economy, but also lowered the inflation forecast and pushed out its timeframe for achieving the inflation target. Gov. Kuroda now expects inflation to reach 2% a year later than previously projected, or by March 2020. This is the sixth time that the BoJ pushed out the timeline under his tenure.
A similar theme is apparent in the Eurozone. Growth projections were lifted over the medium-term while inflation forecasts have been downgraded, with inflation unlikely to hit ECB’s 2% target this decade. Importantly, in the latest press conference ECB President Draghi communicated that inflationary momentum in the Eurozone is not self-sustaining and the ECB is in no rush to taper its bond purchases at this point so as to maintain support.
U.S. economic data were relatively constructive. The pace of homebuilding bounced back above the 1.2 million annualized pace, Empire and Philly surveys telegraphed robust growth, and jobless claims fell to 233 thousand. Still, the robust data offered little to support the greenback, with political uncertainty related to the ACA, debt ceiling, and NAFTA remaining front-andcenter. The dollar also lacked Fed hawks’ support with the FOMC in a 10-day blackout period ahead of next week’s policy meeting. While we only expect only minor tweaks to the policy statement we look forward to the post-meeting speaking circuit in anticipation of updated Fed communication, which remains at odds with markets on upcoming rate hikes. We believe that the truth about rate hikes in the next eighteen months is somewhere between the market’s two and Fed’s four. Moreover, while we can’t rule out a hike later this year, the probability of such a move is diminished at this point, especially taken together with balance sheet normalization slated to begin in the fall.
Michael Dolega, Senior Economist
This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.