Weekly Outlook: June 20 — June 24: Powell and Lagarde Testify, UK and CAN CPIs, Prel. PMIs
We don’t have any central bank deciding on monetary policy this week, but that is far from suggesting a quiet week. Actually, it looks equally important as the last one. Both ECB President Christine Lagarde and Fed Chair Powell will deliver testimonies, while the RBA releases the minutes of its latest gathering. We also get inflation data from the UK, Canada, and Japan, which could prove determinant with regards to monetary policy decisions by the BoE, the BoC and the BoJ. The preliminary PMIs will also come out, giving us a first taste on how the global economy has been faring during the month of June.
On Monday, there are no top-tier data on the economic agenda, but there is an event that could attract a decent amount of attention and that’s the testimony of ECB President Christine Lagarde before the European Parliament in Brussels.
At its latest gathering, the ECB kept all three of its main interest rates untouched, but signaled it would hike rates next month, followed by a perhaps bigger increase in September. This added credence to the view of those seeing a 75bps increase by September, as it could mean a quarter-point hike in July and doubling that in September. However, Lagarde and her colleagues failed to provide details on how they are planning to address the problem of “fragmentation”, which refers to the divergence in the economic state and especially borrowing costs between different Eurozone countries, something that raised concerns among the financial community.
The Bank held an ad-hoc meeting last week, saying that it would direct cash to more indebted nations from debt maturing, and that they would work on a new instrument to prevent an excessive divergence in borrowing costs. That said, ECB President Lagarde said that the ECB’s job is taming inflation and not helping budgets. So, having all that in mind, we expect Lagarde to confirm market expectations with regards to the path of interest rates for the summer, but we are very eager to hear any remarks related to “fragmentation”. Will she show more sympathy this time around with regards to the periphery, or will she stick to her guns that inflation is the Bank’s top priority, and not helping budgets? In our view, the first scenario may allow the euro to continue the recovery started today morning, while the second one could invite the bears back into the action.
The preliminary PMIs, due out on Thursday, could also affect the euro’s future course of action, as they will provide an early sign on how the economy has been faring during the month of June. Although the market can handle a small slowdown, as due to the uncertainty surrounding the war in Ukraine this may be largely priced in, a larger-than-expected decline could come as a disappointment. Market participants may scale back their hike bets, which could result in a weaker euro.
On Tuesday, investors’ attention is likely to travel to Australia, where we have the RBA meeting minutes and a speech by RBA Governor Lowe. At its latest meeting, this Bank decided to lift interest rates by 50bps, to 0.85%, against the consensus of 25bps, also noting that inflation is expected to increase further and that they will take further steps in normalizing monetary conditions.
Since then, market participants have lifted their bets with regards to the RBA’s future course of action, with the ASX 30-day interbank cash rate futures yield curve suggesting another 12, yes 12, quarter-point increases by the end of the year. In our view, the minutes will reflect the hawkish vibe we got from the meeting statement, so, investors and traders may focus more on Lowe’s more-up-to-date remarks. If he signals that they are willing to take more bold steps in curbing surging inflation, the Aussie is likely to gain. However, we don’t expect this currency to see a long-lasting recovery. Due to its risk-linked status, expectations over further aggressive tightening around the globe, and increasing fears over recessions, could bring it back under selling interest.
Later in the day, we get Canada’s retail sales for April, with expectations pointing to a decent slowdown in both headline and core terms. However, following a hawkish BoC at its last gathering, we don’t believe that retail sales could prove a game changer with regards to monetary policy. Investors may prefer to pay more attention to Canada’s CPI data, due out on Wednesday.
On Wednesday, ahead of Canada’s CPIs, we get the UK CPIs for May. The headline rate is expected to have ticked up to +9.1% yoy from 9.0%, but the core one is expected to have slid to +6.0% yoy from +6.2%.
Last week, the BoE hiked interest rates by 25bps as was widely anticipated, enhancing the notion that it will follow a slower rate-hike path than most of the other major central banks. However, officials said that they are ready to act “forcefully” if deemed necessary, with market participants lifting their pricing up. They now see interest rates near 3% by year end, expecting at least 50bps at each of the September and October meetings.
Accelerating inflation could add credence to that view and may support the pound. However, we are reluctant to call for a trend reversal. The Bank itself warned that the economy may have contracted in the second quarter, and thus, more data revealing an ugly economic picture could prompt market participants to scale back their hike bets, and thereby result in another round of selling in the British currency. The PMIs on Thursday may be of those releases. Thus, ahead of the PMIs, we will treat a potential rebound in the pound due to the CPIs as a corrective bounce.
During the European afternoon, as we already noted, we have the Canadian CPIs for May. Headline inflation is expected to have accelerated to +7.5% yoy from +6.8%, but the core rate is anticipated to have declined to 5.4% from 5.7%.
At its latest gathering, the BoC hiked by 50bps, its second double hike in a row, taking its benchmark rate to 1.5%. That said, this was largely anticipated and fully priced in. So, in our view, the most important takeaway from that gathering was that the Bank reiterated its willingness to “act more forcefully if needed”. Thus, accelerating inflation could add credence to that view and help the Loonie gain at the time of the release, even if the core rate declines somewhat. After all, even that rate remains well above the 2% midpoint of the Bank’s target range of 1–3%.
Later in the day, Fed Chair Powell will deliver his semi-annual testimony before Congress. He will deliver the same testimony on Thursday as well. Last week, in line with the market pricing, the Fed raised interest rates by 75bps. The new dot plot was also very close to the path priced in by the financial community. The median dot for 2022 was at 3.4%, up from 1.9%, which implies around another 175bps by the end of the year. In other words, as the market has been pricing in, another triple hike in July, and two more doubles thereafter.
However, at the press conference following the decision, Chair Powell said that at the next meeting, they may hike either by 50 or 75 bps, depending on incoming data. In our view, this meant that a 75bps liftoff is not a done deal as the market pricing has been suggesting. Thus, with that in mind, we will monitor his testimony for hints and clues as to how likely a 75bps hike is at the next meeting. The dollar could strengthen if he appears more confident on another triple hike, while the opposite may be true if he keeps highlighting the probability that 50bps could also be the case.
On Thursday, the spotlight is likely to turn to the preliminary PMIs for June, from the Eurozone, the UK, and the US. In the Eurozone, both the manufacturing and services PMIs are expected to have declined somewhat, taking the composite index down to 54.0 from 54.8. As we already noted, we don’t expect this to hurt the euro much, as it may already be largely priced in. However, a deeper slide could well prompt EUR-traders to adjust their bets with regards to the ECB’s future course of action.
In the UK, there are no forecasts available for now, but similarly to the Eurozone, decent declines could increase concerns over a recession, and thereby prompt participants to price out some BoE hikes. The result could be a depreciating pound.
Later in the day, in the US, the manufacturing PMI is forecast to have slid fractionally, but the services index is expected to have inched higher. We don’t believe that the US indices will attract the same attention as those of the Eurozone and the UK, as USD-trader may have their gaze locked on Fed Chair Powell’s testimony.
On Friday, we get more CPIs for May, this time from Japan. There is no forecast for the National headline rate, but the core rate is forecast to have held steady at +2.1% yoy. Although this is a tick above the BoJ’s objective of 2%, it is still the lowest among the major economies, and thus, we don’t believe that it will tempt BoJ policymakers to alter their ultra-loose policy very soon. After all, they kept all their tools untouched at the last gathering, when the core rate was already at 2.1%.
A few hours later, we have the UK retail sales for May, with both the headline and core monthly rates expected to dive into the negative territory, adding to concerns over the UK economy falling into recession.
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