Fed, ECB and BOJ meetings, inflation from the US, employment data from the UK and Australia as well as retail sales from the US and China will be highlights of the massive week ahead of us.
USD
ISM Services PMI for May came in at 50.3 vs 52.2 as expected and down from 51.9 in April. The reading barely held above the 50 level. Prices paid index has declined to the lowest levels since the start of the pandemic in March of 2020 and good news from this report basically ends there. New orders declined, but is still above the 50 level while backlog of orders plunged to 40.9. There was also a huge rise in inventories index. Employment fell into contraction which is contradicting the payroll support that showed services sector gaining jobs. With services sector moving dangerously close to restrictive territory the chances of recession are rising while chances of June rate hike are falling.
The yield on a 10y Treasury started the week and year at around 3.7%, rose to 3.82% and finished the week at around the 3.75% level. The yield on 2y Treasury reached around 4.6%. Spread between 2y and 10y Treasuries started the week at -80bp then widened to -84bp. FedWatchTool sees the probability of a 25bp hike at 22% while probability of no change in June is at 78%. However, after hikes by RBA and BOC the probability of a skip, meaning no hike in June but hike in July is at 63%.
This week we will have inflation and consumption data as well as Fed meeting. Markets are leaning toward the pause in June. This meeting will present us with new Summary of Economic Projections and dot plot.
Important news for USD:
Tuesday:
CPI
Wednesday:
Fed Interest Rate Decision
Thursday:
Retail Sales
EUR
Final services PMI reading for the month of May was revised down to 55.1 from 55.9 as preliminary reported and came in lower than 56.2 in April. The report says that services sector is supported by strong labor market and tourism sector that enjoys potent recovery. Price data points to increases in services sector which will have negative impact on inflation, meaning it will add upside pressures to inflation that just started to fall. Composite was also revised down and it printed 52.8 vs 53.3 as preliminary reported and down from 54.1 the previous month.
Final Q1 GDP reading was revised down and now it shows that economy contracted in the first quarter (-0.1% q/q). Annual reading was also revised down to 1% y/y from 1.3% y/y as reported in preliminary and second readings. Q4 GDP was also revised down from 0% q/q into negative territory of -0.1% q/q so now the economy has officially entered a technical recession. Technical recession constitutes two consecutive quarters of negative growth.
This week we will have ECB meeting. New growth (revised down) and inflation projections will be announced and 25bp rate hike is widely accepted consensus.
Important news for EUR:
Thursday:
ECB Interest Rate Decision
GBP
Final Services PMI for the month of May were slightly revised up to 55.2, but are down from 55.9 in April. Composite was also revised up to 54 and is down from 54.9 the previous month. Although the numbers are down compared to the previous month, they are still at a very healthy levels. We see in the UK strong divergence between manufacturing and services sector that is seen in many other developed economies. The report shows that main driver is domestic demand and consumers switching from spending on goods to services spending. It also notes strong wage pressures and increase in prices charged by companies.
This week we will have employment data.
Important news for GBP:
Tuesday:
Claimant Count Change
Unemployment Rate
AUD
RBA has surprised the markets and raised cash rate by 25bp bringing it now to 4.10%. This is a second consecutive rate hike. The statement shows that inflation is past its peak but still way too high with upside pressures and rate hike was intended to bring inflation down to its targeted range of 2-3%. Wages have picked up and they are in line with inflation target “provided that productivity growth picks up.” The statement shows that “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve”. Additionally, inflation and labor market remain most watched data but now “trends in household spending” have been added to the watchlist.
Q1 GDP data came in at 0.2% q/q vs 0.3% q/q as expected and down from 0.5% q/q in Q4 of 2022. Domestic demand was the biggest driver of growth as it contributed 0.5pp to the GDP reading. Household consumption rose by 0.2% while government consumption rose by 0.1%. Net trade deducted 0.2pp as exports rose by 1.8% while imports rose by 3.2%. One of the notable data showing how inflation is hurting households is a drop in household saving ratio to 3.7% from 4.4% Terms of trade were improved by 2.8% but only because price of imports fell more than price of exports.
Caixin services PMI in May rose to 57.1 from 56.4 in April while expectations were for it to drop to 55.2. The reports shows that both supply and demand for services expanded and that indexes for business activity, new orders and new continued to increase and are now above the 50 level for five straight months. Input and output prices continued to increase, the former indicating higher labor and raw material costs while latter indicate increased demand for services. Input costs increased at higher rate than output prices.
Trade balance data for May was abysmal. In USD terms trade surplus plunged to $65.81bn from $90.21bn in April. Expectations were for it to rise to $92bn. Exports have collapsed and came in at -7.5% y/y from 8.5% y/y the previous month while imports fell 4.5% y/y vs fall of 7.9% y/y in April. There are base effects from last year’s reopening, but still this a much larger drop than anyone expected. Chinese banks have cut deposit rates in order to boost investments and stimulate the economy. Inflation data for the month of April ticked up to 0.2% y/y from 0.1% in March but expectations were fore a 0.3% y/y increase. PPI has continued to plunge and came in at -4.6% y/y vs -3.6% y/y the previous month. Calls for further rate cuts are getting louder post this report.
This week we will have employment data from Australia as well as production and consumption data from China.
Important news for AUD:
Thursday:
Employment Change
Unemployment Rate
Industrial Production (China)
Retail Sales (China)
NZD
Manufacturing sales in Q1 have continued to decline coming in at -2.1% q/q after a -4.7% q/q fall in Q4 as higher interest rates take its toll on the economy. GDT auction saw dairy prices drop by 0.9%. NZD has benefited from the risk on appetite that developed in the second half of the week and gained against USD and JPY.
CAD
Over the weekend OPEC+ meeting in Vienna resulted in an announcement of a reduction in the output target that will take effect from the July 1. Saudi Arabia will lower their production by 1 million barrels per day, their reduction will be highest of all members. Additionally, members agreed that their cuts will go on through 2024 as well while previously reductions should last only until the year end. WTICrude has gapped at the open to over $74 as a result.
BOC has surprised the markets and raised the rate by 25bp bringing it now to 4.75%. This is the first rate hike since January after a few meetings with pause. The bank sees inflation as stubbornly high and expect CPI inflation to slow down to around 3% in the summer but “concerns have increased that CPI inflation could get stuck materially above the 2% target”. They acknowledged that growth surprised to the upside. There is no commitment to further rate hikes but the bank will continue monitoring inflation outlook and expectations. BOC rate is now above the inflation rate.
Employment report was very disappointing. Jobs have fallen by 17.3k making it the first time they have fallen since August of last year. This has caused the unemployment rate to rise to 5.2% from 5% for the first increase in the rate also since August of last year. Wages have slipped to 5.1% y/y from 5.2% y/y the previous month. All of the job losses were in full-time (-32.7k) while part-time rose by 15.5k.
JPY
Final services PMI for the month of May was revised down to 55.9 from 56.3 as preliminary reported and up from 55.4 in April. It still represents a record high number. The report showed improvements in employment index, thus continuing a four-month trend of stronger employment. Input and output prices have continued to increase but their rise has moderated, they are now increasing at a slower pace. Due to revision in services reading composite was also revised down and it now prints 54.3 vs 54.9 as preliminary reported, still up from 52.9 the previous month.
Wages data saw nominal earnings rise 1% y/y in April vs 1.3% y/y in March. When we calculate inflation we see that real wages fell by 3% y/y, more then previous month when they fell by 2.3% y/y. Household spending was also abysmal falling 4.4% y/y vs falling 1.9% y/y in March. Final reading of Q1 GDP saw improvement to 0.7% q/q from 0.4% q/q as preliminary reported and up from 0.1% q/q in Q4 of 2022. The improvement was made on the back of stronger capital expenditure that rose 1.4% vs 0.9% as preliminary reported. Private consumption was at 0.5% making it the biggest increase in the last three quarters.
This week we will have BOJ meeting. No changes to monetary policy are expected but there is a perpetual fear that they may abandon Yield Curve Control or widen the YCC band which would lead to JPY strength.
Important news for JPY:
Friday:
BOJ Interest Rate Decision
CHF
SNB total sight deposits for the week ending June 2 came in at CHF519bn vs CHF515.7bn the previous week. This is the second week that deposits are up and it may indicate a change in trend if SNB is happy with current level of CHF. May inflation data was encouraging as it came in line with expectations. Headline number fell to 2.2% y/y from 2.6% y/y in April while core reading fell below the 2% level and printed 1.9% y/y vs 2.2% y/y the previous month. SNB is on the path to hike one more time at their next meeting later in the month and after that, data is indicating, they should pause.
