Preliminary inflation data from the Eurozone, employment data from the US and official PMI data from China will be the main economic news in the week ahead of us. Please note that Monday is a Memorial Day Holiday, markets in the US will be closed, therefore liquidity will be lower.
USD
FOMC minutes from May meeting showed unanimous decision for May but a split in regards of what to do in the future. “Some” members stated that inflation is falling slower than expected and that it could mean more rate hikes in the meetings ahead. On the other hand, “several” members stated that if economy continues to perform as expected there will be no need for further rate hikes. Both camps agreed that inflation is “unacceptably high” and that they will be data dependent.
Second reading of Q1 GDP was revised higher to 1.3% annualized from 1.1% annualized as reported in advanced reading. Personal consumption helped push the number up with a contribution of 2.52% followed by government spending. Net exports were basically flat while fixed investment were a drag on the reading. PCE data for April saw headline number rise to 4.4% y/y from 4.2% y/y in March with core PCE ticking up to 4.7% y/y from 4.6% y/y the previous month. Personal spending rose 0.8% m/m while personal income rose 0.4%. Deadly combination of rising inflation and rising income means that Fed will keep the foot on the rate hike pedal.
The yield on a 10y Treasury started the week and year at around 3.67%, rose to 3.85% and finished the week at around the 3.82% level. The yield on 2y Treasury reached around 4.6%. Spread between 2y and 10y Treasuries started the week at -57bp then widened to -75bp. FedWatchTool sees the probability of a 25bp hike at 58.5% while probability of no change in June is at 41.5%.
This week we will have ISM Manufacturing PMI and NFP data. Headline NFP number is expected to come at around 180k with the unemployment rate ticking up to 3.5%.
Important news for USD:
Thursday:
ISM Manufacturing PMI
Friday:
NFP
Unemployment Rate
EUR
ECB policymaker Villeroy, a hawkish leaning member, stated that main question is the pass-through effect or prior rate hikes. He added that he expects ECB to be at the terminal rate by September also stating that it is far more important how long will rates stay high than what the terminal rate will be. He reiterated that bank is data dependent and that in next 3 meetings they could hike or pause.
German Ifo business climate for April snapped the streak of seven month’ increases and came in at 91.7, down from downwardly revised 93.4 in March. Ifo economist has stated that German economy is heading towards stagnation in Q2. Second reading of German Q1 GDP came in at -0.3% q/q and with Q4 reading printing -0.5% q/q Germany hash entered a technical recession, defined as two consecutive quarters of negative growth. Private and public consumption were drag on the reading while net exports, helped by China reopening, managed to contribute positively.
Preliminary PMI data for the month of May showed slowdown of the economy. Manufacturing PMI slipped to 44.6 from 45.8 in April due to dreadful German reading of 42.9. Services PMI managed to beat expectations with 55.9 vs 55.6 but it fell from 56.2 the previous month, German reading managed to climb to 57.8 thus accentuating different paths with manufacturing going down, while services going up. Composite was slightly down to 53.3 from 54.1 in April. The report states how production and new orders are declining rapidly but are still well above averages for this time of year. Additionally, price pressures in service sector, ECB pays close attention to that inflation, are seen rising which will be another input for ECB to continue hiking rates. Employment index is on the rise as companies continue to hire.
This week we will have preliminary May inflation data and it is expected to go down.
Important news for EUR:
Thursday:
CPI
GBP
Preliminary May PMI data were all on decline. Manufacturing fell deeper into contraction with 46.9, services declined to 55.1 from high of 55.9 in April and composite was dragged down to 53.9. The report shows that economy is still expanding but at a slower pace. The divergence between sectors is also seen in the prices charged. Services sector sees increases in prices while manufacturing sees decreases in prices.
April CPI data was not something BOE wanted to see. Headline number declined from 10.1% y/y to 8.7% y/y but expectations were for a bigger decline, down to 8.2% y/y. Monthly inflation rose 1.2% vs 0.8% as expected. Details show that food inflation was the biggest contributor to rising prices as it rose astonishing 19% y/y. The drop in headline number was due to prices of housing and housing services, that is electricity and gas prices, as well as Ofgem energy price cap going out of the calculation. Core CPI rose to 6.8% y/y from 6.2% y/y in March with a monthly increase of 1.3%! almost doubling the expected number. Core inflation is at the highest level in over 30 years.
BOE Governor Bailey stated the day before the inflation report that inflation is turning the corner and that bank is drawing nearer to the peak rates. After the report his statements cannot be taken seriously and markets are repricing rate expectations higher, toward 5.34% as a terminal rate. Post report he said he was satisfied with inflation coming down into single digits. He also argued that only one-third of the rate hikes had actually had effect on the economy and that there is still room for current rate hikes to show their effects. Markets are, however, pricing three more rate hikes.
AUD
PBOC has left LPR rates unchanged as was widely expected as they stand at 3.65% for 1-year and 4.3% for 5-year. The former is used as a benchmark for most new and outstanding loans while latter is used for most mortgage loans.
This week we will have official PMI data from China.
Important news for AUD:
Wednesday:
Manufacturing PMI (China)
Non-Manufacturing PMI (China)
Composite PMI (China)
NZD
RBNZ meeting was a live one where options for pause, 25bp rate hike and 50bp rate hike were all on the table. In the end decision was to go for a 25bp rate hike and bring Official Cash Rate (OCR) to 5.5%, This will be a peak in interest rates as projections show it will stay there until at least June of 2024. September of 2024 could see first rate hike while OCR is seen at 3.31% in June of 2026. The bank sees GDP for Q2 and Q3 to be negative which will bring a technical recession, two consecutive quarters of negative GDP growth, while CPI for 2024 is seen at 3.6%. The statement reiterated that “The OCR will need to remain at a restrictive level for the foreseeable future, to ensure that consumer price inflation returns to the 1% to 3% annual target range, while supporting maximum sustainable employment.“ Significant sign that this will be a pause in rates led to big repricing of NZD down. Additionally, Q1 retail sales data were abysmal. They came in at -1.4% q/q vs 0.2% q/q as expected and down from downwardly revised -1% q/q in Q4 of 2022.
CAD
Preliminary manufacturing sales for April came in at -0.2% m/m vs 0.7% m/m in March. Food and primary metal industries were the biggest drags. Wholesale trade in April rose 1.6% m/m vs -0.1 m/m the previous month on the back of higher sales of petroleum and petroleum products. CAD took advantage of week JPY and rose to 103, it fell against USD while it was mostly flat against other currencies.
JPY
Preliminary May PMI data saw manufacturing return to expansion territory after six months. The reading printed 50.8, up from 49.5 in April. The report showed growth after decline for output and new orders as well as weaker input and output prices inflation. Services continued to increase and came in at 56.3, up from 55.4 the previous month. The report showed stronger growth for output as well as new and new export orders, weaker inflation for output prices but input prices showed stronger inflation. Composite was lifted to 54.9 from 52.9 in April and it is a level not seen for almost a decade!
CPI data for the Tokyo area in the month of May showed headline number easing to 3.2% y/y from 3.5% y/y in April. Ex fresh food category also printed 3.2% y/y and was down from 3.5% y/y the previous month. Both readings came in weaker than expected. On the other hand, ex fresh food, energy category, so called “core-core”, ticked up to 3.9% y/y from 3.8% y/y in April and marked a new 40-year high. BOJ Governor Ueda is mulling a possibility of changing Yield Curve Control from 10y bonds to 5y bonds. Core machinery orders, a good proxy for the business investment 6-9 months into the future, fell in March 3.5% m/m and 3.9% y/y. Both numbers missed expectations by a large amount. This data point is very volatile but still this is a huge drop in y/y reading from 9.8% in February.
CHF
SNB total sight deposits continued to decline and came in at CHF515.7bn vs CHF520.1bn the previous week. SNB is firm on the path of strengthening the Swissy to contain inflation.
