The macro review for w/c 17 June 2019 – Central banks were the main focus during the week – mostly signalling that more policy accommodation is to be expected. The FOMC, RBA, and ECB indicated that further accommodations were required in order to reach inflation targets over the medium term.
From the FOMC this week, we expected to see a shift in the language, opening the door to greater accommodation. While rates remained on hold at this meeting, the decision signalled growing support among committee members for more policy accommodation. Downside risks for the domestic economy are on the radar – weakening business sentiment and investment, re-emergence of ‘cross-currents’ on trade and global growth. The concern for the FOMC has been muted domestic inflation – with downside risks seen as further slowing progress on bringing inflation back to the 2% (symmetrical) target. Key language changed; removing reference to a “patient approach”. Forecasts were little revised except for PCE inflation which was revised lower for this year.
The two regional US manufacturing surveys indicated an abrupt loss of momentum in Jun. The prelim composite PMI for Jun indicated private sector activity stagnated – led by both manufacturing and services. At the same time, housing market conditions and existing home sales have stabilized since the start of the year.
ECB President Draghi also flagged further rate cuts and monetary stimulus were likely. This is in response to continued weakness across the Eurozone especially in manufacturing and exports. Downside risks pose a threat to the ECB reaching its 2% inflation target and ECB President Draghi reaffirmed the conviction of the Bank to meeting the 2% target.
Annual Eurozone CPI growth slowed further in May while the prelim PMI’s indicated a slight improvement in momentum – led by services while manufacturing continued to contract.
The BoJ also kept rates on hold. There was little change here – with the Bank signalling policy accommodation to remain in place for an extended period, until at least Spring 2020. Inflation in Japan ex fresh food remained low in May with little sign of acceleration. The prelim manufacturing PMI indicated continued slight contraction in manufacturing activity. Exports and import declined in May.
The BoE kept rates on hold and has so far maintained its very slight tightening bias – which assumes a smooth Brexit. But the MPC has started to acknowledge downside risks are picking up with Brexit and political uncertainty partly fuelling underlying weaker growth in H1 relative to 2018. While stronger household consumption and weaker business investment patterns have persisted, retail sales (volumes) have declined/stalled for the last two months.
The RBA minutes also confirmed that further policy accommodation in Australia is likely. The case for rate cuts; to reduce spare capacity in the labour market in order for inflation to return to the 2-3% band (via an increase in wages growth). The return of inflation to the 2-3% range would be more gradual without further cuts given the current level of unemployment and underemployment.
There are more data releases covered in last weeks review. Use the links on the contents page to navigate to different country sections. Download the review here;
The outlook for w/c 24 June 2019 – The focus will be on the G-20 summit in Osaka at the end of the week – 28-29 Jun. Closely watched will be the outcome of the meeting between US President Trump and China’s President Xi and whether or not there will be another round of tariff escalation. There will also be meetings regarding the US-Japan trade negotiations.
US data highlights this week include a focus on manufacturing output. After the falls in momentum reported in the regional surveys and prelim composite PMI for Jun last week, there will be several further readings of regional activity in Jun. The final reading of consumer sentiment for Jun will also be released – possibly reflecting the more positive outcome of no tariffs on imports from Mexico.
Also, this week will be the first read on durable goods orders and shipments for May, personal consumption expenditure and incomes and the PCE price index for May.
US Fed Chairman Powell speak this week in an interview discussing the challenges facing the U.S. economy and the policies of the Federal Reserve.
In Japan – the prelim reading for May industrial production will be important and the extent to which it confirms the weaker PMI readings for output in manufacturing.
In Australia, month-end private sector credit data will be released for May. This is still cycling over the May election result and the unexpected win by the Liberal Party. US Treasury supply will be somewhat lighter this week – the US Treasury will settle approx. $180bn in ST bills and coupons, raising approx. $16bn in new money.
More detail (including a calendar of events) is provided in the briefing document – you can download the file here;
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
