PCE and preliminary CPI from Eurozone coupled with GDP from the US and Switzerland as well as official PMI data from China will highlight the shortened week ahead of us as we Monday will be a holiday in the US (Memorial Day).
USD
Fed Governor Waller stated that he wants to see more good data on inflation, several months more good inflation data. He added that monetary policy is restrictive enough and that further rate hikes will most likely not be needed. The economy is evolving along Fed’s expectations and there are no signs of inflation accelerating in the incoming data. Wallet, however, acknowledged that progress towards 2% inflation may be slower and added that probability of a recession seems to have disappeared.
FOMC minutes showed that it will take longer than previously expected for members to gain greater confidence that inflation is sustainably moving down to the 2% target. Many members expressed their concerns if monetary policy is restrictive enough. Almost all members agreed that it is appropriate to start slowing down the pace of QT. These more hawkish assessments along with much stronger than expected PMI numbers brought risk off mode again in the markets. USD strengthened and bond yields rose.
The yield on a 10y Treasury started the week at 4.42%, rose to 4.50% and finished the week at around 4.46%. The yield on 2y Treasury started the week at 4.84% and reached the high of 4.96%. Spread between 2y and 10y Treasuries started the week at -41bp then widened to -47bp as curve proceeded to invert further. The 2y10y is inverted for over twenty months. FedWatchTool sees the probability of no change at June meeting at almost a 100%. Probability of a July rate cut sits at around 18% while September is at around 56%.
This week we will have second estimate of Q1 GDP and Fed’s preferred inflation measure PCE which is expected to slide further.
Important news for USD:
Thursday:
GDP
Friday:
PCE
EUR
Preliminary May PMI data showed improvement in the manufacturing sector to 46.7 from 45.3 while increase to 45.8 was expected. Both Germany and France saw their numbers improve. Services were unchanged at 53.3 due to a sharp drop in French reading which returned into contraction. Composite was lifted to 52.3 from 51.7 the previous month, but composite PMI for the French economy dropped below the 50 level indicating a drop in activity. The report shows that input and output prices in services sector declined compared to the previous month which will make ECB happy as they get more confident that their decision for a June rate cut is adequate. The negotiated wages index rose 4.7% y/y in in Q1, higher than 4.5% y/y increase in Q4 of 2023. Increase in wages will not deter ECB from June cut but it may slow down the pace of rate cuts and throw July out of the picture.
This week we will have preliminary May inflation data, headline expected to stabilize white core is seen dropping further.
Important news for EUR:
Friday:
CPI
GBP
April inflation report showed headline number drop to 2.3% y/y from 3.2% y/y in March. Expectations were for a further drop, down to 2.1% y/y. The biggest contributor to the drop in inflation was lowering of the energy price cap by 12%. The most concerning fact is that services inflation printed 5.9% y/y vs 5.5% y/y as expected indicating that inflation pressures in services sector are much stickier than BoE projected. Core CPI declined to 3.9% y/y from 4.2% y/y the previous month, but markets were expecting a 3.6% y/y reading. This report will significantly lower chances of a June cut, leaving August as the first month to expect a rate cut and on the back of that GBP rallied.
Preliminary PMI data for the month of May showed manufacturing PMI returning to expansion after a drop of last month and printing 51.3. It is a 22-month high for the reading and it showed a jump in output index. Services dropped to 52.9 from 54.7 in April, still a healthy reading but business activity index slumped. Composite was a victim of weak services and it printed 52.8, down from 54.1 the previous month. The report shows “The survey also brings welcome news of a cooling in service sector inflation, which is needed to open the door for the Bank of England to start cutting interest rates.”
Retail sales for the month of April were a disaster as they show big declines across all measures with March readings being revised down. Headline number showed a 2.3% m/m decline while ex autos, fuel category declined by 2% m/m. Consumer is struggling. UK Prime Minister Sunak called for snap elections on July 4.
AUD
Minutes from the latest RBA meeting showed that members discussed whether to increase rates but opted for no change as it was appropriate to do so. They could not rule out either rate cuts or rate hikes. Risks surrounding inflation have increased, meaning it may take longer to return inflation down to their target. Minutes had a hawkish tone to them as they mentioned rate hikes several times (if forecasts proved to be overly optimistic the bank could hike rates).
PBoC has left 1-year and 5-year LPR rates unchanged at 3.45% and 3.95% respectively as was widely expected. Last week they have lowered rates on home loans by 25bp in order to spur up falling real estate market and more easing is expected during the year.
This week well have official PMI data from China.
Important news for AUD:
Friday:
Manufacturing PMI (China)
Services PMI (China)
Composite PMI (China)
NZD
RBNZ had left the Official Cash Rate (OCR) unchanged at 5.5% but their projections and wording were hawkish. New projections see OCR at 5.54% in June 2025 vs 5.33% previously and 5.4% in September of 2025 vs 5.15% previously. They see the need for monetary policy to remain restrictive in order for inflation to return to their 1-3% target which will be achieved by the end of the 2024. Domestic services inflation pressures persist while wages and spending are easing. The committee stated that inflation has fallen slower than expected and they were discussing the possibility of a rate hike at this meeting. At the press conference Governor Orr sounded less hawkish than the tone of the statement which dampened NZD’s rise. During the week Governor Orr clarified that they are prepared to start cutting rates before inflation falls to 2%. Retail sales for the first quarter showed increase of 0.5% q/q vs -0.3% q/q as expected and up from -1.9% q/q in the Q4 of 2023 indicating that consumer is improving.
CAD
Inflation in April resumed its downtrend. Headline number printed 2.7% y/y as expected, down from 2.9% y/y in March. Food prices, services and durable goods led the declines, exactly what BoC wants to see. Gasoline prices rose m/m and if we would exclude them the drop in inflation would be even larger. All three core measures have declined further with median and common printing 2.6% y/y while trim printed 2.9% y/y. BoC will lean heavily towards cutting rates after this report and CAD is weakening. March retail sales only added to CAD woes as they showed headline number falling 0.2% m/m while ex autos plunged 0.6% m/m. One saving grace is that preliminary April reading is seen increasing 0.7% m/m but that reading is subject to revisions as more data is gathered.
JPY
Preliminary May PMI data saw manufacturing return to expansion territory for the first time since May of 2023 and print 50.5, up from 49.6 in April. Services dipped to 53.6 from 54.3 the previous month but with still healthy activity and deep into expansion. Composite improved slightly to 52.4 from 52.3 in March. The yield on 10y JGB has crossed the 1% level for the first time since 2013.
National CPI for the month of April saw headline number at 2.5% y/y, down from 2.7% y/y in March. Ex fresh food dropped to 2.2% y/y from 2.6% y/y the previous month while ex fresh food, energy component printed 2.4% y/y, down from 2.9% y/y in March. With inflation quickly dropping towards the 2% target the room for BoJ to further increase rates diminishes significantly.
CHF
SNB total sight deposits for the week ending May 17 came in barely unchanged at CHF467.4bn vs CHF468.9bn the previous week. The range for sight deposits seems to get tighter.
This week we will have Q1 GDP reading.
Important news for CHF:
Thursday:
GDP
