ECB and BoC meetings, NFP, ISM PMIs, with inflation from Switzerland, GDP from Australia, employment data from Canada and trade data from China will highlight this news packed week ahead of us.
USD
Conference Board consumer confidence for the month of May rebounded strongly and printed 102 after 97.5 print in April. This sudden and big jump eased worries about weakening in labor market and its impact on consumer and caused yield curve to bear steepen as yields on longer-dated Treasuries rose faster than on the shorter-dated. The reading also pushed back rate cuts further while we think that first rate cut will come in September.
Second reading of Q1 GDP was revised down to 1.3% annualized as expected from 1.6% annualized as reported in advanced reading. Digging into the details there were drops in consumer spending and net exports (stronger USD is bad for exports) while government spending contributed more than preliminary reported.
PCE data for the month of April saw headline and core number both come in unchanged and in line with expectations (2.7% y/y and 2.8% y/y respectively). Monthly numbers saw headline increase by 0.3% while core rose by 0.2% vs 0.3% as expected (0.249% to the third decimal). Personal consumption rose just 0.2% m/m after downwardly revised 0.7% m/m in March while personal income rose by 0.3% m/m vs 0.5% m/m increase the previous month. Data coming in line with expectations gave boost to risk assets. Stock market rallied while USD declined.
The yield on a 10y Treasury started the week at 4.47%, rose to 4.63% and finished the week at around 4.51%. The yield on 2y Treasury started the week at 4.96% and reached the high of almost 5%. Spread between 2y and 10y Treasuries started the week at -48bp then tightened to -38bp after weak treasury auctions and jump in consumer confidence as curve proceeded to steepen. The 2y10y is inverted for over twenty months. FedWatchTool sees the probability of no change at June meeting at 99% while probability of a rate cut is around 9%. Probability of a July rate cut sits at around 12% while September is at around 50%.
This week we will have ISM PMI and NFP data. Headline May NFP number is seen around 150k, lower than in April, with the unemployment rate unchanged at 3.9%.
Important news for USD:
Monday:
ISM Manufacturing PMI
Wednesday:
ISM Services PMI
Friday:
NFP
Unemployment Rate
EUR
ECB Chief Economist Lane stated that, in his opinion, they have brought inflation down in a timely manner and it is appropriate to start with rate cuts. He added that policy will need to remain restrictive but that within that restrictive territory there is room for a rate cut. Lane was just adding more fuel to the fire we all know by now and which is called June rate cut. Furthermore, he stated that there is a risk of easing monetary policy too quickly and that disinflation can be expected during the course of next year.
ECB survey saw inflation expectations continue to decline as consumers now see inflation at 2.9% in the year ahead which is the lowest since September of 2021. Additionally, inflation expectations for the three years ahead are seen at 2.4%. Although numbers are above the 2% target they are at least moving in the right direction which is satisfactory from ECB’s standpoint.
Preliminary Eurozone CPI for the month of May came in at 2.6% y/y vs 2.5% y/y as expected and up from 2.4% y/y in April. Core reading printed 2.9% y/y 2.7% y/y as expected and the month before. German CPI came in as expected at 2.4% y/y, up from 2.2% y/y in April while French CPI was unchanged at 2.2% y/y while increase to 2.4% y/y was expected. This tick up in inflation although unsettling will not deter ECB from cutting next week and will contribute to a “hawkish” cut, meaning that it will be questionable how many more rate cuts will there be this year.
This week we will have ECB meeting. Rate cut is fully priced in by the markets. We expect that there will be no clear path regarding further rate cuts laid out. ECB will stay data-dependent.
Important news for EUR:
Thursday:
ECB Interest Rate Decision
GBP
GBP has had a mixed week as markets were digesting latest data. Inflation coming down, but still printing higher than expected, kept GBP elevated but worries around weak consumer, as shown by latest retail sales report, pushed it down. Ultimately, markets see BoE delivering first rate cut in August, rather than in June and that should keep GBP supported.
AUD
Monthly CPI reading in April surprised to the upside. The print came in at 3.6% y/y vs 3.4% y/y as expected and up from 3.5% y/y in March. The reading showed big 0.76 m/m increase and the huge increase in inflation was evenly distributed among components giving bigger cause for concern that inflation is sticky. RBA cannot be satisfied with this reading. Rate cuts have been delayed and based on that change in pricing AUD strengthened. As a reminder, monthly CPI does not include all of the CPI components, but still it does not paint a bright picture on the inflation front. Private CAPEX for Q1 came in at 1% q/q vs 0.5% q/q as expected and up from 0.8% q/q in the Q4 of 2023 on the back of increases in plant and machinery expenditures.
Official PMI data for the month of May saw misses on expectations. Manufacturing has returned into contraction with a 49.5 reading after a 50.4 in April. Details show declines in new orders and new export orders, both below the 50 level. Production index also declined but remained in expansion. Prices paid components increased indicating that inflation pressures are building. Services printed 51.1, a tick down from 51.2 the previous month, new orders and employment still in contraction, while composite dropped to 51 from 51.7 in April.
This week we will have Q1 GDP from Australia and trade data from China.
Important news for AUD:
Wednesday:
GDP
Friday:
Trade Balance (China)
NZD
May business survey saw business outlook decline further to 11.2 from 14.9 in April. The biggest declines were seen in commercial construction, employment intentions and ease of credit. Declines in pricing intentions and inflation expectations are positive signs and although the first number is still elevated at least it is moving in the right direction.
CAD
Preliminary wholesale trade data for the month of April showed a rebound as they grew by 2.8% m/m after dropping 1.1% m/m in March. Q1 GDP showed growth of 1.7% annualized vs 2.2% annualized as expected while GDP of Q4 2023 was revised down to 0.1% from 1% annualized. Details show growth in both household consumption and business investment but it was much lower than expected.
This week we will have BoC meeting and employment data. We expect BoC to cut rates by 25bp as inflation, growth and consumption are coming down while the unemployment rate is going up. Additionally, majority of mortgages in Canada are variable and thus higher interest rates cause mortgage expenses to go up lowering disposable income. If BoC proceeds with a cut it will widen the gap between Canada and US rates which will cause CAD to weaken and that could cause a concern for policymakers who may opt to vote for no change and wait for Fed to cut first.
Important news for CAD:
Wednesday:
BoC Interest Rate Decision
Friday:
Employment Change
Unemployment Rate
JPY
PPI services for the month of April came in at 2.8% y/y, up from 2.3% y/y in March. The reading is also called Corporate Services Price Index as it reflects prices corporations pay. BoJ has stated that this is the fastest increase in reading in almost ten years. If these price increases are fully transferred to consumers it may lead to more sustainable inflation pressures. That is what BoJ is looking for in order to normalize monetary policy.
Inflation in the Tokyo are in the month of May reversed its course and started moving up. Headline number came in at 2.2% y/y vs 1.8% y/y in April. Ex fresh food component rose to 1.9% y/y vs 1.6% y/y the previous month while ex fresh food, energy printed as headline number (2.2% y/y vs 1.8% y/y in April). Back above the 2% target for the headline and “core-core” and combination of weak JPY and higher wages could move inflation further above the target in the future. April retail sales rebounded and posted a 1.2% m/m and 2.4% y/y increase. Ministry of Finance announced that they have spent JPY9.8 trillion in the markets to strengthen JPY. If we take average price of USDJPY during that period we get intervention of around $65bn.
CHF
SNB total sight deposits for the week ending May 24 came in at CHF461.2bn vs CHF467.4bn the previous week. Continued decline but only towards the bottom of the well-established range. SNB Chairman Jordan stated that risk of higher inflation is small and added that weak Swissy is the main reason for higher inflation. If the risks increase SNB could sell foreign currency in order to prop up the value of Swissy and fight inflation that way. Q1 GDP surprised to the upside as it showed growth of 0.5% q/q vs 0.3% q/q as expected.
This week we will have inflation data.
Important news for CHF:
Tuesday:
CPI
