Key Events: –
Tuesday: UK Inflation Data (May)
Wednesday: US FOMC MonPol Decision, US CPI (May), US Retail Sales (May), UK Labour Market Report (Apr/May), New Zealand GDP (Q1)
Thursday: BoE MonPol Decision, SNB MonPol Decision, UK Retail Sales (May), Australian Labour Market Report (May)
Friday: BoJ MonPol Decision, Eurozone CPI (May, F)
North America: –
The Federal Open Market Committee (FOMC) is set to issue its latest monetary policy decision on Wednesday, with CME Fed Fund Futures fully pricing a 25bps hike in, which would leave the target rang at 1.00-1.25%. The Fed will also issue a fresh round of economic projections on Wednesday (previous forecasts available here). In the March forecasts, the FOMC was projecting three 25bps in total in 2017, while markets only attribute a circa 50% chance to that outcome at present. The minutes from the Fed’s most recent decision noted that the Q1 slowdown was transitory, however, the Committee noted that it was prudent to wait for further evidence that the weak string of recent data was transitory before taking the next leg up on its hiking cycle. The Fed did highlight that “risks to the forecast for real GDP were seen as tilted to the downside,” while the central bank noted that it sees possible upside risks from President Trump’s proposed expansionary fiscal policy, although there is a high degree of uncertainty around the detail.
A closer inspection of the minutes also shows that “a couple of participants indicated that increasing the target range for the federal funds rate at the current meeting would be warranted by their economic outlook, but they also noted that maintaining the state of current policy for now would be consistent with the Committee’s gradual approach.”
This alludes to growing divisions amongst voting members, with Philadelphia Fed President Patrick Harker and perhaps Dallas Fed president Robert Kaplan the two most likely candidates to voice their hawkish view. Minneapolis Fed president Neel Kashkari has continued to strike a dovish tone (recall, he was the sole dissenter when the FOMC hiked rates in March), using a recent speech to suggest that the recent pull-back in inflation was worrying; he also stressed that he needed to see more data before deciding on a June hike.
In terms of balance sheet normalisation, the last meeting saw the FOMC note that it discussed a staff paper proposing that the balance sheet roll-off should begin at a “low” pace, increased gradually every three months, circumstances permitting, until a pre-determined maximum pace is reached. So once again the Fed offered little detail on the most pertinent subject matter. It did highlight that “nearly all” members were happy with this approach, and agreed it should start this year.
US CPI data for May will hit on Wednesday. The headline is expected to rise by 2.2% Y/Y from 1.9%, and the core seen at 1.9% Y/Y from 1.8%. Commerzbank suggest that “the drop in gasoline prices will no doubt check inflation in May. The main driver of inflation is rent. Apart from this element, inflationary pressure has eased considerably. However, the price pressure that is on the way at the producer price level is a signal that consumer prices are set to pick up speed again soon as in 2015, when the gap between producer prices and consumer prices was about as wide as it is now.”
Wednesday also sees the release of US Retail Sales data for May. The headline is expected to rise by 0.1% M/M after it fell by 0.1% last time out.
Other releases of note during the week: Tuesday US PPI (May) Thursday US Industrial Production (May) US Philly Fed Survey (Jun) Friday US Housing Starts (May) US Building Permits (May) US University of Michigan Sentiment
The first round of the French legislative elections will be held on Sunday 11th June, with the second round on Sunday 18th June. There are 577 MPs in the National Assembly, which is the more powerful of the two houses of parliament in France. As a result, if President Emmanuel Macron were to obtain a large majority he would find it easier to implement his agenda.
HSBC notes that “recent polls have suggested that Macron’s party could get an absolute majority of more than 289 seats at the National Assembly. However, the outcome is harder to predict than for the presidential elections, as up to four candidates can make it to the run-off on 18th June.”
The European economic docket gets underway on Tuesday, with the release of the German ZEW economic sentiment indicator for June. The current conditions index has sharply risen in recent months, sitting close to record highs, with order intakes presenting some downside risk to the upcoming release. The expectations index currently sits close to the long-run average.
The latest instalment of the Greek saga will come on Thursday as the Eurogroup convenes. Greece didn’t get a sign-off on its second programme review, but Eurogroup chief Jeroen Dijsselbloem is optimistic about the prospects of achieving a deal this week, which would give Greece enough time to meet the circa EUR 7bln interest and debt redemptions due in July. It is worth noting that progress since the last meeting seems limited.
HSBC notes that until “Germany is willing to provide more debt relief – or at least specify in detail the measures it would accept by mid-2018 – the IMF does not seem to be willing to get on board the bailout programme. And without specific debt relief measures, and the IMF on board, the European Central Bank (ECB) has shown reluctance to include Greece in its QE programme.”
While IMF chief Christine Lagarde has noted that the fund could agree to a programme “in which the disbursement only takes place when the debt measures have been clearly outlined by the creditors”
May’s final Eurozone flash inflation release will hit on Friday, with the headline seen coming in at 1.4% Y/Y, and the core Y/Y estimate coming in at 0.9%. The European Central Bank (ECB) lowered its inflation profile in its latest set of staff macroeconomic projections, and HSBC notes that “we still see very few signs of underlying inflationary pressures. Domestic price pressures remain particularly muted, with core now back in line with the average rate that has prevailed since 2015, and wage inflation currently only running at around 1.5% Y/Y. Although Eurozone growth is firming up, this is not yet feeding through to higher inflation.”
The Swiss National Bank (SNB) convenes on Thursday, with analysts expecting the central bank will stand pat. The Swiss economic recovery has been somewhat sluggish, though the forward-looking surveys are relatively upbeat. SNB members have continued their dovish rhetoric in recent weeks, with Chairman Thomas Jordan stating “the CHF remains significantly overvalued and that negative rates and FX interventions were ‘absolutely crucial’ to curb the currency’s strength. In addition, he admitted that low interest rates can lead to distortions but he stressed the need for the banking sector to adapt.”
Other releases of note during the week: Wednesday Eurozone Industrial Production (Apr) Thursday Eurozone Trade Balance (Apr)
The fallout from the General Election will be front and centre after the Conservatives lost its majority in the snap election, and were forced to form a confidence and supply government with the DUP.
The key risk event will be the Bank of England (BoE) decision on Thursday. All of those surveyed expect the BoE to stand pat, with consensus looking for a 7-1 vote to leave monetary policy unchanged. It is worth noting that this will be Kristin Forbes’ (the current lone dissenter) final meeting before her term finishes at the end of the month. Goldman Sachs highlights that “in May, the MPC expressed some scepticism about the lack of prospective monetary policy tightening embedded in the “very gently rising path” of market forwards at the time. The forward curve has flattened yet further since then. However, we do not expect the MPC to restate its scepticism of market pricing in the Minutes to its June decision. Tactically, we think the MPC will instead reserve judgement until it is able to offer an updated set of growth and inflation forecasts in its August Inflation Report.” Looking ahead, analysts broadly expect the BoE to keep rates on hold through 2019, as the spectre of Brexit hangs over the UK economy.
In terms of economic data, Tuesday will bring May’s inflation figures. Analysts look for headlines prints of 2.7% Y/Y and 0.2% M/M, against prior readings of 2.8% and 0.2%. The median estimate looks for a core CPI print of 2.3% Y/Y, which would represent a moderation from last months 2.5%. HSBC highlight “more upward pressure from the pass-through of last year’s falls in sterling,” which is set to crimp consumer spending as wage growth remains anaemic.
Wednesday brings the latest labour market report. The unemployment rate is expected to hold steady at 4.6%, with wage growth including bonuses expected to accelerate to 2.4% on a 3-month Y/Y basis, from the prior 2.2%. wage growth remains week, while the unemployment rate stands a mere 0.1pp above the BoE’s equilibrium level 2.1%.
Retail sales are due on Thursday the M/M release is expected to fall by 0.7% from a rise of 2.3%, with the Y/Y print seen at 1.7%, against a prior 4.0%. The April bounce went against the recent trend of soft releases as consumer spending is crimped by the pop in inflation and anaemic wage growth.
Chinese activity data is due on Wednesday, with May’s industrial production and retail sales for May scheduled for release. Analysts are looking for a steady 10.7% Y/Y for retail sales, with industrial production expected to moderate to 6.4% Y/Y from 6.5%. Risks for the releases seem to be skewed to the upside; TD Securities highlights “decent May official manufacturing and non-manufacturing PMIs, however, the soggy Caixin manufacturing print suggests the risks to our number are skewed to the downside.”
The Bank of Japan (BoJ) issues its latest monetary policy decision on Friday, with analysts expecting no change. Overall economic activity is picking up, led by exports, with labour market conditions moving to the tightest levels in about two decades.
The issue is that this has not led to any meaningful wage growth, and therefore only a nominal level of inflation has been seen. The recent Spring wage negotiations saw the increase in wages decelerate for the second consecutive year, a worry considering the ultra-loose settings already in place at the BoJ.
In Australia focus will fall on May’s labour market report, due on Thursday. The median estimate looks for 10,000 jobs to be added to the economy following two outsized increases which have been attributed to sample rotation and seasonal quirks. Both the unemployment and participation rates are seen steady at 5.7% and 64.8% respectively.
May ‘should’ be a clean read, although TD Securities are attaching “downside risk to our forecast as there could be payback from recent unusual strength.”
Across the Tasman in New Zealand, the key risk event will be the Q1 GDP release on Thursday. Expectations are for strong consumption and construction to be offset by a fall in business investment, with net exports also set to weigh. Median estimates look for 0.7% Q/Q (a little less than the 0.9% rise that the Reserve Bank expected in its most recent Monetary Policy Statement) and 2.7 Y/Y from 0.4% and 2.7% last time out. The last input for the national accounts data is the BoP current account, due on Wednesday.
Other releases of note during the week: Monday Japanese Machine Orders (Apr) Tuesday Australian Business Conditions & Confidence (May) Wednesday Japanese Industrial Production (Apr) Australian Consumer Confidence (June) During The Week China Money Supply & New Loans (May)