Why today may be one of the most interesting days for markets this quarter

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  • Luke Kawa and Sid Verma

A day expected to affirm the US consumer’s strength could also begin with a step into uncharted unconventional policy by Japan, the nation whose demographic trends may serve as an early warning signal of what awaits other advanced economies.

Friday “could be among the most challenging sessions of the third quarter” for global markets, writes Marc Chandler, head of currency strategy at Brown Brothers Harriman & Co. “The focus is primarily on Japan and Europe, but the US reports its first estimate of second-quarter GDP.”

Trader James Dresch on the floor of the New York Stock Exchange this week. He and his peers face a raft of potentially ... Trader James Dresch on the floor of the New York Stock Exchange this week. He and his peers face a raft of potentially big market-movers today. Photo: Richard Drew

It’s one of those rare days where the world’s biggest economies will all be in the spotlight. Investors will have a lot on their plates to digest, with a Bank of Japan meeting, the results of stress tests on European banks, as well as new growth figures for the euro area and North America all scheduled to be released.

Analysts at HSBC Holdings, citing “high” expectations for the Bank of Japan meeting, outlined three scenarios in a report on Thursday: disappointment (causing a sharp weakening in the yen relative to the US dollar in the short-term), greater monetary stimulus (a strong yen in the short-term) and helicopter money.

The analysts write: “For the first two scenarios we would expect the medium term impact on [exchange rates] to be limited, although the short-term reaction would likely be different”. Only helicopter money – printing more money – would deliver a weaker yen in the medium-term, they say.

“We still expect the BoJ to cut rates and increase the pace of asset buying modestly,” Societe Generale analysts write, adding that markets would be “disappointed” if Japan’s central bank withheld its monetary firepower.

Japan’s economic recovery is at risk as a slowdown in overseas demand and the yen’s surge this year are making the nation’s products less attractive overseas and hurting the earnings of exporters.

Bank stress tests

Capping off a big week for the global economy – following the Federal Reserve and BoJ meeting – the European Banking Authority will announce the results of its stress tests on Friday evening, 9pm London time (6am Sydney time), which is expected to shed light on non-performing loans at Italian lenders.

Separately, annual headline inflation in the euro zone for June is expected to tick into positive territory for the first time since January, notes Brown Brothers Harriman & Co.’s Chandler, and the first estimate of second-quarter GDP growth for the euro area is also due out. The rate of expansion is expected to moderate to 0.3 per cent quarter-over-quarter from 0.6 per cent in the first three months of the year.

The US consumer is poised to post its best rate of growth in over a decade, but data released on Wednesday give cause to temper expectations on how much headline growth will accelerate.

Following the release of the Census Bureau’s advance economic indicators report, the Atlanta Fed GDPNow forecast for second-quarter growth tumbled by half a percentage point to 1.8 per cent. The consensus estimate among economists surveyed by Bloomberg is for annualised quarter-over-quarter growth of 2.6 per cent.

While the initial print has been subject to heavy revisions, it’s the release that tends to move markets the most.

Meanwhile, America’s neighbour to the north is slated to report GDP growth for the month of May, with analysts expecting Canada’s economy to show a monthly contraction of 0.5 per cent as wildfires began to wreak havoc in oil-producing regions of Alberta.