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by Charalambos Pissouros

Weekly Outlook: Jun 11 – Jun 15; Fed, ECB, and BoJ Decide on Monetary Policy. US and UK CPIs, as well as UK’s Jobs Data, Also in Focus

Calendar 01

On Monday, during the European morning, we get the UK industrial and manufacturing production data for April. Expectations are for industrial production to have accelerated somewhat, to +0.2% mom from +0.1% in March, but this would drive the yoy rate slightly lower, to +2.7% from +2.9%. Manufacturing production is anticipated to have rebounded to +0.3% mom from -0.1%, which could push the yoy manufacturing rate up to +3.1% from +2.9%. That said, bearing in mind that the manufacturing PMI for the month declined to 53.9 from 54.9 in March, we see the risks surrounding the manufacturing production as tilted to the downside. The nation’s trade balance is also coming out and expectations are for the trade deficit to have narrowed somewhat.

On Tuesday, during the Asian morning, Australia’s NAB business survey for May is scheduled to be released, alongside the nation’s home loans for April. No forecast is available for the NAB survey, while home loans are expected to have declined 1.9% mom after falling 2.2% in March.

During the European day, we get the UK employment report for April. Expectations are for the unemployment rate to have remained unchanged at a 42-year low of 4.2%, while average earnings including bonuses are anticipated to have risen at the same yearly pace as the previous month (+2.6% yoy). That said, we expect the market to pay more attention to the earnings excluding bonuses, the yearly rate of which is also expected to have held steady, at +2.9% yoy. At the press conference following the latest BoE meeting, Carney made it clear that the Bank pays more attention to regular pay, because of the way bonuses distort headline earnings.

UK realwages 110618

According to the Markit UK Report on Jobs for the month, starting salaries for permanent workers continued to rise, with the rate of inflation picking up from March, while rates of pay for temporary staff rose to the greatest extent for two years. In our view this shifts the risks surrounding the earnings forecasts to the upside.

In Germany, the ZEW survey for June is coming out. Expectations are for the current conditions index to have declined to 85.0, while the expectations one is forecast to have slid to -13.0 from -8.2.

From the US, we get CPI data for May one day ahead of the FOMC policy decision. Expectations are for the headline and core rates to have risen to +2.8% yoy and +2.2% yoy, from +2.5% and 2.1% respectively. Although the Fed drives the monetary policy wheel mostly based on the PCE inflation metrics, further acceleration of the CPIs above 2% could increase the likelihood for the PCEs to follow suit in the coming months. This means that Fed officials are unlikely to tolerate above target for long and perhaps consider an extra rate increase by year end.

US CPIs 110618

On the political front, US President Donald Trump and North Korean Leader Kim Jong Un hold a historic summit in Singapore. The summit is likely to center around denuclearization and peace on the Korean peninsula.

In the UK, the House of Commons will vote on proposed amendments to the government’s EU withdrawal bill. Prime Minister Theresa May will seek to overturn changes made by the House of Lords, one of which is the meaningful vote amendment. The Lords’ amendment would allow parliament to determine the government’s course of action in case MPs reject a Brexit deal, or in case the EU and the UK are not able to find a common ground. On the other hand, the government’s proposal suggests that MPs could still vote down a Brexit deal, but they would not be able to direct future actions.

On Wednesday, the spotlight is likely to fall on the FOMC monetary policy decision. This is one of the “bigger” meetings, where besides the rate decision, we get updated economic projections and a press conference by Fed Chair Jerome Powell.

According to the Fed funds futures, market participants are almost certain that the Committee will increase interest rates by 25bps, with the implied probability for such an action currently standing at around 92%. Thus, a rate hike by itself is unlikely to trigger market volatility. If indeed the Committee decides to hike, then all eyes are likely to turn to the accompanying statement, the updated economic projections, and the new “dot plot”.

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The main message we got from the minutes of the latest Fed meeting is that officials are on track for raising interest rates in June, but they may not be in a rush to increase the pace thereafter, even if inflation overshoots their 2% inflation goal over the next few months. As such, investors will be eager to see whether the new “plot” will continue to point to one more hike this year, or whether there will be an upside revision, pointing to an extra one. The Fed funds futures suggest that the probability for getting a 4th hike this year is around 35%.

As for the economic indicators, during the European morning we have the UK CPIs for May. Expectations are for the headline rate to have ticked up to +2.5% yoy from +2.4%, while the core rate is anticipated to have remained unchanged at +2.1% yoy. That said, taking into account the UK services PMI for the month, we view the risks surrounding the forecasts as tilted to the downside. In the PMI report, it was noted that the rate of charge inflation eased for the second month running, to its weakest since June 2017.

UK CPIs 110618

The latest PMI data suggested that following the weak economic activity in Q1, the economy is now turning the corner, something that may have prompted market participants to start flirting again with the idea of a near-term BoE rate increase, perhaps as early as August. Nonetheless, another slowdown in the CPIs, or even unchanged rates, could once again pour cold water to such expectations. On the other hand, accelerating inflation, conditional upon accelerating wages in Tuesday’s data, could further strengthen the August-hike case.

From the Eurozone, we get industrial production data for April, while from the US, we have PPIs for May. Euro area industrial production is anticipated to have declined 0.5%, after rising 0.5% in March. As for the US PPIs, the headline rate is anticipated to have risen to +2.8% yoy from +2.6%, while the core one is forecast to have remained unchanged at +2.3% yoy.

On Thursday, the central bank torch will be passed to the ECB. When they last met, ECB officials decided to keep policy unchanged, while they made no changes to the accompanying statement. Thus, the spotlight fell on President Draghi’s press conference. The president acknowledged the economic moderation since the turn of the year but noted that it may in part reflect a pull-back from the high pace of growth observed at the end of last year, while temporary factors may also be at work.

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The latest PMI data suggested that economic slowdown continued in the euro area, but preliminary CPI data pointed to accelerating inflation, with the headline CPI rate rising to+1.9% yoy in May, in line with the ECB’s objective of “below, but close to 2%”. What’s more, following a report that at this meeting, policymakers are likely to hold a discussion that could end up with an announcement on when they intend to end QE purchases, hawkish remarks from several ECB officials reinforced the idea that the gathering is likely to be a “live” one. Thus, investors will be sitting on the edge of their seats in anticipation of any signals or hints on what happens to the QE program after September, as well as whether officials continue to view the economic slowdown as temporary.

As for the rest of Thursday’s agenda, during the Asian morning, we get Australia’s employment report for May. Expectations are for the unemployment rate to have ticked back down to 5.5% from 5.6%, while the net change in employment is forecast to show that the economy added 18k jobs during the month, compared to 22.6k in April.

In China, we have industrial production, retail sales and fixed asset investment, all for May. Following the Q1 GDP data, which showed that the Chinese economy grew 6.8% yoy, the same pace as in Q4 2017, it would be interesting to see how the economy has been performing during the second quarter of 2018. Industrial production is forecast to have slowed somewhat, to +6.9% yoy from +7.0%, while the retail sales rate is anticipated to have risen to 9.6% yoy from 9.4%. Fixed asset investment is expected to have risen at the same pace as in April (+7.0% yoy).

During the European day, we get the final May inflation prints from Germany. As usual, both the final CPI and HICP rates are expected to confirm their preliminary estimates.

We get inflation data from Sweden as well. Expectations are for the for both the CPI and CPIF rates to have risen to +1.9% yoy and +2.1% yoy from 1.7% and 1.9% respectively. At its latest meeting, the Riksbank pushed back the timing of when it expects to start hiking rates, noting that the repo rate will begin to be raised towards the end of the year. Back then, the CPI and CPIF rates were 1.9% and 2.0% respectively. So, a rebound back near those levels is unlikely to alter officials’ view. The next gathering of the world’s oldest central bank is scheduled for the 3rd of July.

From the UK, we get retail sales for May. Both headline and core sales are anticipated to have slowed notably, but still, the yoy rates are forecast to have edged up. Specifically, the headline yoy rate is anticipated to have risen to +2.4% yoy from +1.4%, while the core one is expected to have increased to +2.5% yoy from +1.5%. The case for rising yoy rates is supported by the BRC retail sales monitor for the month, the yearly rate of which rebounded strongly.

UK retail sales 110618

We get May retail sales data from the US as well. Both headline and core sales are anticipated to have accelerated to +0.4% mom and +0.5% mom, from +0.2% and +0.3% respectively. The Conference Board consumer confidence index for the month rose, but the UoM sentiment index slid somewhat. So, given that these indices are not painting a clear picture with regards to consumer morale during the month, we find it hard to say to which direction the retail sales’ risks are tilted.

Finally, on Friday, during the Asia morning, the BoJ decides on monetary policy, and once again, no change in policy is expected. Latest CPI data showed that inflation continued to slow in both headline and core terms, which combined with the economic contraction in the first three months of 2018 support our longstanding view that BoJ policymakers have a long way to go before they start thinking about a stimulus exit.

Later, during the European day, we get Eurozone’s final CPIs for May. As usual, expectations are for the final prints to confirm the preliminary estimates and show that headline inflation accelerated to +1.9% from +1.2%, while the core rate rose to +1.1% yoy from +0.7%. Eurozone’s qoq wage growth rate for Q1 is also coming out, as well as the bloc’s trade balance for April.

In the US, industrial production is forecast to have slowed to +0.2% mom in May from +0.7% in April, while the New York Empire State manufacturing index for June is anticipated to have declined to 19.00 from 20.10. The preliminary UoM Consumer Sentiment index for June is also coming out, alongside the 1-year and 5-year UoM inflation expectations.



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