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Macroeconomics: The Day Ahead for 19 June

  • Very subdued start to the week, digesting UK Rightmove House Prices, awaiting US NAHB housing survey; focus on China-US meeting, mooted China stimulus package, ECB speakers; US closed for Juneteenth

  • Week Ahead: UK inflation & Retail Sales, G7 flash PMIs, US housing data and Japan national CPI head modest run of statistics

  • Week Ahead: BoE, Norges Bank, SNB and TCMB the focal points in busy week for rate decisions, very busy run of central bank speakers including Powell semi-annual testimony

EVENTS PREVIEW

The week gets off to a very subdued start with the US holiday set to thin trading, and precious little in the way of statistics, leaving markets to continue to ponder the latest doubling down on hawkish rhetoric from G7 central banks, and fret about China’s mooted stimulus package. There is a busy schedule of ECB speakers, and in the background efforts to reform the EU Growth and Stability budget pact and EU Power Markets are once again faltering, and/or in gridlock, further undermining the growth outlook, above all relative to the US and China.

Recap: The Week Ahead – Preview:  

The week gets off to a very subdued start with the US holiday set to thin trading volumes, and precious little in the way of statistics, leaving markets to continue to ponder the latest doubling down on hawkish rhetoric from G7 central banks, and fret about China’s mooted stimulus package. There is a busy schedule of ECB speakers, and in the background efforts to reform the EU Growth and Stability budget pact and EU Power Markets are once again faltering, and/or in gridlock, further undermining the growth outlook, above all relative to the US and China.

With a good many G10 central banks (Fed, ECB, BoC and RBA) seemingly keen to double down on hawkish rhetoric of late, Powell’s semi-annual testimony and Congressional Fed nomination hearings, and a deluge of central bank speakers will be front and centre, along with the minutes of the recent RBA and Bank of Canada policy meetings. In policy decision terms outside of the BoE, Norges Bank and Switzerland’s SNB are expected to hike rates a further 25 bps to 3.50 and 1.75% respectively. Brazil’s BCB, Philippines BSP, Bank Indonesia, Czechia’s CNB and Hungary’s MNB are all seen holding rates, while Turkey’s TCMB is expected to align its official key rate with market rates, as Erkan hosts her first policy meeting, and hike rates by 1,150 bps to 20.0% (though the range of forecasts is very wide: 14% – 30%).

Geopolitics will also remain in focus, as US Secretary of State Blinken visits China to try and help ease tensions, while China Premier Li heads to France and Germany to discuss bilateral relations, as markets wait hopefully on details of a now well flagged China economic stimulus package, with a 10 bps cut in 1 & 5-yr LPR rates seen at Tuesday’s monthly fixing.

A light week for govt bond sales sees auctions in US, UK, Germany, Belgium, Japan, Australia and Canada, while a very light week for earnings has Accenture, Darden Restaurants, FedEx and KB Home among the likely highlights. The commodity space will be looking to the launch of SHFE’s China Alumina contract, and China oil output and trading data, with the schedule also including Australia Energy Week, Lithium and Battery Raw Materials, Grains & Oilseeds MENA and JP Morgan’s Energy, Power and Renewables conferences.

In the UK, CPI data is published just ahead of the MPC meeting, and follows April’s upside shock. Headline is seen easing in m/m terms to 0.5% from 1.2%, which would see the y/y dip to 8.4% from 8.7% (with only modest base effects), but the stickiness of core CPI at a forecast unchanged 6.8% y/y will be the source of much discomfort for the BoE. In headline terms much will depend on how much the drop in fuel prices offsets persistent food price pressures (likely to ease in H2), while core Services appear likely to edge higher again, though core Goods should drop. With Chancellor Hunt calling for further govt departmental spending cuts, the PSNB ex-Banks is expected to post a deficit £19.5 Bln, much wider than the May 2022’s £9.2 Bln. Retail Sales are expected to drop -0.2% m/m, with much depending on how much of a boost there was from the Coronation, though May’s cool weather may only compound the pressure from beleaguered household finances. GfK Consumer Confidence is seen edging higher again to a still very weak -26 from -27, but given that it is frequently driven by a combination of politics and energy prices, the question is whether lower fuel prices and the lowering of the household energy price cap offsets a desultory political landscape. The BoE’s MPC is expected to hike rates a further 25 bps to 4.75%, but much may depend on CPI after the much higher than expected Average Weekly Earnings data last week, even if the recessionary headwinds above all from the housing market are picking up pace. The risk of a very fractured vote with Dhingra & Tenreyro voting for no change, while any or all of Haskel, Mann or Ramsden vote for a 50 bps looks to be high. It may also be the case, in contrast to earlier in the year, that there is no real MPC pushback on markets anticipating a further 100 bps of rate hikes, in principle letting tighter financial conditions do some of their work for them, while the MPC waits on an updated set of economic forecasts at the August Monetary Policy Report meeting, for which there will probably be some revision hints, likely upward in inflation and wages terms. The accompanying rate guidance may also be little changed from May: “The MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”

Across the pond in the US, the NAHB Index is seen edging up 1 pt to a still weak 51, Housing Starts little changed and Existing Home Sales falling a more modest -0.7% m/m, but it will be the Powell testimony and Cook, Jefferson and Krugler nomination hearings which command most attention. Neither Powell, nor the nominees and array of other Fed speakers are likely to stray from the hawkish bias at last week’s FOMC meeting, but be keen to maintain the room for manoeuvre that was also inherent in the somewhat contradictory messages from the dot plot hike and the rate pause. It will be interesting to see if Powell is asked any testing questions about the shift from May’s FOMC meeting press conference assessment that saw rates as probably ‘sufficiently restrictive’ to last week’s assertion that rate cuts are probably a ‘couple of years out’.

As for the remaining data schedule, flash G7 PMIs are seen little changed across the board, in other words confirming that manufacturing remains in recession, while services continues to see a generally modest expansion, though an array of anecdotal evidence suggests that services are losing momentum. Japan’s national CPI is forecast to see headline and ex-Fresh Food dropping in y/y terms, but ‘core core’ (ex-Fresh Food & Energy) edging up to 4.2% y/y from 4.1%, i.e. echoing the already published Tokyo CPI data, but the key question in BoJ policy terms is the extent of forecast revisions at the July policy meeting.

As quarter end looms, equity and credit markets continue to show remarkable risk appetite resilience, with commodities belatedly also showing some renewed speculative interest (see GS Commodity index chart),

G4 Central banks Balance sheets

this despite the sharp upward revisions to market rate trajectories. As I noted in the Q1 edition of The Ghost In The Machine article From Stockholm to Helsinki Syndrome – a Revisit’ , it remains critical to keep an eye on actual central bank balance sheet sizes, rather than the respective current pace of QT balance sheet reduction, which remain as the attached chart of G4 (Fed, ECB, BoJ & BoE) central bank balance sheets underlines in aggregate above the low of September 2022, after a sharp drop from their February 2022 peak. Call it ‘stealth QE’ or what you will, but $8.0 Trln of the $11.0 Trln of QE injected in response to the pandemic continues to slosh around markets, and per se act as a powerful cushion against the sharp rise in rates. But the cumulative impact of the rate hikes to date will start to be felt more forcefully in H2, as more and more businesses and consumers face difficult choices in refinancing maturing debt or refixing their mortgages. In that respect also take a look at the GS US Financial Conditions index and how it has mirrored G4 central bank balance sheets, but bear in mind that Financial Conditions do NOT equal Non-financial Credit Conditions.


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