Last week showed that inflation is becoming a real dilemma for monetary policy and portfolio strategy as low inflation is a negative positive.
Reactions in the Dow and S&P 500 off the back of Fed chair Janet Yellen’s dovish testimony showed markets will champion pushback on rate rises. And when her testimony was backed by a dreary US CPI print on Friday night – the Fed’s 2 per cent inflation mandate is fast becoming a pipe dream in 2017. Meaning loose monetary policy in the US is more likely to remain than not, which will be a strategy positioning changer – watch growth sectors.
The macro events of the week:
- Today sees China’s Q2 GDP read and June industrial production numbers. GDP is retrospective, however it delves into the consumption and government spending side. It will give colour to the idea China is organically growing in 2017 rather than being backed by further stimulus, as it was in 2016.
Industrial production continues to back away from the 25-year lows of last year. Increases in manufacturing support the trade balance data that Chinese exports are rebounding, and in turn means demand for bulk imports (iron ore, copper, coal etc.) is likely to continue. Watch cyclical sectors off the back of spot prices shifting higher if this is confirmed.
- RBA minutes out tomorrow may contain more colour around the RBA’s growth forecasts and inflation outlook. The RBA’s view on growth and inflation is much higher than the markets. Any further justification of the board’s view in the minutes would be welcome as inflation remains elusive in Australia.
- Australian employment data on Thursday: look through the headline figures – it’s participation and wage growth data that you will want to concentrate on. If wage growth continues to grow at (or below inflation in some sectors) the biggest inflation lever in Australia will make the RBA reassess its forecasts and market positioning in discretionary and value sectors will step back.
- European Central Bank meeting on Thursday night. Although the ECB has no direct links to Australian equities there is a growing belief the ECB will tweet some of its rate positions. Inflation and growth in Europe are showing green-shoot signs of improvement, however it’s still very low compared to global peers. It’s more that monetary policy at the ECB is so loose and unconventional (negative deposit rates) that several members want this removed (Germany being the main protagonist). This is likely to drag on the DAX and CAC and may lead to some global volatility. That’s something to be mindful of come Friday morning.