Key events this week – BoE policy meeting, Fed Chair Powell testimony, Fed Vice Chair nomination hearings, RBA Minutes, global flash PMI’s Jun
Recap from last week;
Monetary policy meetings spanned a broad spectrum of conditions last week.
The FOMC paused hikes with the FFR at 5-5.25%. The pause marks a shift in the cycle to slowing the pace of hikes as we get “closer to the destination”. Guidance retained a hawkish bias with another two hikes possible this year and Jul likely a ‘live’ meeting at this stage. A key theme from Chair Powell was that the FOMC is still not seeing the kind of progress it wants on core inflation. The core PCE inflation projection was revised higher to 3.9% by the end of the year (up from 3.6%) and is projected to moderate to 2.6% by the end of 2024. The latest US core CPI inflation for May still had a 5% handle across the 12mth and 6mth/3mth annualized rates. But the breadth of higher inflation may be narrowing. Other measures of core CPI showed a shift towards slower inflation over the more recent months.
The upward revision to US growth projections by the FOMC for the remainder of 2023 indicates a better outlook than expected back in Mar. Growth over the year is expected to slow (from current growth of +1.6%) to +1% (previously expected +0.4%) by year-end and unemployment is expected to increase to 4.1% by year end (previously 4.5%). So far, there are some further signs of loosening labor market conditions with another week of elevated initial jobless claims. US retail demand was stronger than expected in May, but annual retail growth remains flat in real terms. US factory output growth remained sluggish, and this was broadly in line with the weaker manufacturing conditions from the May surveys.
The ECB raised its policy rates with guidance that more hikes are still expected. Core inflation forecasts for 2023 were revised higher (from Mar) but are still expected to moderate through the remainder of the year. Growth forecasts were revised only slightly lower.
The BoJ kept policy unchanged, maintaining ultra-loose conditions. The BoJ expects inflation to ease over the coming months and notes that it is yet to achieve ‘sustainable’ inflation. After the meeting, there was some speculation that a policy ‘tweak’ could be made in Jul. The latest Japanese CPI for May will be released this week – with core CPI ex-food & energy expected to increase to +4.4% in May from +4.1% in Apr.
The PBoC cut a short-term lending rate, increasing expectations for cuts across other key policy rates and other stimulus measures to boost sluggish domestic conditions.
Aus and UK labor market data remained strong. Tight labor markets may keep pressure on wages while inflation remains high in both countries. By the end of the week, markets were pricing in another two rate hikes in Aus by the end of the year – despite signs of slowing growth.
Finally, NZ recorded its second quarterly GDP decline in a row (Q4 and Q1). The RBNZ recently called a pause to its hiking cycle.
Outlook for the week ahead
The focus will remain on central banks this week. The BoE will meet and is expected to raise rates by a further 25bps at this meeting. The latest UK CPI data for May will be released prior to the meeting and headline inflation is expected to slow only slightly to +8.5% over the year and by +0.4% over the month. The Swiss National Bank will also meet this week.
US Fed Chair Powell will give two days of testimony with the semi-annual monetary report. The Fed Vice Chair nomination hearings will take place – featuring Governors Jefferson and Cook. There will be multiple Fed speakers throughout the week including Governor Waller.
The RBA minutes of the Jun meeting will be released. Markets expected a pause at the last meeting, so it will be important to gauge the discussion around policy options and just how finely balanced this latest decision was.
In the US, key housing data for May will be important; including existing home sales (expecting 4.24m SAAR), building permits (expecting 1.435m), and housing starts (expecting 1.4m).
Finally, the flash S&P PMI’s for Jun will be released this week. These will provide some insight into shifts in growth momentum in the final month of Q2. So far, the key dynamic has been stronger services momentum helping to offset weaker/sluggish manufacturing activity.
This week, the US Treasury will auction and settle approx. $339bn in ST Bills, including a 42-Day Cash Management Bill (CMB), raising approx. $121bn in new money. The US Treasury will also auction the 5-year TIPS and 20-year Bond this week – both will settle on 30 Jun.
QT Jun: Approx $4.7bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $1.2bn in ST Bills will mature and roll off the Fed balance sheet.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
