FOMC and BoJ meetings followed by inflation data from the US and China will be the highlights of the week ahead of us that will also see employment data from the UK and Australia.
USD
ISM manufacturing PMI for the month of May came in at 48.7, down from 49.2 in April while a 49.6 print was expected. New orders plunged deeper into contraction printing only 45.4. Production also recorded a drop and barely managed to stay above the 50 level. Employment index and new export orders returned to expansion with both printing 51.1 while prices paid component fell by more than expected, but it is still at elevated level of 57.
ISM services PMI came in at 53.8 in May vs 50.8 as expected and returned to expansion after a 49.4 reading in April. The rebound was led by production index which jumped to 61.2 from 50.9 the previous month. Even bigger gain was seen in new export orders which rose into expansion with a 61.8 print after a 47.9 reading in April. New orders also improved as did employment, but the latter still remained in contraction. Prices paid component declined but with a print of 58.1 it shows that inflation pressures are still very high.
May NFP reported blasted expectations as it printed 272k vs 185k as expected. The unemployment rate, though, ticked up to 4% while participation rate dropped to 62.5%. Wages rose 0.4% m/m and 4.1% y/y both higher than expected (0.3% m/m and 3.9% y/y). Private education and health was again the biggest contributor with 86k jobs added followed by government with 43k and leisure and hospitality with 42k. Combination of high main number and much higher wages pushes back first rate cuts and USD strengthened on the back of that.
The yield on a 10y Treasury started the week at 4.50%, rose to 4.51% and finished the week at around 4.44%. The yield on 2y Treasury started the week at 4.88% and reached the high of 4.90%. Spread between 2y and 10y Treasuries started the week at -37bp then tightened to -44bp as curve proceeded to steepen. The 2y10y is inverted for over twenty three months. FedWatchTool sees the probability of no change at June meeting at 99% while probability of a rate cut is around 1%. Probability of a July rate cut sits at around 9% while September is at around 54%.
This week we will have May inflation data, expected to remain unchanged and FOMC meeting. Markets are pricing no hike for this meeting so the main attraction will be the new Summary of Economic Projections (SEP). This new SEP will show us whether Fed members still see three cuts for the year or if they have revised their forecast to two cuts this year.
Important news for USD:
Wednesday:
CPI
Fed Interest Rate Decision
EUR
Final manufacturing PMI for the month of May was revised down to 47.3 from 47.4 as preliminary reported on the back of negative revision to French reading and weak Italian print. German reading was unchanged while Spanish was a bright spot printing 54. Still, the reading is highest since March of 2023 and could be a turning point for Eurozone. Final services and composite were revised slightly to the downside and they now read 53.2 and 52.2. Composite represents a twelve month high indicating economic recovery which is supported by stronger demand and better business confidence.
ECB has cut interest rates by 25bp bringing deposit rate to 3.75% as was widely expected. The Governing Council remains adamant to bring inflation down to 2% target in a timely manner. Rates will stay restrictive for as long as it is necessary as bank continues to follow a data-dependent and meeting-by-meeting approach. There will be no pre-commitment to any rate path. New projections see headline inflation averaging 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026. Core inflation is seen at an average of 2.8% in 2024, 2.2% in 2025 and 2.0% in 2026. GDP is expected to pick up to 0.9% in 2024, 1.4% in 2025 and 1.6% in 2026. Both headline and core inflation were revised up for 2024 and 2025.
During the press conference, Lagarde stated that one member was against the cut (Holzman) and emphasized that ECB is not pre-committng to any rate path and the need for data-dependent approach and still restrictive rates. The decision leaves no room for another cut in July but we could see the next cut at September meeting.
GBP
Final manufacturing May PMI came in at 51.2 vs 51.3 as preliminary reported. The reading is the highest since July of 2022 and represents return to expansion after sudden drop the previous month. The report shows that business optimism jumped to new 27-month high and that “…output charge inflation strengthened for the fifth successive month and to its highest level in a year. That said, a solid easing in the rate of increase in input costs should help prevent price pressures from becoming embedded.” Final services reading was unchanged at 52.9 while composite was revised higher to 53 from 52.8 as preliminary reported. The report shows easing of price pressures in the services sector, just what BoE wants to see, but services inflation still sits at an uncomfortably high level.
This week we will have employment data.
Important news for GBP:
Tuesday:
Payroll Change
Unemployment Rate
AUD
Minimum wage was lifter by 3.75% after a 5.75% increase the previous year. Higher cost-of-living were cited as the main reason for wage increase. Higher wages generally lead to higher inflation and with inflation being sticky in Australia it leads to conclusion that RBA will stay on hold for a longer period of time.
Q1 GDP printed increase of 0.1% q/q vs 0.2% q/q as expected and in the previous quarter. On a yearly basis, growth has eased to 1.1% from 1.5% in Q4 of 2023. GDP per capita declined for the fourth straight quarter while terms of trade posted a second consecutive quarter of growth. Household consumption rose by 0.4% while government consumption rose by 1%. Net exports were negative and reduced growth as imports rose faster than exports. Investment declined by 0.9%.
Caixin manufacturing PMI in May rose to 51.7 from 51.4 in April. The report shows expansion of both supply and demand as new orders and new export orders continued to increase. Employment is still in contraction and price pressures remained low. Caixin services posted 54, up from 52.5 the previous month which helped push composite to 54.1. Trade data in May saw further widening of surplus to $82.62bn as exports surged 7.6% y/y beating expectations while imports rose by 1.8% y/y missing expectations.
This week we will have employment data from Australia and inflation data from China.
Important news for AUD:
Wednesday:
CPI (China)
Thursday:
Employment Change
Unemployment Rate
NZD
Q1 terms of trade came in at 5.1% q/q vs 3.1% q/q as expected, a big rebound after a drop of 7.8% in Q4 of 2023. This is a great sign for the economy when terms of trade improve due to export prices increasing and import prices decreasing. Unfortunately, this was not the case, as both export and import prices fell with latter falling at a stronger pace. Still, this will be a positive input for NZD. First June dairy auction showed prices increase by 1.7% making it the fifth consecutive auction of rising prices.
CAD
BoC has lowered the rate by 25bp and to 4.75% from 5%. The statement sees slower than expected growth and acknowledges falling inflation. Inflation is seen dropping to historical average giving board members more confidence that it is moving toward the 2% target. However, it still remains too high in some components, notably shelter. The economy is still operating in the excess supply. The statement concludes with “With continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive and reduced the policy interest rate by 25 basis points. Recent data has increased our confidence that inflation will continue to move towards the 2% target. Nonetheless, risks to the inflation outlook remain. Governing Council is closely watching the evolution of core inflation and remains particularly focused on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.”
At the press conference Governor Macklem stated that if inflation continues to decline it will be “reasonable to expect” more rate cuts, but they remain data-dependent and continue with meeting-to-meeting approach. He added that core inflation will be the main focus of bank members in assessing where inflation is headed. Additionally, he mentioned that the way situation is currently unfolding it points to a soft landing adding that there is a room for economy to grow above potential.
Employment report for the month of May saw headline number at 26.7k vs 22.55k as expected. However, the unemployment rate ticked up to 6.2% while participation rate remained at 65.4%. Additionally, all of the jobs added were part-time (62.4k) as full-time jobs recorded a decline of 35.6k showing weakness in the labor market. Wages, on the other hand, continue to increase and rose by 5.1% y/y.
JPY
Q1 CAPEX data came in at 6.8% y/y vs 12.2% y/y as expected and down from 16.4% y/y in the Q4 of 2023. Companies posted a massive Q1 as their profits increased 15.1% y/y vs 8.3% y/y as was expected and up from 13% y/y in the previous quarter. Total cash earnings in April rose 2.1% y/y after March reading was revised up to 1% y/y. Real wages are still down 0.7% y/y as inflation is pressuring them down. Real wages have been negative for almost two years. Household spending in April rose 0.5% y/y for the first positive reading since February of 2023. BoJ is hoping that incoming higher wages will translate to higher spending and thus spur the economy.
Final manufacturing PMI for the month of May was revised down slightly to 50.4 but still in expansion territory, first in twelve months. The report shows increase in employment and cost pressures which can lead to more sustainable inflation pressures, just what BoJ wants to see. On the other hand, new orders and output were stable while both domestic and external demand remain subdued. Final services and composite readings were both revised up and are well into expansion showing 53.8 and 52.6 respectively.
This week we will have BoJ meeting. This meeting is considered to be a live one, meaning that we could see further steps taken toward normalization of monetary policy.
Important news for JPY:
Friday:
BoJ Interest Rate Decision
CHF
SNB total sight deposits for the week ending May 31 came in at CHF461.9bn vs CHF461.2bn the previous week. Almost unchanged as SNB lets market dictate Swissy’s direction. May CPI data saw both headline and core number unchanged from previous month at 1.4% y/y and 1.2% y/y respectively.
