Macroeconomics: The Week Ahead: 12 to 16 June 2023

The Week Ahead – Preview:

This week will have the Fed, ECB and BoJ policy meetings as its focal points, but these are also accompanied by a very busy data run from US (CPI, Retail Sales, PPI, Industrial Production, NY & Philly Fed Manufacturing and Michigan Sentiment surveys), China (Retail Sales, FAI, Industrial Production & Property sector indicators), and UK (labour data, monthly GDP & activity data). Elsewhere there are final CPI readings in the Eurozone, along with German ZEW survey, Australia has labour data, and Japan looks to Trade and Machinery Orders. Outside of the major central bank policy meetings, there is a reasonable volume of central bank speakers, including BoE’s Bailey testifying to the House of Lords Economic Affairs Committee on central bank independence. A busy week for govt debt sales has 3, 10 & 30-yr in the US, 10-yr sales in the UK and Germany, and multi maturity sales, France, Italy, Spain and Finland, while Adobe, Kroger, Lennar and Oracle top a modest run of earnings. In the commodity space, the IEA and OPEC follow on from the EIA last week with monthly oil market reports, as oil and indeed gas markets remain focussed on demand dynamics, amid denied talk of a US/Iran nuclear deal, and continued concern about China’s post-Covid recovery, with this week’s run of commodity conferences dominated by the energy transition and climate change.

In the US, CPI and PPI are published on the first and second days of the much anticipated FOMC meeting, at which the Fed is expected to keep rates unchanged (at 5.00/5.25%) for the first time since it started hiking rates in March 2022, but the latest ‘dot plot’ and Powell’s press conference are expected to hint at a July rate hike. The committee’s forecasts are also likely to see marginal upward revisions to growth and inflation forecasts, and a downward revision to Unemployment. While markets have back reversed much of the rate pivot that had been anticipated in April, they continue to anticipate the risk of rate hike in July, but still look for two rate cuts thereafter by year end. What Powell and the FOMC will wish to avoid is markets ‘misinterpreting a pause’ as a pivot signal, and this will be their biggest challenge. Much may of course depend on the CPI, and to a lesser extent PPI data, with CPI seen up a very ‘average’ 0.2% m/m, but core up 0.4% m/m, which thanks large base effects above all from energy prices, will see y/y rates slow to 4.1% from 4.9% headline, and a more modest 5.2% from 5.5% for core. Easing housing costs (OER) will help at the core level, and much may depend on the degree of divergence on new (seen lower) and used (Manheim index suggests higher) auto prices, and it is worth noting that beneficial base effects will be even bigger in the June report, which comes just ahead of the next FOMC meeting. Watch out for potential for some dissent on the rate vote, with both Bowman and Kashkari recently suggesting that the case for a pause had as yet not been made. PPI is likely to underscore the already evident diminishing pipeline pressures, with headline expected to fall to 1.5% y/y from 2.3%, and ex-Food, Energy & Trade to 3.0% y/y from 3.4%. Post FOMC meeting the attention then moves to US activity data, with the reversal in June Auto Sales weighing on headline (exp. -0.1% m/m), while core measures are seen up 0.2%/0.3% m/m. Industrial Production and Manufacturing Output are seen little changed, with weekly jobless claims expected to ease back to 250K after last week’s sharp jump, with unseasonal retooling closures in the auto sector, and fraudulent activity said to have exaggerated the prior week’s surge. The NY and Philly Fed surveys are forecast to show both in recession territory, even if the very wild m/m changes in the NY survey undermine its credibility. Last but not least Michigan Sentiment is expected to improve on the month, but at 60.2 remain very weak on any historical comparison.

Just ahead of the ECB meeting, China publishes its credit aggregates, activity and property sector data, with the PBOC also expected to keep its 1-yr MTLF rate unchanged at 2.75%, though local media (Securities Daily) citing local analysts has suggested a 5-10 bps cut may be made. It would at best be a signal of intention to support the economy, though given more heft with a reserve requirement cut (perhaps at later date). Activity data will again be flattered by base effects, though not to the extent of April’s below forecast outcomes, with Retail Sales seen slowing to 13.7% y/y from 18.4%, Industrial Production dropping to just 3.6% from 5.4%, and FAI to 4.4% from 4.7%, while the contraction in Property Investment is seen deepening to -6.7%. This would fit with the NBS PMI readings, and reinforce concerns that the post-Zero Covid recovery is foundering on a broad lack of confidence. In that respect, a close eye will be kept on the surveyed Unemployment Rate, above all the key issue of very high Youth Unemployment (>20%). But the key question remains what measures the authorities are willing to implement to get the recovery back on track.

By contrast to the US and China, the Eurozone data schedule is very light, amounting to little more than final national CPI readings and the German ZEW survey, the latter being expected to see another more modest further drop in Expectations, and a sharp slip in the Current Situation to -40.2 from -34.8, with the final Eurozone CPI reading published after the ECB meeting. The latter is expected to deliver another 25 bps hike to 3.50% Depo and 4.0% Refi, but the focus will be on the statement guidance and the updated staff economic forecasts. If, as many anticipate, forecasts for 2024 and 2025 inflation and growth are revised down (though 2023 may be revised slightly higher), to a large extent acknowledging recent data, then this will likely reinforce the view that the ECB will pause after one final further rate hike in July. They will however be cautious in signalling an end to rate hikes, knowing that both June and July are likely to see some renewed upward on core CPI (above all from travel), and likely note there remain upside risks on inflation, even if the cumulative impact of their rate hikes is still ‘work in progress’. The question is whether Lagarde offers any comments on how close rates are to being ‘sufficiently restrictive’, and whether the obvious headwinds to growth feature more prominently, and prompting a switch from growth risks being characterized as balanced (May) and now being to the downside.

The UK’s BoE does not meet until the 22nd June, but will by then have this week’s labour market, monthly GDP and other activity to hand, along with next week’s perhaps critical CPI data. The last set of labour data were rather mixed, with forecasts for HMRC Payrolls forecast to show a modest 23K dead cat bounce after the totally unanticipated 136K slide in April, with the less timely LFS Employment measure seen slowing to a still solid 150K from March’s 186K. But it will be Average Hourly Earnings which will be in the spotlight and headline seen rebounding to 6.1% from 5.8%, and ex-Bonus expected to hit a fresh peak of 6.9% y/y (vs. prior 6.7%), and thus underlining the scale of wage pressures. Vacancies are likely to fall again, but at 1.083 Mln in April remain sky high on any historical comparison. Wednesday brings monthly GDP, which is forecast to see a rebound to 0.2% m/ after sliding -0.3% in March, paced by a 0.3% m/m rebound in the Index of Services from -0.5% as strike effects ebb. Industrial Production and Manufacturing Output are both seen slipping 0.1%, a modest correction to gains of 0.7% in March, with Construction Output seen flat for a second month.

In both the US and UK, a close eye needs to be kept on politics, with tensions between factions of the Republican and Conservative parties threatening to bring legislative process to a grinding halt, while Germany’s fragile three party coalition government appears to be finding little that it can agree upon.