BOE and SNB rate hikes, potential rate cut from PBOC, preliminary PMI data from the Eurozone and the UK as well as Fed Chairman Powell testify in front of the Senate on Thursday will highlight the week ahead of us.
USD
US CPI data for the month of May dropped to 4% y/y from 4.9% y/y in April with a 0.1% m/m increase. Yearly headline number has been declining for eleven straight months. Shelter was again the biggest contributor to inflation (0.6% m/m) followed by index for used cars. The food index also contributed positively to the reading with food price index increasing 0.2% m/m. The biggest drop down was seen in the energy components. Core inflation came in at 5.3% y/y from 5.5% in April. Core services ex-shelter, the metric closely watched by Fed, has increased 0.1% m/m which is well in line with 2% target.
Fed paused as was widely expected and left the rate in the range of 5-5.25%. This is the first meeting that there was no change in the rate after ten consecutive ones that saw rate hikes. Accompanying dot plot showed members expecting rate to be at 5.6% vs 5.1% in March which will imply at least two more rate hikes. Additionally, no members see rate cuts in 2023 and high for rates in 2024 is seen at 4.6% vs 4.3% in March indicating that rates will stay higher for longer. The reason for more rate hikes can be found in the Summery of Economic Projections (SEP) which show GDP will be much stronger in Q4 (1% vs 0.4% as previously forecasted). SEP also shows that the unemployment rate will be lower than thought (4.1% vs 4.5% in March). The hawkish stance was confirmed by Chairman Powell in the press conference and that opens the door for a July hike.
Retail sales in May 0.3% m/m vs -0.1% m/m as expected. Control group, the one used to calculate the GDP, came in at 0.2% m/m as expected. When we exclude autos retail sales rose by 0.1% m/m as expected. Overall, the reading is a positive one, but still the numbers show that consumer is feeling the burden of high inflation and is adjusting its own purchases accordingly. In nominal terms sales are up 1.6% y/y and when we take inflation into the account, real retail sales are deeply negative.
The yield on a 10y Treasury started the week and year at around 3.75%, rose to 3.85% post FOMC and finished the week at around the 3.77% level. The yield on 2y Treasury reached around 4.8% after the FOMC meeting. Spread between 2y and 10y Treasuries started the week at -86bp then widened to -97bp. FedWatchTool sees the probability of a 25bp hike at 77% while probability of no change in July is at 23%.
EUR
German ZEW June survey was mixed. Current situation fell to -56.5 from -34.8 while expectations component improved to -8.5 from -10.7. It is the first improvement in four months. Industrial production for the Eurozone in the month of April improved by 1% m/m vs 0.8% m/m as expected. Q2 has started with a small bounceback but we have to remember that March reading was a very bad on. The data still shows underlying issues as new orders continue to be weak.
ECB has raised rates by 25bp as was widely expected and brought the deposit rate to 3.5%. Inflation has been coming down but it is projected that it will remain too high for too long. Inflation is seen averaging 5.4% in 2023, 3% in 2024 and 2.2% in 2025. Projections for core inflation has been revised up and are now at 5.1% in 2023, 3% in 2024 and 2.3% in 2025. GDP has been revised down to 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025. The Governing Council is committed to bring inflation down to 2% and will continue to follow a data-dependent approach. Bundesbank has come with its own projections and they see German economy shrinking by 0.3% in 2023 and then to expand by 1.2% in 2024 and 1.3% in 2025. Inflation risks are seen tilted to the upside and current projections are for inflation to be at 6% in 2023, 3.1% in 2024 and 2.7% in 2025.
ECB President Lagarde started the press conference by acknowledging that the economy of Eurozone stagnated in recent months, as was seen by GDP data. She emphasized that data-dependent approach is the way to go further. Wages are increasing and are now seen as the important component of inflation. She explicitly said that ECB is not done with rate hikes, there is no thinking about pausing and if there is no material change in data rate hike in July will occur. Analysts are now putting terminal rate at 4% and see hikes in July and September.
This week we will have preliminary June PMI data.
Important news for EUR:
Friday:
S&P Global Manufacturing PMI (Eurozone, Germany, France)
S&P Global Services PMI (Eurozone, Germany, France)
S&P Global Composite PMI (Eurozone, Germany, France)
GBP
May Employment report was a scorching hot one. Payroll change showed adding of 23k jobs. Previous month’s number was revised from loss of 135k jobs to gain of 7k jobs. April unemployment rate has ticked down to 3.8% from 3.9% while expectations were for it to tick up to 4%. Employment change in previous three months amounted to 250k jobs added. Claimant count change was -13.6k and previous month;s reading was revised down. On the wages side number were even more hot with average weekly earnings coming at 6.5% 3m/y, up from upwardly revised 6.1% 3m/y in April. Ex bonus category jumped to 7.2% 3m/y from upwardly revised 6.8% 3m/y the previous month. Due to high inflation real wage growth is still negative but it is trending up. The report overall, particularly wages, screams rate hike next week. BOE policy member Haskel, a hawk, stressed the importance of keeping inflation expectations anchored and added that further rate hikes cannot be ruled out.
This week we will have inflation and preliminary June PMI data as well as BOE meeting. A 25bp rate hike is consensus with around 25% of a 50bp rate hike.
Important news for GBP:
Wednesday:
CPI
Thursday:
BOE Interest Rate Decision
Friday:
S&P Global Manufacturing PMI
S&P Global Services PMI
S&P Global Composite PMI
AUD
After a lackluster April employment report, May report came in with a bang. Employment change saw 75.9k jobs added vs 15k as expected. The unemployment rate ticked down to 3.6% while participation rate reached record high level of 66.9%. Rounding up stellar jobs report was the fact that 61.7k jobs added were full-time with other 14.2k being part-time. Labour market is getting tighter and with high inflation running RBA may be forced to continue hiking rates. In any case, chances of another rate hike have increased.
PBOC has cut 7 day reverse repo rate to 1.9% from 2%. This is intended to release liquidity into the system and thus stimulate economic growth. Later in the week they have decided to cut 1-year MLF also by 10bp bringing it to 2.65% from 2.75%. MLF rate is used when banks borrow funds from the central bank. A 1-year rate refers to transactions with duration of 6 months to 1 year. Activity data from China in May disappointed. Industrial production came in at 3.5% y/y, down from 5.6% y/y in April while retail sales came in at 12.7% y/y vs 13.6% y/y as expected and down from 18.4% y/y the previous month. High retail sales numbers are distorted due to base effects from last year’s lockwodns. Incoming weak data was the main reason for rate cuts and looser monetary policy.
This week we may see continuation of rate hikes from China with a cut to Loan Prime Rates (1y and 5y).
Important news for AUD:
Tuesday:
Loan Prime Rate (China)
NZD
Electronic retail card sales, constitutes about 70 of total retail sales, fell in May by 1.7% m/m while expectations were for an increase of 0.3% m/m. April reading was revised down to 0.4% m/m from 0.7% m/m. Consumption appears to be a drag on Q2 GDP. Q1 GDP came in at -0.1% q/q and 2.2% y/y. Considering that Q4 was at -0.7% q/q it signals that New Zealand economy entered a technical recession, two consecutive quarters of negative growth. Services industry contracted by 0.6% with net exports contracting 2.5% while household consumption expenditure contributed positively with 2.4%.
CAD
Housing starts in May came in at 202.5k vs 235k as expected and down from 261.4k in April. Existing homes sales also rose in May, A healthy migration is keeping demand for housing up despite higher mortgage costs. CAD took advantage of weak USD and JPY and gained against them, but it was weaker against other major currencies.
JPY
BOJ meeting was another snooze fest as there were no changes to monetary policy or the targeted band of Yield Curve Control (YCC). The rate is still at -0.1%, the only country with negative interest rates and YCC band is +/-50bp around 0%. BOJ stated that economy is picking up as a whore and that it is likely to continue improving moderately. They see core inflation growth slowing towards the middle of the current fiscal year, meaning towards the end of Q3 and start of Q4. JPY has been battered whole week with GBPJPY as the biggest mover gaining around 3.5% (around 700 pips).
CHF
SNB total sight deposits for the week ending June 9 came in at CHF509.8bn vs CHF519bn the previous week. After couple of weeks of increases in sight deposits they are now continuing their longer term downward trajectory as SNB continues to strengthen Swissy in order to stabilize inflation.
This week we will have SNB meeting where a rate hike is guaranteed but markets are still unsure whether it will be a 25bp or a 50bp rate hike.
Important news for CHF:
Thursday:
SNB Interest Rate Decision
