Key events to watch in the week ahead: 10-14 July 2023

This week’s overview

The shortened trading week in the US put the Federal Reserve’s (Fed) rate outlook on centre stage once more, as resilient labour market conditions and persistent services sectors’ prices supported a hawkish bias in Fed’s policies overnight. Ahead, the US non-farm payroll data will be on close watch.

A reversion in the Fear and Greed Index back to ‘extreme greed’ territory late last week may raise the risks of a near-term retracement, but it is too early to conclude a trend reversal. Seasonality over the past 20 years has been in favour of S&P 500’s upside in July, with the month delivering the second-highest average return and positive frequency, as compared to the other months.

Heading into the new week, here are three events to watch:

10 July 2023 (Monday, 9.30am SGT): China’s inflation rate

Subdued inflationary pressures in the world’s second largest economy thus far have added to signs of a cooling economy, as soft domestic demand forced consumer prices to rise on average by just 0.3% over the past three months. Another close-to-zero reading in June will likely echo recent calls for more to be done by Chinese authorities in the second half of this year, given that the People’s Bank of China (PBOC) Governor Yi Gang has previously downplayed the risks of deflation and highlighted “ample policy room” to support economic growth.

Over the past one year, China’s consumer price index (CPI) has matched or underperformed market expectations on 11 of the 12 previous readings. Given that the China’s economic surprise index has recently reached a new low since January this year, the stage seems set for another lacklustre read. China’s trade data will be in focus for the coming week as well, which will be released on 13 July 2023, Thursday.

12 July 2023 (Wednesday, 8.30pm SGT): US consumer price index (CPI)

Given the broader trend of moderating US inflation rate and the Fed’s data dependent stance, rate expectations have remained well-anchored for an impending end to the Fed’s tightening cycle with the last 25 basis-point (bp) hike in July.

Consensus is for further moderation in pricing pressures in the US CPI, with the headline figure expected to decline to 3.1% year-on-year from previous 4%. Likewise, the core aspect is expected to decline to 5.0% year-over-year from 5.3% in May. Month-on-month, both the headline and core inflation prints are expected to increase by 0.3%.

Thus far, a new low in US core CPI since December 2021 has indicated some degree of success in Fed’s tightening moves, but services sector’s inflation has revealed some persistence lately. Further easing in core pricing pressures will be key in providing room for a rate pause from the Fed ahead, along with some flexibility for rate cuts towards the end of the year if needed.

12 July 2023 (Wednesday, 10pm SGT): Bank of Canada’s (BoC) interest rate decision

After keeping rates on hold for a good five months since January this year, the BoC threw markets off guard with a surprise 25 bp hike at its previous meeting, as policymakers conveyed their uneasiness on the tight labour market, renewed strength in the housing market and still-elevated inflation. Fresh economic data since then has revealed some signs of a softer labour market and receding inflation, but market participants are not fully convinced. Rate expectations continue to lean towards the need for additional tightening, with a 25 bp hike expected at the upcoming meeting (55% probability).

It will be a difficult call to make however. Even if policy rate were to be kept unchanged at the upcoming meeting, markets are now conditioned to believe that any rate pause could be to buy some time to assess the impact of policy tightening, as opposed to a clear end to the hiking cycle. Forward guidance from the central bank will be key in anchoring rate expectations, with any calls for additional tightening likely to be supportive for the Canadian dollar (CAD).