Fed, BOJ, Stress Test Results Ahead – Global Stimulus On The Cards?

THE WEEK THAT WAS

On July 19th, US Building Permits for June – an excellent indicator of future construction activity, were reported with a higher-than-expected reading. In particular, according to the Commerce Department, residential starts increased 4.8 percent to a 1.19 million annualized rate, the most since February, from 1.14 million in May. The reading for May was revised to a number lower than initially reported.

In the UK, Retail Sales fell 0.9%, after witnessing a 0.9% rise in May. The data for june had been expected to fall 0.4% on a month on month basis, as the willingness of consumers to spend was hampered by the results of the June 23 referendum.

The euro slipped lower against the US dollar on Thursday after the European Central Bank left interest rates unchanged, and also made no changes to its asset purchase program, in its first meeting since the U.K. voted to leave the European Union. The euro hit $1.1009 compared with $1.1017 late Wednesday. ECB President Mario Draghi stated that the central bank stands ready to act, but would need to see more economic data to assess the effect of the Brexit vote before doing so.

The number of people filling for unemployment benefits in the US dropped unexpectedly last week, reaching the lowest level in 3 months, indicating a steady labor market. Initial jobless claims dropped 1,000 to 253,000 in the week ending July 16, from an unrevised 254,000 in the prior period.

The dollar index gained on Friday, putting it on track for its fifth straight weekly up, due to rising expectations of a rate increase from the Federal Reserve, while other central banks are seen cutting rates or adding stimulus. On Friday, the dollar index inched up by 0.15% to 97.135, near a four-month high touched on Wednesday.

THE WEEK COMING UP

Global central banks will hold their monetary policy meetings next week. Policymakers are likely to remain cautious as they wait for the market shock from Brexit to settle down.

The US Federal Reserve begins its 2 day meeting on Tuesday. The Fed is widely expected to keep the interest rate on hold when the meeting ends on Wednesday. However the Fed statement is expected to acknowledge improved economic prospects. According to Commerzbank, the economic outlook may not be very clear by mid-September. Therefore the next rate hike is more likely to happen in December.

The Bank of Japan holds its meeting on Friday. Amid the environment of low inflation and a strengthening yen, investors anticipate that the bank will ease policy and announce further stimulus at the Friday conference. Prime Minister Shinzo Abe is also reported to be working on a stimulus package with a headline value of at least 20 trillion yen ($189 billion), potentially taking some pressure off the BOJ. For now, economists expect the bank to expand its asset purchase program and cut its key rate to -0.2 percent from -0.1 percent.

In Europe, the market is focussed on the results of bank stress tests, which are scheduled to be released on Friday. Italian lenders shall be in even greater focus, being the weakest link amongst EU banks, due to their low profitability and $397 billion worth of non-performing loans on their books, a legacy of Europe’s debt crisis. On Thursday, Mario Draghi has implied the possibility of setting up a public backstop to help Italian banks to sell down some of their bad loans that have hampered their ability to lend.

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