PCE and inflation from Canada will be the highlights of a week that represents end of Q2 followed by final Q1 GDP readings for the US and the UK.
USD
May retail sales report saw headline number rise by 0.1% m/m vs 0.3% m/m as expected with April reading being revised down. Control group came in at 0.4% m/m as expected but previous month’s reading was revised down. Sporting goods, clothing, motor vehicles and online have recorded biggest increases while gasoline stations showed the biggest decline followed by furniture and home furniture stores. Misses on the numbers plus negative revisions make this report on the weaker side and should contribute to the USD weakness.
The yield on a 10y Treasury started the week at 4.23%, rose to 4.29% and finished the week at around 4.26%. The yield on 2y Treasury started the week at 4.71% and reached the high of 4.76%. Spread between 2y and 10y Treasuries started the week at -49bp then tightened to -45bp as curve proceeded to steepen. The 2y10y is inverted for over twenty three months. FedWatchTool sees the probability of no change at July meeting at 90% while probability of a rate cut is around 10%. Probability of a September rate cut sits at around 66% while November is at around 79%.
This week we will get Fed’s preferred inflation report, PCE. Expectations are for it to come flat on the month and 0.1% m/m for core which will spur chances of a rate cut.
Important news for USD:
Friday:
PCE
EUR
ECB Chief Economist Lane stated that bank should discern “noise” from “signal” in the incoming data and make decisions based on that as there are still questions regarding inflation momentum. He added that every meeting is a live one and that only big moves in EUR will have impact on monetary policy decisions. According to him, full effect of rates on inflation did not yet occur. Final CPI readings for the month of May confirmed numbers seen in the preliminary reading, namely 2.6% y/y for the headline and 2.9% y/y for the core.
Preliminary June PMI numbers missed expectations and flashed red across the board. Manufacturing printed 45.6 vs 47.3 in May as weakness was seen in both German and French readings. The output index has fallen to a six-month low with new orders and employment both declining. Services PMI came in at 52.6, down from 53.2 the previous month making it two consecutive months of declines. Services sector is stumbling but as stated in the report it is keeping the Eurozone afloat. Concerns about incoming French elections are weighing heavily on the economy as services continued to fall deeper into contraction. Composite PMI managed to stay in expansion with a 50.8 print, down from 52.2 in May. Overall, PMI numbers indicate a positive Q2 GDP reading, but raise concerns regarding performance in the third quarter.
GBP
May inflation report saw headline number fall to targeted 2% as expected from 2.3% y/y in April. Food, household goods and clothing prices are continuing to fall. Core CPI dropped to 3.5% y/y as expected from 3.9% y/y the previous month. Services inflation declined to 5.7% y/y from 5.9% y/y in April and it remains very elevated. It is 0.4% higher than BoE projected in their May Monetary Policy Report.
BoE has decided to leave the bank rate unchanged at 5.25% as was expected. The vote was 7-2 with Dhingra and Ramsden voting for a 25bp rate cut as was also expected. High services inflation is singled out as the issue and it was stated that members are uncertain that inflation will stay low before rates are cut. Monetary policy will need to remain restrictive in order to bring down inflation. Digging into the minutes there was a mention of high services inflation print not altering significantly disinflationary path indicating that the bank is laying ground for the cut, increasing chances of that cut coming in August.
Preliminary June PMI readings saw interesting print, manufacturing came in higher than services (51.4 vs 51.2). Manufacturing continued to improve and reached highest level since July of 2022 while services declined for the second month in a row and reached lowest point since December of 2023. Composite PMI declined to 51.7 from 53 in May. After a string of weak retail sales readings May report showed a rebound as both headline and ex autos,fuel beat expectations and rose 2.9% m/m. More impressive is that actual retail sales volumes rose across all of the main sectors.
AUD
RBA has left cash rate unchanged at 4.35% as widely expected. The statement states that inflation dropped significantly from the highs in 2022, but it remains elevated. The path to bring inflation to bank’s target is unlikely to be smooth. Inflation is coming down slowly than expected, bringing inflation down remains bank’s top priority. Economic outlook remains uncertain and there are also uncertainties regarding lags in the effect of monetary policy. Governor Bullock warned that a lot of things need to go their way to bring inflation back to range. She added that there was talk about hiking rates at the meeting but members ultimately decided to keep rate unchanged. Ultimately, she said that rate cuts were not discussed but that does not mean chances of rate hike were increasing. The statement and speech focus solely on inflation and bank cannot cut rates with these inflation numbers, meaning higher for longer is on.
May activity data from China was mixed. Industrial production plunged by more than expected (5.6% y/y vs 6% y/y as expected and down from 6.7% y/y in April) while retail sales rose by more than expected (3.7% y/y vs 3% y/y as expected and up from 2.3% y/y the previous month). The unemployment rate was unchanged at 5% y/y while Fixed Asset Investments dropped to 4% y/y from 4.2% y/y in April. Real estate investment fell -10.1% YTD vs -9.8% YTD the previous month as property sector is still in shambles. PBoC has left 1-year MLF rate at 2.5% as widely expected.
NZD
RBNZ Chief Economist Conway stated that inflation may prove more sticky in the short term but it could fall more quickly in the medium term. There are still challenges to bring inflation down to the target and restrictive policy is still needed. Ultimately, he expects headline inflation to drop to their target by the year end. Q1 GDP data showed growth after two consecutive quarters of negative growth and printed 0.2% q/q and 0.3% y/y after -0.1% q/q and -0.2% y/y in the previous quarter.
CAD
BoC minutes from the latest June meeting showed that members of the Governing Council debated whether to wait until July to make their move and start cutting rates. Members have agreed that inflation has slowed down enough for them to cut but were wary of inflation stalling. Members have also agreed that their moves will be taken meeting-by-meeting, meaning that every meeting is a live one and that dependence on data remains the main focus.
This week we will have inflation data. Core inflation is the main focus of BoC so this report will have big impact on their decision making process.
Important news for CAD:
Tuesday:
CPI
JPY
Nationwide headline inflation for the month of May came in at 2.8% y/y vs 2.9% y/y as expected and up from 2.5% y/y in April. Ex fresh food printed 2.5% y/y, up from 2.2% y/y the previous month while ex fresh food, energy (so-called core-core) came in at 2.1% y/y down from 2.4% y/y in April. The “core-core” is on decline since September of 2023 and although headline number is safely above the 2% target we could easily have it drop below 2% next month which is not something BoJ wants to see when discussing rate hikes.
Preliminary PMI data showed decline in economic activity in June. Manufacturing PMI came in at 50.1, down from 50.4 in May due to weaknesses in new orders. Services PMI, on the other hand, plunged into contraction with a 49.8 reading after printing 53.8 the previous month due to easing in new orders, new export orders, employment and backlog of orders. This combination dropped composite PMI to 50 from 52.6 in May.
CHF
SNB has cut key policy rate at their June meeting by 25 so the new rate is now at 1.25%. That is the second cut of the year as the rate was at 1.75% at the start of the year. SNB states that they will adjust monetary policy if necessary to control inflation. New inflation projections, however, are revised lower and see it at 1.3% for 2024, down from 1.4% previously, 1.1% for 2025, down from 1.2% previously and 1% for 2026, down from 1.1% previously.
Outgoing SNB Chairman Jordan stated that Swissy’s strength is due to geopolitical tensions and added that underlying inflation pressures have eased. Additionally, he reiterated that they are prepared to intervene in the markets if necessary and that intervention can be in both directions as he emphasized the importance of exchange rate and its influence on inflation. SNB total sight deposits for the week ending June 14 came in at CHF453.5bn vs CHF459.8bn the previous week.
