Weekly Outlook: Jun 21 — Jun 25: BoE, PMIs, PCE, and Fed Speakers Under the Spotlight
Following last week’s hawkish shift by the Fed, market participants may pay extra attention to speeches by several Fed officials this week, as they try to estimate when they are planning to begin scaling back their bond purchases. The core PCE index, the Fed’s favorite inflation metric, may also attract special attention due to that. We also have a BoE meeting on Thursday, but we don’t expect any material change in policy this time around.
Monday is a relatively light day in terms of economic data releases. Thus, we believe that market participants may pay extra attention to speeches by ECB President Christine Lagarde and New York Fed President John Williams.
Taking the ball rolling with ECB’s Lagarde, around 10 days ago, the ECB decided to keep all its monetary policy settings unchanged, noting that its PEPP (Pandemic Emergency Purchase Programme) will continue to run at a “significant higher pace”. The Bank raised its 2021 and 2022 GDP and inflation forecasts, but at the press conference following the decision, ECB President Lagarde clarified that headline inflation will remain below target over the forecast horizon. She admitted that they were somewhat more optimistic about the economic outlook than three months ago, but highlighted that the decision statement was unanimously supported, suggesting that tapering was not on any official’s mind at that moment. It would be interesting to hear what she has to say now, but we don’t expect her to deviate much from what we’ve heard at the press conference following the meeting.
Now, passing the ball to Fed’s Williams, we will closely monitor any potential remarks on monetary policy, especially following last week’s hawkish shift by the Fed. Remember, that the Committee left policy unchanged, but signaled that interest rates could start rising in 2023. What’s more, at the press conference following the decision, Fed Chair Powell said that there had also been a first discussion on QE tapering that the talks will continue in the coming months as the economy continues to heal. On Friday, St. Luis Fed President James Bullard added extra pressure to the markets saying that he sees the first interest rate increase taking place next year. With that in mind, we will be eager to see whether Williams is as hawkish as Bullard on interest rates, and how soon does he anticipate the Committee to start scaling back its bond purchases.
We have more Fed officials on this week’s agenda, including Fed Chair Powell on Tuesday, who will be testifying before Congress, San Francisco Fed President Mary Daly the same day, and Atlanta Fed President Raphael Bostic on Wednesday.
As we already noted, Tuesday’s main event may be Fed Chair Powell’s testimony before the House Select Subcommittee on the Fed’s emergency lending programs and current policies to fight the coronavirus crisis. We don’t believe that Powell’s words will be much different than at the press conference following last week’s decision, but we will look for any potential clues and hints on when does he expects tapering to begin, as well as when does he believe interest rates should start rising.
As for Tuesday’s data, the only one worth mentioning is the US existing home sales for May, which are expected to have declined slightly.
On Wednesday, we get the preliminary PMIs for June from the Eurozone, the UK and the US. With regards to the Euro area, the manufacturing index is expected to have declined slightly, to 62.2 from 63.1, but the services one is anticipated to have risen to 57.5 from 55.2. This is likely to take the composite index up to 58.8 from 57.1, confirming that the bloc continues to recover from the pandemic-related economic damages at a decent pace. However, we don’t expect the euro to gain much on potentially strong numbers, as the ECB has made it clear that they are not thinking about scaling back their monetary policy support any time soon. No forecast is available for the UK prints, while in the US, both the manufacturing and services indices are expected to have declined somewhat, but to have stayed at elevated levels, confirming the Fed’s hawkish shift last week.
As for the rest of the releases, we have Canada’s retail sales for April, which are expected to have declined around 5.0% mom in both headline and core terms, as well as the US new home sales for May, which are anticipated to have increased somewhat.
On Thursday, the highlight may be the BoE interest rate decision. When they last met, British policymakers kept interest rates unchanged, but they proceeded with a technical change in which the pace of weekly bond purchases slowed down. That said, they reaffirmed that “as measured by the target stock of asset purchases, that stance remains unchanged”, adding that the QE slowdown is not a material change and that they are ready to reverse it if deemed necessary. With regards to their economic projections, they expected the UK economy to recover to pre-pandemic levels over the course of this year, while on the inflation front, they said that it may rise above 2% towards the end of the year, but this is likely to be due to transitory effects and thus, the rise may prove to be temporary.
Given that this is not a Super-Thursday, where we get updated economic projections and a press conference by Governor Bailey, we don’t expect officials to proceed with any change at this gathering. We believe that they may prefer to wait for the August meeting to announce any further slowdown in bond purchases. However, it would be interesting to hear their opinion on the inflation and growth outlooks, following the recent strong CPI and GDP data. A more optimistic language could be interpreted as a sign that they are getting closer in slowing further their purchases, which could support the British pound somewhat.
Later in the day, we get final US GDP for Q1, which is expected to confirm its 2nd estimate of 6.4%.
Finally, on Friday, the spotlight is likely to fall on the core PCE index, the Fed’s favorite inflation metric, for May. The yoy rate is forecast to have increased to +3.4% from+3.1%, raising more questions as to whether the spike in headline inflation is indeed transitory. Combined with last week’s hawkish shift by the Fed, such an increase may add to speculation that the Fed will have to start scaling back its QE purchases sometime soon. Personal income and spending are also due to be released. Income is forecast to have declined at a slower pace than in April, while spending is anticipated to have slowed somewhat.
Ahead of the income, spending, and PCE data, during the Asian session, New Zealand’s trade balance for May and Japan’s Tokyo CPIs for June are scheduled to be released. No forecast is available for New Zealand’s trade balance, while, with regards to the Tokyo numbers, we have a forecast only for the core rate which is expected to have ticked up to -0.1% yoy from -0.2%.
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