Week Ahead: ECB Meeting Poses Another Headache For Euro
XM Group | Jul 16, 2021 07:32AM ET
The main event next week will be the ECB meeting, where the forward guidance will likely be changed to commit to negative rates for longer. That could cement the divergence with the Fed and other central banks that are moving towards higher rates. There’s also a volley of economic data while the earnings season gets rolling.
What inflation?
Another week, another scorching US inflation number that markets did not care much about. Most of the acceleration in inflation was concentrated in reopening-linked sectors, so both the Fed and bond markets continue to dismiss this phenomenon as something that will fade soon as supply chain disruptions ease.
The counter argument is that once the reopening momentum fades, other elements might step up to keep inflation hot. For instance, home prices have gone berserk this past year but rents haven’t followed suit, thanks to the eviction moratorium. The moratorium ends this month, so will rents fire up in August? Remember that ‘shelter’ holds one-third of the entire CPI weight.
Meanwhile, many Republican-governed states have already cut the generous federal unemployment benefits, which will expire in September nationwide. This means that a flood of workers could return soon, making for some stellar jobs reports. Add on top the $4.1 trillion in new spending that Biden is trying to roll out, and it’s a recipe that can keep inflation going.
Long story short, America may not escape this inflationary environment as quickly as the Fed and markets currently think. With the economy approaching full employment and inflation riding high in the autumn, the Fed might have to slam on the brakes. This means less money printing and eventually higher interest rates, which is good news for the dollar.
In Canada, retail sales for May will hit the markets on Friday. The loonie has taken a beating lately from the pullback in oil prices and a resurgent US dollar, but vaccination rates are high and the outlook for the economy remains bright with US spending benefits likely to spill over. The Bank of Canada seems set to raise rates by next summer.
Finally, the earnings season will kick into high gear with household names like Netflix (NASDAQ:NFLX), Intel (NASDAQ:INTC), Coca Cola, Johnson & Johnson, and Verizon (NYSE:VZ) reporting their quarterly results.
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