Key events this week – Inflation; US PCE, CPI for the Euro Area, Tokyo, Aus, and Canada, ECB Forum on Central Banking – policy panel with Fed Chair Powell, BoE Governor Bailey, ECB President Lagarde, and BoJ Governor Ueda
Recap from last week
If there has been a theme from the recent round of central bank meetings it’s central banks signaling that they may not be done raising rates as they continue to address persistent inflation. Most central banks have raised rates to levels expected to be restrictive, but for many, inflation remains too high. This came into sharp focus last week as the Bank of England hiked rates by 50bps after another worse-than-expected inflation report. The BoE noted ‘more persistence in the inflation process, against the background of a tight labor market and continued resilience in demand’. UK inflation was higher than expected with headline CPI unchanged at +8.7% in May. The monthly rate slowed to +0.7% (but expecting +0.4%). UK Core CPI accelerated to +7.1% over the year, up from +6.8% in Apr – led by another acceleration in services inflation.
The RBA minutes noted that the decision to increase rates in Jun was another ‘finely balanced decision’. The minutes also noted that “the recent data suggested that inflation risks had shifted somewhat to the upside. Given this shift and the already drawn-out return of inflation to target, the Board judged that a further increase in interest rates was warranted”. The removal of forward guidance from the minutes was unusual.
Japan has been the exception during this hiking cycle (as well as China). The latest Japanese CPI showed a modest slowdown in headline inflation to +3.2% in May. Falls in fuel, light, and water charges were the main contributor to the slowdown. But core underlying inflation – ex-fresh food and energy continued to accelerate, reaching another high of +4.3%. The BoJ continues to reinforce its commitment to its YCC program and low rates. The latest BoJ Summary of Opinions showed mixed views on the expected persistence of current inflation.
The week ended on a low note with the flash PMIs showing a deterioration in private sector momentum in Jun. Services activity continued to offset weakening manufacturing activity, but even services output growth momentum slowed (less so in the US). Manufacturing PMIs and output indexes shifted into and/or remained in contraction across Japan, Aus, the US, the UK, and Europe (especially Germany). Services activity remained mostly positive, but momentum slowed.
Outlook for the week ahead
With most central banks in data-dependence mode, inflation, labor markets, and growth reports will remain important inputs. This week, inflation will be in focus.
US PCE inflation (US Fed preferred measure) is expected to remain around +4.4% for May. Core inflation is expected to remain little changed at +4.7%. The other important US data point will be initial claims. This has been elevated over the last three weeks around the +260k level but has shown little flow through yet to a rise in continuing claims. Initial claims are expected to stay elevated at +266k this week.
The prelim Eurozone headline CPI for Jun is expected to slow to +5.6%(from +6.1%) while core inflation is expected to increase to +5.5% (up from +5.3% in May). Germany, Italy, and France prelim CPI reports for Jun will all be out this week.
The Aus monthly CPI for May will be an important input for the RBA meeting next week given the continued “finely balanced” nature of recent hiking decisions. The headline CPI is expected to slow to +6.1% from +6.8%. CPI ex-volatile items (auto fuel and fruit & veg) is the measure of underlying inflation in this series and is currently running at +6.8%.
Canada’s headline CPI for May is expected to ease to +3.4% (from +4.4%) while core CPI is expected to remain elevated at +5.2% (from +5.7%). The last BoC meeting noted concerns over inflation becoming “stuck materially above 2%”.
Finally, Japan’s Tokyo CPI is expected to show more persistent inflation with headline CPI increasing to +3.8% and core (ex-fresh food and energy) increasing to +4.4%.
The ECB Forum on Central Banking runs this week 26-28 Jun. On the final day is a policy panel discussion featuring US Fed Chair Powell, ECB President Lagarde, BoE Governor Bailey, and BoJ Governor Ueda.
US Fed Chair Powell will also take part in a discussion at the Financial Stability Conference in Spain.
This week, the US Treasury will auction and settle approx. $522bn in ST Bills, Notes, Bonds, FRNs, and TIPS, raising approx. $198bn in new money.
QT Jun: Approx $11.8bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $39.1bn in ST Bills, Notes, and Bonds 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
