Low Rates, Yet No Inflation: Global Week Ahead

For the Global Week Ahead, the newsroom Reuters produced five big themes likely to dominate the thinking of investors and traders.

Be mostly concerned about how to solve this riddle: Rates are at record lows. Why no consumer price inflation?

(1) CONSUMER INFLATION STAYS ELUSIVE

Inflation remains elusive in both the United States and the Eurozone, complicating efforts to normalize monetary policy after years of extraordinary stimulus.

U.S. inflation will get another reading on Thursday, Sept. 14th. A Reuter’s poll of economists forecast prices in August rose +0.3%. Stripping out the volatile food and energy components, core CPI is expected to rise +1.6% in the 12 months through August, still well below the U.S. Fed’s +2.0% target.

(2) THE BANK OF ENGLAND MEETS – WEAKER POUND IN PLAY

While the European Central Bank (ECB) struggles with low inflation and a strong currency that exacerbates the problem, the Bank of England (BoE), which meets in the coming week, faces the opposite scenario — above-target consumer inflation and a U.K. pound that some see falling to parity with the euro.

Traders cite the possibility BoE policymakers might express concern about the weak pound’s impact on inflation. Analysts place a one in four chance the pound sterling will reach parity with the euro in the next year.

(3) BANKS WANT HIGHER RATES – ECB HIKES WON’T HAPPEN

If anyone needs a “normalization” of monetary policy, it’s the banks. Earlier this year, as an improving global economy brought the prospect of steadily rising interest rates, investors scooped up bank shares in a big bet on recovery.
Yet as ECB President Mario Draghi made clear after last week’s policy meeting, rate hikes, which have a major impact on lenders’ revenue and profits, remain a distant prospect in the Eurozone.

An index of bank stocks has underperformed the wider market. Not that everyone is giving up on banks. With Eurozone growth picking up so, eventually, must interest rates.

(4) CHINA‘S YUAN – NEW SAFE HAVEN

Is the Yuan’s sudden surge driven by a bid for safe havens against North Korea’s nuclear threats? Or has the market taken on board the People’s Bank of China’s desire to root out depreciation expectations?

The Yuan currency had its best monthly gains ever in August and has wiped out all of the 6.5% losses it suffered against the dollar in 2016. Its rise immediately after North Korea’s sixth nuclear test on Sept. 3 was two standard deviations more than average daily moves in the past year, far outpacing the gains seen in the yen and gold.

FX reserves rose $11 billion in August, suggesting the People’s Bank of China (PBOC) might have reined in the currency through some form of intervention. But it can’t do more without giving Washington the ammunition to complain about currency manipulation.

(5) RUSSIA MAY CUT RATES… TO MATCH BRAZIL

Russia’s central bank will ponder a cut in its key rate to as low as 8.5% when policymakers meet on Friday, according to a senior official. The bank has already flagged that rate cuts are on the cards.

Brazil’s 100 basis point rate cut last Wednesday ramped up the pressure, leaving Russia in the top spot for the highest forward-looking real interest rate among major emerging market economies.

Top Zacks #1 Rank (STRONG BUY) Stocks--

Sony Corp (NYSE:SNE) : This is Japan’s electronics giant. The market cap is $50 billion and the stock prices just under $40 a share, after a good recent run. The Zacks long-term VGM score is B, with an A for Value. That means there may be more momentum in store here.

HSBC Holdings (NYSE:HSBC) : This is an enormous European banking group, with a $192 billion in market capitalization. The long-term Zacks VGM score is B. The shares have moved up from $40 to $48 this year.

Tencent Holdings (OTC:TCEHY) : This is an enormous $387 billion in market cap Chinese company now. But the long-term Zacks VGM score is B with a Growth score of A -- but a Value score of D. Big China Tech stocks have been steamrollers. Yet, there may be sufficient earnings upside ahead, given the high Growth score.

Key Global Macro—

Don’t lose sight of the quiet, ongoing NAFTA negotiations.
Also, keep a lookout on moves in advance of Mainland China’s 19th National Congress. This will commence in Beijing on October 18th and is held every five years.

Closer in, a Bank of England policy meeting wraps this Thursday. It will be the most watched event in Europe this week.

On Monday, India’s exports came in higher than forecast at +6% y/y, vs. a prior reading of +3.9%. Also, Imports came in higher at +17%W y/y, vs. +15.4%.

Malaysia’s industrial production came in higher also, at +6.1% y/y vs. +4.0%.

Turkey’s GDP landed at +5.1% y/y. That sounds good, given the political turmoil.

In comparison, Italy’s industrial production was up +4.3% y/y.

On Tuesday, Argentina’s 7-day repo rate should remain at 26.25%.

The U.K.’s CPI is running hot at +2.6% y/y.

The U.S. NFIB small business optimism index stands at 105.2. We get a fresh reading.

Brazil’s broad retail sales are forecast to be +2.8% y/y, down slightly from +3.0% prior.

South Korea’s unemployment rate is 3.6%.

On Wednesday, the U.K.’s ILO unemployment rate will come in. The last had 4.4%.

Germany’s key HICP inflation rate came in at +1.8% y/y before. We get a fresh reading.

The Swiss National Bank (SNB) gives us a Monetary Policy Assessment.

On Thursday, there is a U.K. Bank of England (BoE) monetary policy meeting and rate decision. The bank rate is at 0.25%. Stuck there since Brexit.

A proxy GDP growth rate (IBR) in Brazil comes out. It is at -0.56% y/y. It could get to +0.8% y/y. That spells the end of recession there.

U.S. initial claims look strong at 298K.

On Friday, the unemployment rate for Turkey comes out. It is high at 10.2%.

There is a Eurogroup meeting.

Russia sets its key monetary policy rate. It is at 9.0%.

Unemployment in Iceland is 3.4%.

The U.S. University of Michigan consumer sentiment survey comes out. It was 98.6.