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by Charalambos Pissouros

Weekly Outlook: June 17 – June 21: Fed, BoJ, BoE and Norges Bank Meetings; RBA Minutes and EZ PMIs

We have a very busy week ahead of us with four central banks deciding on monetary policy: the FOMC, the BoJ, the Norges Bank and the BoE. Following hints from several Fed policymakers that they could cut rates in order to avert a steep economic downturn, investors will be eager to see whether the Committee will officially signal that rate reductions are indeed on the cards. The BoJ and the BoE are expected to keep their respective policies unchanged, while the Norges Bank could hike. We also get the minutes from the latest RBA policy meeting and Eurozone’s preliminary PMIs for June.

Monday appears to be a relatively light day in terms of events and economic releases. We only get wage data for Q1 from the Eurozone, and the New York Empire State manufacturing index from the US. No forecast is available with regards to the Euro area wages, but the bloc’s Labor Cost Index is expected to have accelerated to +2.6% yoy from +2.3% in Q4, 2018. The US Empire State index is anticipated to have declined to 11.00 from 17.80.

On Tuesday, during the Asian morning, we get the minutes of the latest RBA monetary policy gathering. At that meeting, policymakers decided to cut rates by 25bps and noted that they will continue monitoring developments in the labor market and adjust policy accordingly. There were no strong hints with regards to more rate reductions in the statement, but policymakers did not close the door either.

ASX interbank cash rate futures

Thus, we believe that market participants will dig into the minutes to find out how willing officials were to proceed with more cuts in the months to come. After the meeting, GDP data showed that the economy accelerated somewhat in quarterly terms, but the yoy rate slid to +1.8% from 2.3%. Yes, this is still above the RBA’s forecast of +1.7% for the first half of this year, but in order for the yearly rate to stay near that projection, the economy would have to grow +0.9% in Q2, a low-probability scenario in our view, given the escalation in trade tensions during the quarter. What’s more, although the employment data showed accelerating job gains in May, this was mainly due to part-time jobs, while the unemployment rate held steady at 5.2%, above the 4.5% mark, which the RBA believes would start generating inflationary pressures. The data kept the door open for further rate cuts, with the ASX 30-day interbank cash rate futures implied curve suggesting that the next one may come in August. Thus, if the minutes show that officials have discussed further rate reductions, even ahead of the aforementioned data, that timing may come forth to the July gathering.

As for Tuesday’s data, during the European morning, we get the German ZEW survey for June, as well as Eurozone’s final CPIs for May and trade balance for April. Both the current conditions and economic sentiment ZEW indices are expected to have declined, while Eurozone’s final CPIs for May are forecast to confirm their preliminary estimates. With regards to the bloc’s trade data, it is anticipated to show a narrowing surplus. Later in the day, the US building permits for May are coming out and expectations are for a minor increase.

Passing the ball to UK politics, we will have the second round of the elimination process towards finding Theresa May’s replacement. Last week, Conservative MPs gave 114 votes to Boris Johnson, with Foreign Secretary Jeremy Hunt taking the second place with 43 votes. The last three contenders, Andrea Leadsom, Esther McVey and Mark Harper were eliminated. With 114 votes in support, Johnson would be extremely hard to be taken down from the first place and thus, it remains the most likely contestant to win this race. This keeps the probability of a no-deal Brexit decent in our view. Yes, last Wednesday, Johnson said that he is not aiming for such an outcome, but he did not rule it out either. He remains willing to do whatever it takes in order to ensure that the UK leaves the EU on October 31st, which means that if no accord is found on time, he may not hesitate to pull the plug.

On Wednesday, all lights are likely to turn to the FOMC policy decision. This will be one of the “bigger” meetings, where apart from the rate decision, the statement and Fed Chair Powell’s press conference, we also get updated economic projections, and a new “dot plot”. When they last met, officials reiterated their “patient” stance, with Powell noting that some transitory factors may be at work with low inflation and that there is no strong case for moving in either direction. The minutes of that gathering echoed Powell’s remarks, revealing that officials’ approach could remain appropriate for “some time”.

However, the meeting took place ahead of the latest escalation in trade tensions between US and China, and recent headlines suggest that several officials may have changed their minds. A couple of weeks ago, St. Louis Fed President James Bullard said that a rate cut may be “warranted soon”, while Fed’s Chief Jerome Powell noted that the Committee would respond “as appropriate” to the risks posed by a global trade war. Officials’ willingness to reduce rates in order to avert a steep economic downturn has prompted market participants to add to their already elevated expectations with regards to lower US rates. According to the Fed funds futures, a 25bps rate cut is now fully priced in for August, while there is a 68% chance for this to happen in July. Another decrease is more-than-factored in for November.

Fed funds futures Market vs FOMC interest rate forecasts

With regards to this meeting, the cut chance is around 23% and thus, if the Committee refrains from acting as it is mostly anticipated, the focus will quickly turn to the accompanying statement and the economic projections, especially the new “dot plot”. The March dots were pointing to no action this year, one hike in 2020, and again no action in 2021. Following the aforementioned cut hints, we see the case for the plot to be revised down, but the big question is by how much. Even if the plot points to one cut this year, this would still be more optimistic than what the market currently anticipates and thus, we doubt that it could hurt the dollar. It could even support it. For the greenback to come under renewed selling interest and the equities to resume their latest recovery, we believe that the dot would have to point to at least 2 cuts in 2019.

Apart from the FOMC gathering, we also have some economic indicators due to be released on Wednesday. During the Asian morning, we have New Zealand’s current account balance for Q1, which is expected to have turned into a NZD 0.53bn surplus from a 3.26bn deficit in Q4, 2018. During the European session, we get the UK CPIs for May. Expectations are for both the headline and core rates to have ticked down to +2.0% yoy and 1.7% yoy, from +2.1% and +1.8% respectively. We get inflation data for May from Canada as well. The headline CPI is expected to have accelerated to +2.2% yoy from 2.0%, but the core rate is forecast to have declined to +1.2% yoy from +1.5%.

On Thursday, the central bank torch will be passed to the BoJ, the Norges Bank and the BoE.

So, let’s kick off with the BoJ, which concludes its two-day meeting during the Asian morning. Last time, Japanese officials kept their ultra-loose policy unchanged and revised their forward guidance, saying that they intend to maintain the current extreme low levels of interest rates for an extended period of time, “at least through around spring 2020”. However, this was just a few days before the latest round of tensions between the US and China, and well before Fed officials' hints over lower rates. If the need for lower rates is confirmed by the Committee on Wednesday, this would add pressure on the BoJ to prevent a narrowing rate spread with the US, especially amidst subdued inflationary pressures and a stronger yen due to trade tensions. Even though we don’t anticipate further easing measures as early as at this gathering, we will be eager to find out whether Japanese officials will decide to push further back their guidance, or not.

Now let’s move on to Norway and the Norges Bank. At its latest meeting, this Bank maintained the view that its next hike would most likely come in June. Since then, data showed that GDP for mainland Norway slowed to +0.3% qoq in Q1 from the stellar 1.1% qoq in the last three months of 2018, which is below the Bank’s latest forecast of +0.6%. Inflation slowed as well, with both the headline and core rates now standing slightly below officials’ projections for May. The data may have put a June hike into some doubt, but with both the CPI rates still above the Bank’s aim of 2%, we believe that there is still a decent chance for officials to push the hike button at this meeting. That said, the rate increase may be accompanied by lower economic forecasts, as well as a downside revision in the Bank’s rate path projections.

Norges Bank interest rates Norway

Then, it’s the BoE’s turn. This would be one of the smaller meetings that are not accompanied by the quarterly Inflation Report, neither a press conference by Governor Carney. Thus, with the Bank almost certain to keep monetary policy unchanged, we believe that the focus will fall on the accompanying statement and the meeting minutes. At the previous gathering, the Bank reiterated the view that if the economy develops in line with its projections, an ongoing tightening would be appropriate, but also noted that the appropriate monetary policy path will largely depend on the nature and timing of the EU withdrawal.

UK real wages earnings vs inflation

Latest data revealed that GDP contracted in April, with the National Institute of Economic and Social Research (NIESR) projecting a 0.2% contraction for the whole second quarter. The Bank’s latest projection was for a 0.2% growth in Q2. However, with the unemployment rate holding steady at its 45-year low of 3.8%, earnings above the Bank’s own projections, and headline inflation near the BoE’s 2% price objective, policymakers are unlikely to alter their policy stance at this gathering. Recent comments by several BoE policymakers add more credence to that view. Deputy Governor Ben Broadbent said that there was no reason for officials to change their outlook, just after the Bank’s Chief economist Andy Haldane and MPC member Michael Saunders backed the case for higher rates. Haldane said that the time for a hike is nearing, while Saunders said that Brexit uncertainty was no reason for delaying rate increases.

As for Thursday’s economic indicators, during the Asian morning, we get New Zealand’s GDP for Q1. Expectations are for the nation’s economy to have grown 0.6% qoq in the first three months of 2019, the same pace as in Q4, 2018, something that would drive the yoy rate up to +2.5% from +2.3%. A +0.6% qoq growth rate would be above the RBNZ’s own projection for the quarter, which is at 0.4%, and would add more credence to recent comments by RBNZ Assistant Governor Christian Hawkesby, who said that interest rates would “remain broadly around current levels for the foreseeable future”. 

From the UK, apart from the BoE decision, we also have the UK retail sales for May, while in the US, the Philly Fed manufacturing index is due to be released. With regards to the UK retail sales, both the headline and core rates are expected to have declined to -0.5% mom, from 0.0% and -0.2% respectively. This would drive both the yoy rates down to +2.7% and +2.4%, from +5.2% and +4.9%, something supported by the tumble in the yoy rate of the BRC retail sales monitor for the month. As far as the US Philly Fed index is concerned, expectations are for a slide to 11.5 from 16.6.

Finally, on Friday, during the Asian morning, Japan’s National CPIs for May are scheduled to be released. The headline and core rates are expected to have declined to +0.7% yoy and +0.8% yoy, both from +0.9%. The case for slowing National inflation metrics is supported by the slide in both the headline and core Tokyo CPI rates for the month. Thus, with all Japan’s inflation metrics, even the BoJ’s own core rate, well below the Bank’s 2% objective, Japanese policymakers are likely to stick to their ultra-loose monetary policy and according to Governor Kuroda’s remarks a week ago, they could even add more stimulus in the future, if necessary.

Japan CPIs inflation

Later in the day, we get the preliminary PMIs for June from several European nations and the Eurozone as a whole. Both the manufacturing and services indices are expected to have risen somewhat, to 48.0 and 53.0, from 47.7 and 52.9 respectively. However, the composite index is anticipated to have remained unchanged at 51.8.

Eurozone PMIs

At its latest meeting, the ECB decided to push further back the timing of when it expects interest rates to start rising, with officials noting that rates are likely to stay untouched “at least through the first half of 2020.” The prior guidance was for rates to remain unchanged “at least through the end of 2019”. Yet, the euro surged at the time the statement was out, perhaps due to expectations that the Bank could push back even further its guidance. At the press conference, ECB President Draghi noted that the positive contribution of negative rates is not undermined by possible side effects on bank intermediation, which may have come as a disappointment to those expecting hints on measures like a tiered deposit rate that was rumored ahead of the April meeting. However, Draghi also said that several members raised the possibility of further rate cuts, while others talked about restarting QE, in case of adverse contingencies. Thus, another disappointment in the PMIs could prompt market participants to increase their cut bets. According to Eurozone money markets, a 10bps rate cut in the deposit rate is nearly priced in for January 2020.

We get preliminary Markit PMIs for June from the US as well. The manufacturing index is expected to have held steady at 50.5, while the services one is anticipated to have ticked up to 51.0 from 50.9. Existing home sales for May are also on the agenda and the forecast suggests a 1.2% increase after a 0.4% slide in April.

From Canada, we get retail sales for April. Expectations are for both headline and core sales to have slowed to +0.3% mom and +0.1% mom, from +1.7% and +1.1% respectively. When they last met, BoC policymakers kept interest rates unchanged, but the statement was not as upbeat as some may have expected. Officials said that data were in line with their projections, which may have come as a surprise given the up-until-then strength in economic indicators. With regards to their forward guidance, they kept it largely unchanged, noting that the degree of accommodation provided by the current rate remains appropriate and that they will remain data dependent in taking future decisions. According to Canada’s OIS (overnight index swaps), investors see a nearly 55% chance for interest rates to be lower by the end of the year, and slowing retail sales, combined with a potential slowdown in the core CPI on Wednesday, may prompt them to push that percentage slightly higher, despite the better-than-expected employment report for May.

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