All week U.S. President Donald Trump teased the market with the possibility of big changes in the relationship between the U.S. and Hong Kong/China, but to everyone’s relief, his press conference revealed nothing exceptionally damaging. Trump said the U.S. will be terminating its relationship with the World Health Organization, which was widely expected. There was no mention of tariffs of the Phase 1 trade deal. He said the travel relationship for Hong Kong would be changed and they would review Hong Kong’s special policy exemptions. Currencies and equities rallied in relief. U.S. data was weak with personal spending falling 13.6% in the month of April and the trade deficit widening to -$69.7 billion from -$65 billion. Personal incomes rose 10% thanks to jobless benefits, but that clearly did not translate into spending. Federal Reserve Chairman Jerome Powell also spoke today and he reiterated that its not clear negative rates are appropriate for the U.S. and they are not close to any balance sheet limits.
The excitement continues next week with a very busy economic calendar. There are three central bank rate decisions, U.S. nonfarm payrolls, major data from Australia and Canada’s labor market report scheduled for release. Nonfarm payrolls is the big number, but it's not due until Friday and is not expected to have any major impact on monetary policy. Job losses are expected to ease, but if they remain significantly elevated and miss expectations, talk of negative rates will return but the central bank is resistant. For the most part, ISMs and NFPs should confirm the slow recovery.
At the start of the week, the Australian dollar will be the main focus with manufacturing PMIs due Monday local time followed by the Reserve Bank of Australia’s policy announcement on Tuesday, Q1 GDP on Wednesday and then retail sales and the trade balance on Thursday. When the RBA met in May, the Australian dollar rallied despite the central bank’s commitment to doing what is necessary to support jobs, incomes and businesses, including scaling up bond purchases. In its quarterly statement on monetary policy, the central bank said it expects the economy to contract 6% this year and the jobless rate to soar to 9% as many jobs lost become permanent. Although the economy is reopening broadly with dine-in options, children looking forward to returning to schools, gyms, libraries and galleries reopening the doors, China’s troubles with the U.S. and Australia’s troubles with China presents new problems for the Australian economy. The Chinese government confirmed that barley tariffs are related to its trade investigations and its press for investigation into coronavirus origins. Australian data could be better with the economy reopening, but the RBA’s outlook should be the main driver of A$ flows.
While there’s plenty of event risk on Australia’s calendar, we may see bigger moves in the euro because the European Central Bank will release its latest economic projections and use it as justification to increase bond purchases. We heard from a number of European policy-makers this week who all seem to suggest that more easing is on the way. This includes ECB President Christine Lagarde, who said this morning that its very likely the ECB’s “mild scenario is out of date” and the economy is likely between the central bank’s “medium to severe scenarios,” which means GDP could fall between 8%-12% in 2020. They are preparing their economic projections now and will release it at next week’s policy meeting. ECB's Isabel Schnabel was more blunt, saying they are ready to expand tools to achieve their mandate. ECB vice-president Luis de Guindos said the central bank is totally open to recalibrating its stimulus program, while Chief Economist Philip Lane says the economic shock requires expansionary fiscal and monetary policies. This degree of uniformity almost guarantees a dovish outlook and more easing that could put a halt to the euro’s rally.
Like the RBA, the Bank of Canada is not expected to increase stimulus because this meeting will be the last for Governor Stephen Poloz, who will be succeeded by Tiff Macklem the day after. Any additional changes will be left to his successor. For what its worth, Poloz remains dovish and sees inflation reaching the central bank's target more slowly. Monthly GDP fell sharply in April with growth contracting 7.2%. However, on a quarterly basis, the economy contracted only 8.2% against a 10% forecast. The last time the BoC met was in April, when it cut its GDP forecasts and unveiled new money market operations as it described the current downturn to be the sharpest on record. Canada’s labor market numbers could have a bigger impact on the loonie than the BoC. More job losses are expected but less than the previous month, when job losses hit a record high. USD/CAD fell to a two-month low on Friday but could find some support in the week ahead.