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A blockbuster week for central banks

Bloomberg
A blockbuster week for central bank meetings with the Bank of Japan being closely watched for any comments on stimulus changes, while the markets are set for a muted start to the week. Investors are also bracing for a flood of earnings including  tech behemoth Apple and financial giant Berkshire Hathaway. Here are some of the things people in markets are talking about today.

Central Banks Take Center Stage

huge week for central banks and economic data before traders in the northern hemisphere pack up for the August summer vacation. Central bankers in the U.S., Japan, the U.K., Brazil and India all meet to set their respective monetary policies. On Tuesday, despite speculation it could soon flesh out its plan for eventually adjusting stimulus, all 44 economists surveyed predict the Bank of Japan will maintain the current setting on interest rates. In China, a purchasing manager index is expected to show manufacturing expanded at a slower pace again July. There is also a wave of statistics in the euro area.  In the U.S., it’s the end of the review period for potential tariffs on $16 billion of Chinese goods. On Wednesday, U.S. Federal Reserve Chairman Jerome Powell and colleagues meet with all but one analyst predicting no change in rates. By contrast, onlookers are bracing for the Reserve Bank of India to raise its benchmark as emerging market currencies get buffeted. The U.S. Treasury Department delivers details of its bond selling with Wall Street analysts readying for an increase in supply. The Bank of England is expected to raise its key rate to 0.75 percent, the highest since 2009. The first Friday of the month means the U.S. publishes its nonfarm payrolls data. The latest Bloomberg survey points to payrolls rising 193,000 in July and unemployment dipping to 3.9 percent.

BOJ in Focus

There is increasing speculation the Bank of Japan will discuss at its two-day meeting starting Monday reducing investments in exchange traded funds that track the Nikkei 225 Stock Average, the old blue-chip gauge, because its purchases are having an outsized impact on its companies, the Nikkei newspaper reported last week. Instead, it will buy more funds tracking the broader Topix index, it said. The BOJ has sometimes been dubbed the Tokyo whale for its huge influence on the country’s stock market. The central bank aims to spend 6 trillion yen ($54 billion) a year on ETFs as part of its stimulus program and owned 3.8 percent of the Japanese stock market as of May 28, according to estimates by Nomura Holdings Inc. Since last week, there has also been talk that the BOJ also may allow the 10-year bond yield more scope to move beyond zero percent as it tweaks stimulus, though most investors expect no big policy changes at the meeting.

China’s Dollar Love

Chinese companies and banks — and even the government — sold bonds denominated in dollars at a record pace last year, and underwriters expect that growth to continue for years. The roughly half-trillion-dollar market has two key attractions for China’s borrowers. For some, it’s an easier place to raise cash than at home — where regulators are cracking down on leverage. For others, dollars are simply easier to use to fund acquisitions and investments abroad. The upshot: there’s a large and growing supply of dollar securities that offer exposure to Chinese companies for investors wary of diving into the country’s increasingly accessible yuan-denominated domestic debt. Ironically, this comes nine years after China blasted the global financial system’s overreliance on the greenback.

Cautious Start

Equity markets are heading for a soft start to the week’s trading in Asia, with futures indicating small declines in Japan, Hong Kong and Australia. Treasuries nudged higher Friday, when U.S. equities and the dollar retreated as second-quarter U.S. gross domestic product narrowly missed estimates on Friday, despite growing at the fastest pace since 2014. Two themes will likely dominate this week, with a slew of earnings and central bank policy decisions coming up.

U.S. Growth Debated

The second-quarter surge shows the U.S. economy is “well on the path” for four or five years of sustained annual growth of 3 percent, said Treasury Secretary Steven Mnuchin — a rosy outlook at odds with that of many economists as well as the U.S. central bank. The U.S. economy accelerated in the second quarter to the fastest pace since 2014, the government reported on Friday, allowing U.S. President Donald Trump to link the increase with his economic policies. The second quarter may prove as good as it gets for the world’s largest economy, though, and few economists expect it to attain the president’s goal of sustained growth of 3 percent. The U.S. expansion, which dates back some nine years, is set to weaken as the impulse from the 2017 tax cuts fades, businesses retrench in the face of foreign tariffs or a strong dollar, and the Federal Reserve raises interest rates further.

What we’ve been reading

This is what’s caught our eye over the last 24 hours.

And finally, here’s what David’s interested in this morning

The week ahead is an exciting one for earnings. In the U.S., about 50 percent of the S&P 500 has already reported. By Friday that goes up to 80 percent. It’s been a blowout quarter so far, with about 90 percent of companies beating earnings estimates. Yes, the tax-savings boost is a factor. But even if you strip that out, the top line has also been great, with about three quarters also topping revenue projections. Plus the sample across most major industry groups is large enough that the probability of big variations at this point is relatively small.

In Europe, we’re also about halfway through reporting on the STOXX 600. Things are more “normal” there: just 60 percent of companies have beaten on sales and about half have reported positive earnings surprises. What’s notable for Europe is that sectors with bad results — like health care and real estate — have seen positive stock price reactions, while those with good results like materials and consumer staples have been punished by the market on the first day post-earnings. In Asia, Japan’s still the one to watch (China doesn’t get busy for a few more weeks; reporting is just starting in Australia). In Tokyo, half of companies will have reported by Friday. It’s more balanced now than at the start of last week, when a positive surprise was the exception. Bloomberg data currently indicates analysts expect 2018 profit growth of 6 percent in Japan, 10 percent in Europe and a crazy 30 percent in the U.S. — which pretty much helps explain market divergence.

 

 

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