Key events this week – US retail sales & housing, RBA minutes, Aus labor market, CPI reports; UK, Canada, NZ, Japan, and Eurozone
Recap from last week
US inflation continued to ease in Jun. The headline inflation rate slowed to +3.1% from +4.1% in May. Core CPI eased by slightly more than expected to +4.9%. While the magnitude of the slowdown over the last two months has been aided by the higher base from a year ago, there has been a solid contribution to the deceleration from more recent developments in inflation. This includes lower energy prices and moderating food and shelter price growth. The more consistent measures of the underlying CPI trend – the trimmed mean and median CPI, have also slowed, including the recent annualized periods. But these measures still highlight that, accounting for outlier categories, inflation from the centre of the distribution (i.e. those product categories not deemed outliers) remains higher than other measures of core CPI.
Even after the better-than-expected report, Fed speeches remained cautious. Governor Waller noted that he would need to “see this improvement sustained before I am confident that inflation has decelerated”. Taking this CPI report into account, he still sees another two 25bps increases over the four remaining meetings this year (including a hike in Jul) while keeping policy restrictive “for some time” to reach the 2% inflation objective. Markets continue to price in a 25bp hike at the July meeting next week but have not priced in another hike after that. We are now in the blackout period ahead of the FOMC meeting next week – although there will be a speech by Vice Chair for Supervision Barr during the week.
The prelim University of Michigan consumer sentiment report for Jul posted a stronger rebound, citing a “continued slowdown in inflation along with stability in labor markets”. Yet, year-ahead inflation expectations increased slightly to +3.3%. Longer-run inflation expectations were unchanged at +3.1%. Sentiment around long and short-term business conditions improved notably this month. The Fed Beige Book survey for Jul noted that despite an improvement in economic activity since May, growth was expected to slow in the coming months.
The RBNZ kept rates on hold last week at 5.5% and noted that rates would likely remain restrictive for some time to ensure inflation returns to the 1-3% range. The BoC hiked rates by another 25bps to 5.0%. The BoC noted that the slowdown in inflation has been led by falling energy prices and ‘less from easing underlying inflation’.
RBA Governor Lowe outlined several changes to the operation of the Aussie central bank after an independent review. On the outlook, he noted that it remained to be determined whether monetary policy has more work to do and it’s still possible that more tightening will be required. At the end of the week, current Deputy Gov Michele Bullock was announced to replace Philip Lowe as the new RBA Governor.
Outlook for the week ahead
We continue to remain focused on growth and inflation indicators leading into the FOMC meeting next week. This week, US retail sales should provide a view on robust consumer spending in Jun with sales expected to increase by +0.5% (+0.3% in May). US housing data will also be in focus esp. building permits (expecting 1.5m SAAR) and housing starts (expecting 1.48m SAAR). Last month, housing starts jumped to 1.63m – and we’ll see the degree to which this is revised this month. Existing home sales are expected to moderate to 4.23m (from 4.3m). Initial claims are expected to increase slightly to +243k.
The RBA minutes are expected to outline in detail the decision to hold rates steady at the Jul meeting. In his speech last week, Governor Lowe noted that there will be a full review of performance, forecasts, and assessment of risks related to the inflation outlook at the Aug meeting – there may be some detail around this in the Jul minutes. The Aus labor market survey for Jun is expected to show a slowdown in net employment growth to +17k (from +76k in May). The unemployment rate is expected to stay at a low of 3.6%.
Finally, there will be several important global CPI reports this week. UK CPI is expected to moderate to +8.2% in Jun and +0.4% over the month. This will be an important report for the BoE after the surprise 50bps hike at the last meeting citing persistent inflation pressures. Canadian CPI is expected to moderate to +3% over the year. Core measures will be in focus for the BoC and are expected to remain around +3.7% ex-food & energy and +3.8% for the trimmed mean. The NZ CPI is expected to moderate to +5.9% at the end of Q2. Finally, the headline CPI for Japan is expected to accelerate slightly to +3.5% in Jun while underlying inflation ex fresh food and energy is expected to stay around +4.2%.
This week, the US Treasury will auction and settle approx. $439bn in ST Bills, Notes, and Bonds raising approx. $63bn in new money. The US Treasury will also auction the 10-Year TIPS and 20-Year Bond this week – both will settle next week.
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
