UPCOMING EVENTS:
Tuesday: UK Jobs, US CPI.
Wednesday: US PPI, FOMC Policy
Announcement.
Thursday: PBOC MLF, ECB Policy
Announcement, US Retail Sales, US Jobless Claims.
Friday: BoJ Policy Announcement,
University of Michigan Consumer Sentiment.
Tuesday:
The UK unemployment rate is expected to rise to 4.0% vs. 3.9% prior. The focus
may be especially on the average earnings that are expected to edge higher to
6.9% vs. 6.7% prior. Given the recent inflation report and wage growth trends,
the BoE is already expected to hike by 25 bps at its upcoming meeting, so this
report is unlikely to change expectations on that front, but hot wage data
might make the market to price an even higher terminal rate which at the moment
is expected to peak at 5.25% in September.
The US CPI report is one of the highlights
of this week as it could change the market pricing of the Fed’s terminal rate
and possibly even the expectations for the following day FOMC rate decision. The
Headline CPI Y/Y is expected to fall to 4.1% vs. 4.9% prior mainly due to the
decline in energy prices, while the M/M reading is seen at 0.3% vs. 0.4% prior.
The market though is likely to focus mainly on the Core measures which are
expected at 5.2% vs. 5.5% prior for the Y/Y reading and 0.4% vs. 0.4% prior for
the M/M figure. The core M/M rate looks stuck at a higher level compared to the
previous three decades.
US Core Inflation M/M
Wednesday:
The US Headline PPI Y/Y is expected to fall to 1.1% vs. 2.3% prior, while the
M/M reading is seen unchanged at 0.2%. The Core Y/Y measure is expected to fall
to 2.9% vs. 3.2% prior and the M/M figure is seen unchanged at 0.2%. The PPI is
unlikely to change much the market expectations unless we get some big
surprises, and it shouldn’t be market moving given that we have the FOMC
decision a few hours later.
The FOMC is expected to keep rates at
5.00-5.25% given the recent talks about “skipping the June hike” by some Fed
members just a few days before the blackout period. Moreover, the recent
employment data might give them some confidence to skip this month and see the
next set of data. Only a hot CPI report the prior day might change their minds,
but it needs to be notably above expectations. The QT pace is expected to
remain unchanged and there are likely to be revisions to the SEP with growth
and unemployment probably seen lower than previously and inflation basically
unchanged. The market will be especially interested in the Dot Plot with the
terminal rate probably seen a bit higher to reflect market expectations.
Thursday:
There’s a growing expectation that the PBOC is likely to cut the MLF rate this
week by 5 or 10 bps. The rate is currently sitting at 2.75%. A tweak to the MLF
would set the stage for a cut in the LPR the following week.
The ECB is expected to hike by 25 bps
bringing the deposit rate to 3.5%. The recent positive disinflationary trend
gave the ECB confidence to step down their hiking pace to 25 bps. The Eurozone
has also entered a technical recession last week with revisions to the previous
GDP data. The market expects another final 25 bps hike at the July meeting
taking the terminal rate to 3.75%. Market expectations are of course guided by
the underlying fundamentals, so they are always to take with a pinch of salt as
one surprising piece of data can change it. Again, if inflation remains sticky
much above the target for too long, the central banks will be forced to do
more, and the consequences could be really ugly.
The US Retail Sales Y/Y are expected at
2.2% vs. 1.6% prior and the M/M reading is seen at -0.1% vs. 0.4% prior. The
Control Group is expected flat at 0.0% vs. 0.7% prior. Retail Sales on a yearly
basis have been falling off a cliff with inflation adjusted readings being
negative.
US Retail Sales
The US Jobless Claims last week surprised
with a big miss, but seasonal adjustments were cited as the likely culprit and
called for caution. These levels are not yet worrying but at this point of the
cycle they can be meaningful. Claims above the 300K level would certainly point
to a likely recession and weigh on the market sentiment. Initial Claims are
expected at 248K vs. 261K prior, while Continuing Claims are seen at 1776K vs.
1757K prior.
Friday:
The BoJ is expected to keep everything unchanged with the bank rate at -0.10%
and QQE with YCC at the current settings. Recent comments from Governor Ueda
suggest that the BoJ is unlikely to do anything at this meeting, so a hawkish
surprise would be something big.
The University of Michigan consumer
sentiment report last month caused a big repricing in interest rates
expectations and consequently big moves in the markets, especially for the USD
and the Bond market. The culprit was the big jump in the long-term inflation
expectations to 3.2% from 3.0% prior. The figure was eventually revised to
3.1%, but there’s clearly some fear in the market about a de-anchoring of
inflation expectations given that we’ve been at this high levels for two years
already. For this reason, the market is likely to focus on that data in
particular, which is expected to remain unchanged at 3.1%.