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Dovish wave reaches EMs; Chinese GDP; earnings season on Wall Street


Central banks in emerging markets adopt increasingly dovish biases and policies, China reports GDP growth and Q2 earnings season kicks off in the US. 


On Wall Street, earnings season gets underway. Consensus estimates expect second-quarter earnings to be 2.6% lower than the year before, the worst result in three years. This would also be the first time since 2016 that the overall earnings growth of Russell 1000 companies has been negative in two consecutive quarters. While accommodative monetary policy has supported equity markets, disappointing earnings or negative guidance could cause volatility. Elsewhere, China reports economic output in Q2. GDP growth is expected to decline to 6.2% year-on-year, down from 6.4% in the first quarter. This is consistent with the official 2019 target of 6-6.5%, and compares with actual growth of 6.6% last year. Hard economic data softened in April and May and surveys suggest that this downwards trajectory continued in June – the Caixin composite Purchasing Managers’ Index (PMI) fell from 51.5 to 50.6 in June (a reading below 50 indicates that activity is contracting). The manufacturing sector was behind this: the Caixin manufacturing PMI fell into contractionary territory with a reading of 49.4. China also releases a raft of monthly indicators for June. Industrial production should expand by 5.2% year-on-year, up from 5% the month before, while fixed-asset-investment growth should stay the same at 5.6% year-on-year. Finally, retail-sales growth should fall slightly to 8.5% year-on-year, down from 8.6% the month before. Meanwhile, New Zealand releases inflation figures. Consumer-price inflation (CPI) is expected to rise to 1.7% in the second quarter, up from 1.5% in the first three months of the year. It looks set to remain well below the Reserve Bank of New Zealand’s 2% target. This, along with other indicators showing sluggish economic activity, will continue to justify the central bank’s dovish bias.

The UK reports on the health of its labour market in May. Employment growth in April was weaker than in the first quarter, but overall the picture was positive. The unemployment rate remained unchanged at 3.8% in April – the lowest since 1974 – and is unlikely to have changed much in May. Wage inflation has also been above 3% since last September (on measures that include and exclude bonuses). While labour-market surveys have been mixed, on balance they suggest there will be some moderation in employment growth going forward. Across the Channel, the eurozone releases data on trade activity in May. The bloc is still running a positive trade balance, but the surplus has shrunk in recent months – it was €15.3bn in April, compared to a monthly average of €16.2bn last year and €20bn in 2017. Elsewhere, the US will report retail sales. Consensus estimates expect core control retail sales (a direct input for the consumption of goods in GDP) to rise by 0.3% month-on-month in June, slightly lower than the 0.4% growth recorded the month before. This suggests there will be annualised growth of 5.7% in Q2, up from 4.1% in the first three months of the year. The fundamentals underpinning consumption are still solid (particularly the labour market). This means that consumption should make a decent contribution to growth in the second quarter. Separately, US industrial production is expected to rise by 0.1% month-on-month in June, following a 0.4% gain in May. Manufacturing output is also expected to increase by 0.2% month-on-month, unchanged from the month before. But surveys suggest that manufacturing activity has been trending downwards: both the Markit and ISM PMIs have fallen sharply in recent months, reflecting trade-related uncertainty and slow external demand. Both indexes suggest that the US manufacturing sector is stagnating. In Argentina, CPI is likely to remain at elevated levels in June, a reflection of the peso’s 20% depreciation against the dollar in the first half of the year. In May, inflation increased to 57.3%, up from 55.8% the month before. In the US, the president of the Atlanta Federal Reserve, Raphael Bostic, will moderate the ‘Fed Listens’ event in Augusta, Georgia. These events are part of the Federal Reserve’s (Fed's) ongoing review of its strategy and tools and are an attempt to involve the public through town-hall style consultations. The review could result in a strategy adjustment, which would be announced in the first half of next year. Meanwhile, Mark Carney, the Governor of the Bank of England, will be a panellist at an event in Paris that marks the 75th anniversary of the Bretton Woods conference.

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In Canada, all eyes will be on whether the consumer-price index will continue the gains it made in May. The average of the Bank of Canada’s three preferred measures of core inflation rose to 2.1% in May, up from 1.9% the month before. The UK also releases inflation data. Consumer-price inflation was 2% in May and is likely to be little changed at 1.9-2% in June. Similarly, core inflation was probably also much the same at about 1.7-1.8% (from 1.7% in May). Energy prices will exert downward pressure on inflation this month – the value of gasoline declined by 0.5%, reflecting developments in international oil prices.

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Japan releases trade data. Exports have shrunk this year, reflecting trade-related uncertainties and weaker external demand. The rate of decline is likely to improve slightly in June: consensus estimates expect a 5.1% contraction year-on-year, compared to a 7.8% decline in May. Three central banks – South Korea, Indonesia and South Africa – meet and are expected to either hint at imminent easing or cut rates outright. In other words, the dovish wave that has emanated from the Fed is now spreading more vigorously to emerging markets. Concerns about global trade, weak external demand and relatively contained inflation – all recurring themes – will justify this accommodative stance. In South Korea, it will be a close call – consensus estimates are split on whether the central bank will keep rates unchanged at 1.75% or cut them by 25bps. Minutes from the May meeting suggest division: a cautious majority of five members of the policy committee endorsed keeping rates unchanged, while two members argued for easing. Since then, economic data and surveys have pointed to sluggish activity, particularly in manufacturing and exports. The fact that Japan recently announced that it is restricting technology exports to Korea will only add to the persistent uncertainty stemming from the ongoing US-China trade spat. At a minimum, the Bank of Korea should revise its growth forecasts down, paving the way for monetary-policy easing in following meetings. Indonesia’s monetary-policy meeting is more likely to result in easing and the central bank will probably cut interest rates by 25bps to 5.75%. Finally, the South African Reserve Bank will probably slash rates by 25bps to 6.5%. Both hard economic data and surveys indicate that growth was subdued in the second quarter, while inflation was well within the 3-6% target range – headline CPI was 4.5% in May, while core CPI was 4.1%. In the US, New York Federal Reserve President John Williams will give a keynote address on monetary policy at the annual meeting of the Central Bank Research Association in New York.

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In Japan, core inflation (excluding energy and fresh food) is likely to be unchanged at 0.5% in June. There has been only modest improvement in price inflation this year – the core measure averaged 0.4% throughout 2018 and 0.5% in the first five months of this year. In the US, the University of Michigan will release its consumer sentiment survey. The government shutdown meant that consumer confidence suffered a temporary setback in the first three months of the year. It has since recovered and is running at historically elevated levels. The index should rise to 98.4 in June, up from 98.2 the month before – this reflects a solid labour market and the recent strong performance of equity indices. The survey will also shed light on long-term inflation expectations, which were the lowest on record in June, coming in at 2.3%. Muted inflation expectations have contributed to the Fed’s dovish turn over the past six months.


Market-based inflation expectations have fallen in the US and eurozone 

Source: Bloomberg, as at July 2019.

Across the world, major central banks have taken a dovish turn. The rise of protectionist threats and weak global economic activity – two factors that are mostly likely linked – were the main triggers for this. In addition, both surveys and market-based measures suggest that long-term inflation expectations have fallen since early this year – a phenomenon we highlighted in our February issue of Ahead of the curve. The decline has been particularly pronounced in the US and eurozone. Recent communication from the Fed – including its twice-yearly testimony to the US Congress last week – points to a rate cut (probably of 25bps) at its next meeting on 31 July. The European Central Bank is also preparing the ground for additional easing in coming months.


The impact of globalisation on price formation, the question of which people benefit from low interest rates and the ability of the newly elected European Union (EU) leaders to tackle a downturn are among the interesting reads you may have missed.

Has globalisation changed the inflation process?

Kristin Forbes of the Massachusetts Institute of Technology finds that factors affecting global supply chains – commodity prices, the output gap, exchange rates and the distribution of producer prices – can significantly affect inflation, even after controlling for standard domestic variables. Over the past decade these factors have become increasingly relevant in explaining CPI rates.

Should egalitarians fear low interest rates?

The Economist questions perceived wisdom about which people benefit from interest-rate cuts. Some on the left think that only asset-owners profit when there is monetary stimulus, while others argue that it helps the poor by staving off unemployment. A recent paper shows the reality is more complicated.

A pragmatic new European leadership team could supply tools to face the next downturn

The Petersen Institute for International Economics looks at how the EU could respond to a downturn, arguing that it may have to take an Abenomics-style ‘three arrows’ approach that coordinates monetary easing, fiscal stimulus and structural reforms. It thinks that the newly elected EU leaders should be able to rise to the challenge.

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