Week Ahead: BoC Could Hike Rates; U.S. Data And Yellen Testimony Eyed

The Bank of Canada could become the first major central bank other than the Federal Reserve to raise rates next week for the first time since at least 2015. The only other important central bank event next week is Fed Chair Janet Yellen’s testimony in Congress. In terms of data, the US will dominate again with key releases that will include CPI and retail sales figures. China will also publish inflation data, while in the UK, the labour market report will come into focus.

Japanese data to start the weekThe economic calendar will kick-off with machinery orders out of Japan on Monday. Month-on-month orders are forecast to rise by 1.7% in May to give an annual growth of 7.7%. It follows a 3.1% m/m drop the prior month. Corporate goods prices will also be watched when released on Tuesday, alongside the revised industrial output numbers for May on Friday. Any disappointing reading will likely be seen as temporary by the markets given the recent evidence of a broadening recovery in Japan. In addition, the weakening outlook for the yen, as the Bank of Japan remains one of few major central banks not to join the hawkish bandwagon, can only further boost the economy.

Steady indicators expected for ChinaInflation and trade data out of China are likely to point to a stable economy. Although recent data has been positive, it hasn’t overwhelmed either as the Chinese economy adjusts to a slower pace of growth. First up will be the consumer and producer price indices on Monday. Annual CPI is forecast to rise by 1.5% in June, unchanged from the prior month, while PPI is also expected to hold steady at 5.5%. Trade data will follow on Thursday, with exports likely to register another strong month in June, at a similar rate to May’s 8.7% growth.

Eurozone industrial output seen accelerating in MayIndustrial production will be the only key release out of the Eurozone next week, due on Wednesday. But before then, the sentix index will be watched on Monday, together with German trade numbers. The sentix index – a gauge of investor sentiment for the euro area – is expected to remain unchanged in July, while industrial output is forecast to improve in May, from 1.4% to 3.6% year-on-year. The data is unlikely to have a major impact on the euro as much of the focus for traders at the moment is the European Central Bank’s next move.

UK unemployment and wage data to be eyedThe main data out of the UK next week will be the labour market release for May on Wednesday. The unemployment rate is expected to hold steady at 4.6% in the three months to May but the details of the report will be scrutinized for any indication of a slowdown in jobs and wage growth. Falling wage growth in the UK has been blamed for the slowdown in consumer spending, as it has coincided with rising inflation, which has squeezed real incomes. Average weekly earnings are expected to ease further in the three months to May from 2.1% to 1.8%. The pound has already come under pressure this week from weak PMI and industrial output figures, and more disappointing data could further weigh on the currency.

Bank of Canada moving closer to raising ratesThe Bank of Canada will come under the spotlight next week as it edges closer to its first rate hike since June 2010. Senior officials from the Bank, including Governor Stephen Poloz, have already signalled to the markets that a rate rise is on the cards but economists and traders are split on the timing. According to a Reuters poll, economists are not expecting a rate hike at the July meeting on Wednesday but the markets have priced in a 25bps increase to 0.75%. Employment data released today reinforced the view that the Canadian economy has picked up a gear, and the sharply rising expectations of a rate increase have pushed the Canadian dollar to a 10-month high versus its US counterpart.

US highlights to include inflation and retail sales, Yellen testimonyThe US will have another relatively busy week in the coming seven days as key inflation, retail sales and industrial output figures are all due, as well as Janet Yellen’s semi-annual testimony in Congress. The latest JOLTS job openings will be the first major data on Tuesday, followed by the June producer prices on Thursday. The bulk of the data will come on Friday though, and will include CPI, retail sales, industrial output and the University of Michigan’s preliminary consumer confidence index. US inflation is expected to rise by 1.7% y/y in June, down from 1.9% previously. Retail sales are forecast to bounce back by 0.2% m/m in June after falling by 0.3% in May.

However, the Fed could overshadow the data once again if Yellen maintains her hawkish stance when she testifies before the House Financial Services Committee on Wednesday and the Senate Banking Committee on Thursday. Yellen will probably stick to her optimistic view of the US economy and will likely be quizzed about the Fed’s balance sheet reduction plan by lawmakers. Any surprise to Yellen’s tone has the potential to move the dollar, although markets appear to be gradually catching up with the Fed’s projections of one more rate hike later this year.

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