Key events for the week ahead – US PCE inflation, Eurozone inflation, ECB Forum on Central Banking
Recap from last week
An increasingly hawkish Fed has raised the risk of a recession, or at least, reduced the chances of a soft landing on a narrow landing strip. In testimony last week, Chair Powell reaffirmed that the economy is “very strong and well positioned to handle tighter monetary policy”. But the Senate and Congress were concerned that the Fed had failed to heed their inflation warnings and that aggressive tightening to reduce inflation could bring on a recession. Chair Powell made an “unconditional commitment” to tame inflation – while waiting for “compelling evidence” that inflation is moving down before easing the pace of tightening. At this stage, either a 50bps or 75bps increase is on the table for Jul.
With growth concerns heightened, there will be increased attention to incoming data. The prelim PMIs for Jun were disappointing. Momentum slowed more than expected in the US and across Europe. The main theme was a contraction in demand/new orders and weaker confidence in the growth outlook. This was evident across US manufacturing and surprisingly, services. Across the Eurozone, orders slowed across services and contracted sharply across manufacturing. Private sector manufacturing activity in Japan also slowed – with demand affected by Covid restrictions in China. Service sector momentum was stronger in Japan as travel and tourism restrictions were eased. The prelim PMI for the UK and Aus showed momentum remained little changed in Jun.
In Aus, the RBA minutes noted further upside surprises in inflation over the prior month. The minutes suggest that the decision to go with a 50bps increase was that the current/low starting level of rates was seen as too stimulatory for an economy with a tight labour market and facing higher inflation. The Board was concerned that the inflation mindset was shifting and did not want to risk higher inflation becoming entrenched. Governor Lowe noted that the Board will be having the same discussion next month on whether to increase the cash rate target by 25 or 50bps.
Inflation was elevated across CPI reports last week. CPI growth in Canada came in higher than expected at +7.7% (expecting +7.5%) in May, the UK CPI came in as expected at +9.1%, and CPI growth in Japan remained at +2.5% for May, slower than expected, but still elevated.
Outlook for the week ahead
The ECB hosts its Forum on Central Banking this week 27-29 Jun. Members from the ECB will speak at the start of the week. On Wed, US Fed Chair Powell, ECB President Lagarde, and BoE Governor Bailey will take part in the economic policy panel.
Inflation will remain top of mind this week. US PCE price inflation for May will be released. This is the FOMC preferred measure of inflation. Headline PCE is expected to remain elevated in May (the Apr headline PCE inflation was +6.3% and core was +4.9%). Other US data will include the ISM manufacturing PMI for Jun, durable goods orders for May, and the monthly personal income and spending for May.
The flash Euro area inflation for Jun will be reported and inflation is expected to accelerate from +8.1% in May to +8.3% in Jun – another record reading. The flash CPIs for Euro area countries will also be released during the week: Spain, Germany, France, and Italy.
The final PMIs for Jun manufacturing activity will start to be released this week. The official Chinese Bureau of Statistics China PMIs will also be released for Jun.
Next Monday is the US National Independence Day holiday.
This week, the US Treasury will auction and settle approx. $347bn in ST Bills, TIPS, Notes, and Bonds, raising an estimated $53bn in new money.
Approx. $35bn in ST Bills, Notes & Bonds will mature on the Fed balance sheet this week and will be rolled over. Approx. $21bn in Notes and Bonds will mature and roll off the Fed balance sheet this week, making up the bulk of the $30bn QT cap for June.
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
