Key Events

Monday: UK Market Holiday, German Ifo Survey

Tuesday: US Trade Balance

Wednesday: French GDP, US GDP (2nd Reading), US Pending Home Sales

Thursday: German Labour Market, German CPI (Prelim), US PCE, Canadian GDP (Quarterly)

Friday: Japan Labour Market, Tokyo CPI, China PMI, EZ CPI (Prelim)

TRADE

The US trade war continues to be fought on a number of fronts. On one side, NAFTA negotiations appear to be reaching a climax with bilateral talks between the US and Mexico progressing. However, Canada have been noticeably absent from latest discussions and the Canadian Foreign Minister Freeland has said that any updated deal would need to be agreed by Canada. US President Trump has the mandate to renegotiate the free trade agreement but a bilateral trade deal between Mexico and the US would need separate Congressional approval. Officials from Mexico are expected to remain in Washington in the coming week - with hopes that Canada will re-join talks - to meet the “soft” deadline of the end of August for a deal to be reached. 

On the China side, negotiations are not so positive. Discussions on Wednesday and Thursday between officials were a step forward but the comments following talks showed that there is still a way to go before any conclusion and the next set of tariffs look as though they will be enacted in the coming weeks. China’s MOFCOM said trade discussions last week were “constructive and candid” and that the two sides will keep in touch on next steps. However, there were no concrete proposals and no visible sign of progress. The Chinese Foreign Ministry later said that they will keep retaliating if the US keeps imposing “unreasonable” trade measures.

EUROZONE DATA

Eurostat will release inflation figures on Friday, with headline inflation expected to remain at 2.1% Y/Y and core at 1.3%, suggesting that energy prices are the dominant force driving price changes. “With pump prices continuing to rise sharply year-on-year in August, and the European driving season in full swing thanks to the summer holidays, energy should continue to make a sizeable upward contribution this month,” writes RBC. The unemployment rate is also announced on Friday and expectations are for a fall to 8.2% in July, a level not seen since 2009. Whether that translates into firmer wage growth will be key for the ECB going forward. “Latest ECB data showed the rate of growth of negotiated wages settlements running at 2.2% y/y in Q2; for 2017 as a whole negotiated wages had posted an increase of 1.5% y/y,” said RBC, “With negotiated pay settlements a good lead indicator for whole economy pay growth, that suggests that euro area wage inflation is poised to pick-up further from Q1’s 1.8% y/y.”

GDP

Both Canada and the US announces GDP figures during the week, with Canada’s growth figures likely to gain more attention than US given the speculation of a potential Canadian rate hike next month. At the time of writing, the market pricing for the Bank of Canada’s September decision is roughly 50-50 for whether they hike rates or delay a move until later in the year. Expectations are for GDP to have grown 3.0% Q/Q annualised in Q2, up from 1.3% in Q1. In their July monetary policy report, the Bank of Canada forecast 2.8% so a number above forecast would only strengthen expectations of an interest rate increase in September. Growth this quarter is expected to be driven by trade with RBC expecting net exports to add 2ppts to growth, after three consecutive detractions.

The second reading of US GDP growth is expected to see a small downward revision to 4.0%. The initial reading saw GDP grow 4.1%, its fasted pace of growth in almost 4 years, boosted by strong consumer and business spending. However, many have cautioned that the growth was caused by one off factors - such as Trump’s tax reform – and that the boost to growth will begin to wane. Separately, farmers increased their exports of soybeans and other agricultural products to China ahead of the tariffs that China was introducing on US goods in July. Nevertheless, Trump welcomed the strong growth, as did many Fed officials, who have cited fiscal policy as a potential tailwind for growth going forward. For Q3, the Atlanta Fed GDPNow model stands at 4.3% but data thus far in August has disappointed to the downside. David Rosenberg, Chief Economist and Strategist at Gluskin Sheff, noted that of 22 economic indicators released in August, 14 have missed expectations, 5 beat and 3 in-line.