Inflation week is ahead of us with US, Eurozone and Canada reporting, all expected to continue lower, additionally we will get official PMI data from China.
USD
Housing sector has posted great results despite high mortgage rates. Housing starts in May printed 1631k vs 1400k as expected and up from 1401k in April. Building permits also showed a strong print coming in at 1491k vs 1420k as expected and up from 1417k the previous month. So far there are no signs that recession will come from the housing sector.
In his testimony before Senate Fed Chairman Powell stated that there is a long way to go to bring inflation back to the 2% target and that nearly all FOMC members agreed about future rate hikes by the end of the year. He reiterated that Fed will continue with meeting by meeting approach and that reducing inflation will likely result in a period of below trend growth.
The yield on a 10y Treasury started the week and year at around 3.77%, rose to 3.82% and finished the week at around the 3.75% level. The yield on 2y Treasury reached around 4.81%. Spread between 2y and 10y Treasuries started the week at -95bp then widened over a full percentage point -103bp. FedWatchTool sees the probability of a 25bp hike at 77% while probability of no change in July is at 23%.
This week we will have Fed’s preferred inflation measure PCE as well as data on income and spending.
Important news for USD:
Friday:
EUR
ECB Chief Economist Phillip Lane stated that rate hike in July seems appropriate given current economic situations but that decision on September rate hike will depend on the incoming data. ECB member of the Executive Board Isabelle Schnabel stated that risks to inflation are skewed to the upside and added that although ECB will remain data-dependent they should err on the side of doing too much. According to her ECB needs to continue raising interest rates until they see convincing evidence that inflation is moving toward 2% targeted level. ECB member Villeroy stated that level of terminal rate is not as important as the time that bank will keep it. Ifo has downgraded their GDP forecast for Germany and they see the economy now shrinking by 0.4% in 2023 vs 0.1% as previously expected.
Preliminary June PMI data was disappointing, particularly French services which plunged into contraction with a reading of 48, down from 54.6 in May. Manufacturing for the Eurozone continued to decline and printed 43.6 vs 44.8 as was expected and as was in May. German manufacturing printed abysmal 41 which was the lowest since May 2020. Services for the Eurozone declined to 52.4 from 55.1 in May with expectations of a drop to 54.5. The report shows divergence between falling prices of goods and rising prices of services. Overall composite for the Eurozone barely hanged in expansion with 50.3 reading dragged down by misses in activity and especially heavy plunge in French reading to 47.3. Eurozone has finished Q2 on a very weak note and another negative GDP reading cannot be ruled out, particularly in France.
This week we will have preliminary June inflation reading.
Important news for EUR:
Friday:
CPI
GBP
UK inflation in May refused to budge. Headline number was unchanged at 8.7% y/y while expectations were for a slower increase of 8.4% y/y. Monthly increase in prices was 0.7%, higher than 0.5% the previous month. Air travel, recreational and cultural goods and services and second-hand cars contributed most to price increases. Food inflation has been on decline but is still the main culprit with astonishing increase of 18.3% y/y. Core inflation posted additional problem for the BOE as it increased to 7.1% y/y from 6.8% y/y in April. This is the highest level of core inflation in over 30 years. Expectations were for it to remain at 6.8% y/y.
BOE has surprised markets and raised bank rate by 50bp thus bringing it to a round number of 5%. The vote for decision was 7-2 with two members voting for no change. The statement shows that core good inflation has been running hotter than expected. Still, members expect inflation to slow down significantly in the second half of the year due to drop in energy prices. Services inflation is expected to remain unchanged while food inflation is projected to fall further. Further tightening is on the table and markets are pricing in terminal rate between 5.75% and 6%. Business surveys show that Q2 GDP should be around 0.25%. Indicators of household spending have somewhat strengthened while labor market remains strong.
Preliminary PMI data for the month of June showed declines across the economy. Manufacturing slid further into contraction, continuing for the fourth consecutive month and printing 46.2. Services declined to still healthy 53.7 which kept composite at 52.8. The report shows that consumer spending on services started to decline due to increase in cost of living and bleak growth outlook. Strong pace of BOE rate hikes is taking negative toll on business activity although labor market still remains strong with firms in the service sector continuing to hire.
AUD
Minutes from the last RBA meeting showed that decision between raise and pause was highly debated. Members opted to act and hike expecting that will bring inflation faster to the targeted level. Balance of risks for inflation is skewed to the upside. Additionally, wage increases are been higher than expected with wages rising in the public sector as well. AUD was repriced down after the minutes were published as they show a less hawkish bank with no clear intentions on hiking in July.
PBOC has cut LPR rates by 10bp as was widely expected. The new 1-year LPR is now at 3.55% while 5-year LPR is at 4.20%. These rates are used as benchmarks, 1-year LPR for most new loans and 5-year LPR for most mortgages. If the economy continues to stumble we can see more cuts in the coming months, but the ball for stimulus is now passed to the fiscal side. Major banks are slashing their GDP forecast for 2023 as a result of weak economic data.
This week we will have official PMI data from China.
Important news for AUD:
Friday:
Manufacturing PMI (China)
Non-Manufacturing PMI (China)
Composite PMI (China)
NZD
Trade balance data for May saw a small surplus of NZD46m as exports printed NZD6.99bn while imports printed NZD6.95bn, a significant jump from NZD6.37bn in April. The jump in imports was due to aircraft and aircraft parts purchases which were followed by increases in medical equipment, machinery and vehicles and vehicle parts. Global dairy auction was flat, there were no changes to prices. Butter prices showed biggest increase while cheddar prices saw biggest decline.
CAD
Retail sales report for April was very strong. Headline number saw increase of 1.1% m/m vs 0.2% m/m as expected. General merchandise and food and beverage categories showed the biggest gains. Ex autos category rose by 1.3% m/m vs 0.4% m/m as expected. Advance reading for May see retail sales growing additional 0.5%.
This week we will have May inflation data.
Important news for CAD:
Tuesday:
CPI
JPY
National inflation numbers for the month of May saw headline inflation fall to 3.2% y/y from 3.5% y/y in April. Ex fresh food category also printed 3.2% y/y, down from 3.4% y/y. However, ex fresh food, energy, so called core-core, printed 4.3% y/y vs 4.1% y/y the previous month. This is a new 42-year high for the reading. BOJ has been adamant in categorizing inflation as “transitory” as they expect it to fall significantly from September/October. Preliminary June PMI data showed that manufacturing stumbled and slipped back into contraction with 49.8 reading. Services PMI also came in weaker than in April (54.2 vs 55.9) but is still at a very healthy level. Composite was driven down to 52.3 from 54.3 the previous month. The report shows weaker growth for output, new orders, new export orders and employment for services with decline from growth for output and new orders for manufacturing. Both sectors show weaker output and input prices inflation.
CHF
SNB total sight deposits for the week ending June 16 came in at CHF510.6bn vs CHF509.8bn the previous week. Total sight deposits have been ranging for the last month and a half.
SNB has raised policy rate by 25bp as expected and brought it to 1.75%. Additional rate hikes and tightening of monetary policy cannot be excluded. Focus at the moment, in the current environment, is on selling foreign currency. This is done in order to strengthen Swissy and bring down inflation from import. We saw this through total sight deposits data. Inflation for 2023 was revised down to 2.2% from 2.6% while it was revised up to 2.2% for 2024 from 2% as previously forecast. Inflation is expected to remain persistent. SNB Chairman Jordan stated that most likely further tightening of monetary policy will occur but approach will be gradual.
