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by Charalambos Pissouros

Weekly Outlook: June 03 – June 07: RBA and ECB Policy Meetings, US Employment Report

Following the BoC policy meeting last Wednesday, this week, the central bank torch will be passed to the RBA and the ECB. The RBA is largely anticipated to cut rates and thus, if this is the case, investors will quickly turn attention to the accompanying statement for clues on whether more cuts are underway. With regards to the ECB, no change in interest rates is expected, but investors may be eager to find out whether officials will push further back the timing of when they expect rates to start rising, and whether they will hint at additional policy measures. We also get the US employment report for May.

On Monday, during the European trading, we get the final manufacturing PMIs for May from several of the Eurozone’s members, as well as for the bloc as a whole. That said, as it is the case most of the times, the final prints are expected to confirm their preliminary estimates.

We get the May manufacturing PMI from the UK as well, while on Tuesday, the construction print is due to be released. The services index will be released on Wednesday. From the PMIs, investors could get an idea of how all this delayed Brexit uncertainty has affected the economy, but once again we don’t expect these releases to prove major market movers. GBP-traders are likely to stay more focused on the political scene, and especially on who could be the UK’s next Prime Minister.

More manufacturing PMIs will be coming later in the day, from the US. We have the final Markit print for May, as well as the ISM index for the month. As it is the case most of the times, the Markit number is expected to confirm its preliminary estimate, while the ISM one is anticipated to have risen to 53.0 from 52.8. That said, bearing in mind that the preliminary Markit figure suggested a tumble to 50.6 from 52.6, we see the risks surrounding the ISM forecast as tilted to the downside.

On Tuesday, during the Asian morning, the RBA will decide on interest rates. At their latest meeting, RBA officials decided to stand pat, which came as a surprise to market participants expecting a rate cut. That said, the minutes of that meeting revealed that the Bank’s forecast scenario was based on the assumption that interest rates will be in line with market pricing, which suggests lower rates over the next six months. A couple of hours after the minutes, Governor Philip Lowe said that the Board will consider the case for a rate cut at the June meeting, prompting market participants to add to their bets with regards to such an action. According to the ASX 30-day interbank cash rate futures implied yield curve, they now assign a 90% chance for that to happen. Ahead of the minutes and Lowe’s speech, that probability was slightly above 50%.

ASX 30-day cash rate futures

Therefore, a 25bps interest rate decrease by itself is unlikely to prove a major market mover for the Aussie. After all, the currency had been in a tumbling mode during most of this month, in line with the increasing rate-cut expectations. We believe that most of the aftermath reaction will depend on the tone of the accompanying statement. A dovish tone, keeping the door open for more rate-reductions in the months to come, could bring the Aussie under renewed selling interest, while anything suggesting that this was a one-off move could even result in a rebound.

As for Tuesday’s economic indicators, during the Asian morning, Australia’s current account balance for Q1 and the nation’s retail sales for April are coming out. The current account deficit is expected to have narrowed to AUD 2.5bn from 7.2bn in Q4 2018, while retail sales are anticipated to have slowed somewhat (+0.2% mom from +0.3%).

During the European day, as we already noted, the UK construction PMI for May is due to be released. We also get Eurozone’s preliminary CPIs for the same month and the forecasts suggest that both the headline and core rates slid to +1.3% yoy and +1.0% yoy, from +1.7% and 1.3% respectively.  The case for a slowdown, at least in headline terms, is supported by the decline in the German inflation rate. Something like that could add to speculation for a more dovish ECB on Thursday. The bloc’s unemployment rate for April is coming out as well and is expected to have held steady at 7.7%.

German vs Eurozone CPIs

On Wednesday, during the Asian session, Australia’s GDP for Q1 is coming out. Expectations are for the nation’s growth to have accelerated to +0.4% qoq from +0.2% in Q4 2018, but this will drive the yoy rate down to +1.7% from +2.3%. In any case, this will be in line with the RBA’s latest forecasts and will also come just a day after the RBA meeting, where officials are expected to hit the cut button. Thus, we don’t expect this data set to affect much expectations around the Banks’ future course of actions. After all, investors will try to gather signals and hints on that front from the statement accompanying the decision. China’s Caixin services PMI for May is also coming out and the forecast is for a slide to 54.3 from 54.5.

As for the European day, we have the final services and composite PMIs for May from the European nations of which we get the manufacturing prints on Monday, as well as from the Eurozone as a whole. The UK services index for the month will be released as well. Eurozone’s PPIs and retail sales, both for April are also on the agenda. The yoy PPI rate for the month is expected to have increased to 3.2% from 2.9%, but bearing in mind that we will already have the preliminary CPIs for May in hand, we don’t expect the PPIs to prove a market mover. Retail sales are anticipated to have slid 0.3% mom after stagnating in March.

From the US, we get the ADP employment report for May. Expectations are for the private sector to have gained 185k jobs, less than April’s stellar 275k, but still a decent number. This could raise speculation that the NFP print, due out on Friday, may also come in below previous figure, which was 263k. That said, we repeat for the umpteenth time that, even though the ADP is the only major gauge we have for the non-farm payrolls, the correlation between the two time-series at the time of the release (no revisions are considered) has been low in recent years. Taking into account data from January 2011, that correlation now stands at 0.45%. The final Markit services and composite PMIs for May, as well as the ISM non-manufacturing index for the month, are also due out.

ADP vs NFP

On Thursday, all lights are likely to fall to the ECB monetary policy meeting. Apart from the decision, the statement, and the conference by President Draghi, we will also get new macroeconomic projections. At their latest gathering, officials reiterated that interest rates are likely to remain at present levels “at least through the end of 2019”, while at the conference, Draghi noted that the risks to the Euro area outlook “remain tilted to the downside”. He also added that policymakers will consider “whether the preservation of the favorable implications of negative interest rates for the economy requires the mitigation of their possible side effects, if any, on bank intermediation”.

ECB interest rates

PMIs for April and May disappointed, while as we already mentioned, inflation is anticipated to have slowed in May. What’s more, last week, Governing Council member Olli Rehn said that the first increase in interest rates is now further away than it was a few months ago, adding that officials will discuss further policy options at this meeting. All this, combined with the latest escalation in tensions between China and the US, suggests that there is a decent chance for the ECB to push further back the timing of when it expects interest rates to start rising, and perhaps hint at additional policy measures, beyond the new round of TLTROs, which is set to begin in September. Perhaps, officials could discuss the introduction of a tiered deposit rate, which was already rumored ahead of the prior meeting. As far as the economic projections are concerned, we see a strong case for downside revisions.

With regards to Thursday’s economic indicators, Eurozone’s final GDP for Q1 and the bloc’s employment change for the quarter are released. The final growth print is expected to confirm the second estimate, while the employment change is anticipated to show the same quarterly pace of job gains as the previous one. Later in the day, the US trade deficit is anticipated to have narrowed somewhat, while the Unit Labor Costs index for Q1 is expected to have fallen at the same pace as in Q4 2018. We get April trade data from Canada as well, alongside the nation’s Ivey PMI for May

Finally, on Friday, we get the US employment report for May. Non-farm payrolls are expected to have risen 183k, less than April’s 263k, while the unemployment rate is expected to have held steady at its 49.5 – year low of 3.6%. Average hourly earnings are forecast to have accelerated to +0.3% mom from +0.2%, which, barring any deviations to the prior prints, would keep the yoy rate unchanged at 3.2%, as the monthly rate of May 2018 that will drop out of the yearly calculation was also 0.3%.

Fed funds futures Market vs FOMC rate expectations

Overall, the forecasts point to a decent report, in line with further tightening in the US labor market, but we doubt that it could materially affect expectations around the Fed’s future course of action. Lately, expectations on that front have been driven by the escalating trade tensions between the US and China, with the fed funds futures suggesting that investors are almost certain that interest rates will be lower by the end of the year. They see only a 5% chance for the Fed stay patient this year, while the probability for only one rate cut is 20%. The percentage for two rate decreases is even higher, at around 35%, while the remaining 40% is for even more cuts.

We get employment data for May from Canada as well. The unemployment rate is anticipated to have held steady at 5.7%, while the net change in employment is forecast to show that the economy added just 7.5k jobs during the month, after hitting a record of 106.5k in April. Following a month with record jobs, a small increase thereafter appears more than normal to us. Thus, we don’t expect something like that to alter market expectations over the BoC’s plans. At their latest gathering, last week, Canadian policymakers kept their forward guidance 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.

As for the rest of Friday’s releases, during the Asian session, Australia’s home loans and Japan’s household spending, both for April, are coming out, while later in the day, we have Germany’s trade balance and industrial production for the same month.

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