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by Charalambos Pissouros

Weekly Outlook: May 20 – May 24: RBA, Fed, ECB Minutes; EZ PMIs and EU Elections

Whilst no major central bank meets to decide on policy this week, three of them will release the minutes of their latest gatherings. Those Banks are the RBA, the Fed and the ECB. With regards to economic data, investors will focus on Eurozone’s preliminary PMIs for May, as they try to assess whether the ECB could introduce any other policy measures besides the already announced new round of TLTROs. The UK CPIs and retail sales for April are also coming out, but we expect GBP-traders to keep their gaze locked on the UK political landscape and the EU Parliament elections.

Monday appears to be a relatively light day in terms of economic data and releases. The only top-tier indicator on the agenda is Japan’s GDP for Q1 and is already out. The qoq growth rate ticked up to +0.5% from +0.4%, beating estimates of a 0.1% contraction. This pushed the yoy rate up to +2.1% from +1.6%.

On Tuesday, during the Asian morning, the RBA releases the minutes of its latest policy gathering. At that meeting, the Bank decided to keep interest rates unchanged at +1.50%, with the tone of the accompanying statement little changed. The Aussie rallied at the time of the announcement, perhaps as, heading into the meeting, there was some speculation for a rate cut.

ASX interbank cash rate futures

The minutes of the previous meeting revealed that members agreed that the likelihood of a hike was low and that a rate cut would be appropriate if inflation does not move higher and the unemployment trends up. Thus, it would be interesting to see whether officials continued to emphasize the cut case. Last week, the disappointing employment data prompted market participants to bring forth the timing of when they expect the RBA to cut rates. According to the ASX 30-day interbank cash rate futures implied yield curve, they are now almost fully pricing in a rate decrease in July, while there is more than 50% chance for that to happen at the upcoming gathering, scheduled for June 4th.  Therefore, if the minutes reveal that policymakers were close to pushing the cut-button in May, investors may push the probability for a June rate-decrease higher.

On Wednesday, we get more minutes, this time from the FOMC. At its last meeting, the Committee decided to keep interest rates unchanged as was widely anticipated, reiterating its “patient” stance with regards to future adjustments to the target range. Officials also noted that “inflation and inflation for items other than food and energy have declined and are running below 2%”, which triggered a slide in the US dollar, perhaps due to increasing bets that officials may eventually decide to hit the cut button by the end of the year.

Fed fund futures Market vs FOMC rate expectations

That said, at the press conference following the decision, Fed Chief Powell noted that some transitory factors may be at work with low inflation and that there is no strong case for moving in either direction. So, having that in mind, we will scan the minutes to see whether the other members, or at least the majority of them, were on the same page with Powell, or not. However, even if they were, that information may be outdated, as the meeting took place ahead of the latest escalation in trade tensions between China and the US. According to the Fed funds futures, the spat prompted investors to increase their cut bets, with the probability for lower rates by year end now standing at 73%. Just a month ago, that percentage was only at 40%.

As for Wednesday’s economic data, during the Asian morning, New Zealand’s retail sales for Q1 are due to be released, with the forecasts suggesting a slowdown in both headline and core sales. Japan’s trade balance for April and core machinery orders for March are also scheduled to be released.

Later in the day, the UK CPIs for April are coming out. Both the headline and core CPI rates are expected to have risen to +2.2% yoy and 1.9% yoy, from +1.9% and +1.8% respectively. Although this could prove to be somewhat supportive for the pound, with the BoE’s hands tied until the Brexit riddle is solved, we don’t expect any major reaction.

UK CPIs inflation

We expect GBP-traders to keep their gaze locked on the political landscape and the uncertainty surrounding the UK’s future relationship with the EU. Theresa May is set to put her deal to a Parliamentary vote for the fourth time on the week starting on June 3rd, but the media suggests that it is doomed to be rejected once again. What’s more, the pressure on May to resign has been increasing day by day.  In the past, May has pledged to step down if her deal passes through Parliament, but recently, many in her own party clearly pointed out that they want her down even if the agreement is rejected, while others are asking for her to quit immediately. Having in mind that several of her potential replacements are hardline Brexiteers, this raises the probability for a no-deal Brexit in the end of October.

From Canada, we get retail sales for March. Expectations are for both headline and core sales to have accelerated. Specifically, the headline rate is forecast to have risen to +1.0% mom from +0.8%, while the core one is anticipated to have increased to +0.8% mom from +0.6%. Despite the stellar employment report for April, which revealed record job gains, inflation data disappointed. Thus, even if we get a decent set of retail sales data, we stick to our guns that BoC policymakers are unlikely to start thinking again about rate increases any time soon. After all, they abandoned their hiking bias just at the previous meeting. We believe that they may prefer to wait for more improvement in economic data before they turn their eyes to the hike button.

On Thursday, we get preliminary PMIs for May from several European nations and the Eurozone as a whole. The bloc’s manufacturing PMI is expected to have risen somewhat, but to have stayed below the boom-or-bust mark of 50. Specifically, the index is expected to have risen to 48.2 from 47.9. The services PMI is forecast to have increased as well, to 53.0 from 52.8. All this is likely to drive the composite index slightly higher, to 51.7 from 51.5.

Eurozone PMIs

At the latest ECB policy meeting, Draghi and co. reiterated their guidance that interest rates are likely to stay at present levels “at least through the end of 2019”, with the ECB Chief noting again that the risks surrounding the Euro area economic 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”. Thus, although the PMIs would still be far from exciting (according to the forecasts), they could lessen further the need for additional policy measures beyond the new round of TLTROs, especially after the rebound in GDP growth during the first quarter of this year.

The minutes of that meeting will also be releases. However, given that Draghi clearly noted that the Council just had a consensus on the need of further analysis with regards to whether further action is needed, we don’t expect any material information to come out from the minutes. “We need further information that will come to us between now and June, and in a sense the projections that we'll have in June by the staff of the ECB will be an important part of this information set”, the ECB Chief said. Thus, we believe that investors will pay more attention to the PMIs in order to assess what kind of announcement we may get in June.

We get preliminary Markit PMIs for May from the US as well. The manufacturing PMI is expected to have ticked up to 52.7 from 52.6, while the services index is expected to have risen to 53.2 from 53.0. That being said, as we noted several times in the past, the market tends to pay more attention to the ISM PMIs, which will be released on June 3rd and 5th. New home sales for April are also on the agenda, and the forecast points to a 2.7% mom slide following a 4.5% increase in March.

On the political front, we have the EU Parliament elections, which will be held between May 23rd and 26th. Given the political gridlock with regards to Brexit, this event may attract some more attention than usual. The UK will hold elections on Thursday. According to media, Nigel Farage’s Brexit Party is set to gain more votes than the Conservative and Labour Parties combined, something that would only add to the already heightened pressure on May to quit.

Finally, on Friday, during the Asian morning, we get Japan’s National CPIs for April. No forecast is available for the headline rate, while the core one is anticipated to have ticked up to +0.9% yoy from +0.8%. Both the headline and core Tokyo rates for the month have risen by more than anticipated (to +1.4% yoy and +1.3% yoy respectively), which tilts the risks for both the National prints to the upside. That said, even if both rates rise as the Tokyo prints suggest, they would still be below the BoJ’s objective of 2%. Even the Bank’s own core CPI stood at only +0.5% yoy in March. Therefore, we stick to our long-standing view that BoJ policymakers still have a long way to go before they consider altering their ultra-loose monetary policy. Governor Kuroda himself added more credence to our view, noting last week that they will keep interest rates low for a long time.

During the European day, the UK retail sales for April are scheduled to be released. Both the headline and core sales are expected to have slid 0.4% mom and 0.6% mom, after rising 1.1% and 1.2% respectively. This would drive both the yoy rates down to +4.5% and +4.2%, from +6.7% and +6.2%. That said, the yoy rate of the BRC retail sales monitor for the month rose to +3.7% from -1.1%, which shifts the risks of the official data to the upside. In any case, as we already noted, we expect GBP traders to continue paying more attention to Brexit-related developments, and thus, we don’t expect economic data to prove determinant with regards to the pound’s forthcoming direction.

In the US, durable goods orders for April are coming out. Headline goods are expected to fall 2.0% mom after increasing 2.8% in March. The core rate is expected to have declined to +0.2% mom from +0.4%. Bearing in mind that the monthly prints of April 2018, which will drop out of the yearly calculation, were -1.7% and +0.9% respectively, we see the case for both the yoy rates to move lower. This is supported by the New Orders sub-index of the ISM manufacturing PMI for the month, which fell to 51.7 from 57.4.


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