Weekly Outlook: June 6 — June 10: RBA and ECB Decisions, US CPIs and CAN Jobs Data
The calendar is rather interesting this week, with two major central banks holding their monetary policy gatherings: the RBA and the ECB. The former is expected to hike interest rates by 25bps, but due to the overly hawkish expectations for its future course of action, the accompanying statement may be more important. The ECB is not expected to hike, but due to the increasing best over hikes in July and September, we will look for hints on that front. Elsewhere, the US inflation numbers, and Canada’s employment data could well shape expectations around the Fed and the BoC, while China’s price figures could prove important for the broader market sentiment.
On Monday, the calendar appears light, with no top-tier data on the schedule, while New Zealand’s and Switzerland’s markets are staying closed due to the Queen’s Birthday and the Pentecost respectively.
On Tuesday, the main item on the agenda may be the RBA interest rate decision. At its latest meeting, this Bank decided to hike interest rates by 25bps, to 0.35% from 0.10%, surprising the financial community, which was expecting a 15bps increase. The Bank committed to doing what is necessary to ensure that inflation returns to target over time, and explicitly said that this will require a further lift in interest rate over the period ahead.
The Bank is expected to continue hiking this week, by another 25bps, but with extremely elevated market expectations over officials’ actions, this may not be enough. According to the ASX 30-day interbank cash rate futures yield curve, market participants expect another 9 quarter-point hikes by the end of the year. Thus, for the Aussie to gain, the RBA needs to accompany this increase with very hawkish remarks, or even surprise participants again by delivering another larger-than-expected hike. Actually, data since the previous meeting support the notion of the RBA staying hawkish. The trade data for March and April revealed an increasing surplus, retail sales accelerated by more than expected in Q1, and GDP slowed, but less than the consensus suggested. Only the employment report came on the weak side, but with the unemployment rate staying at 3.9%, the lowest since 1974.
As for the rest of Tuesday’s events, we get the final UK services and composite PMIs for May, but as it usually the case, the final prints are expected to confirm their preliminary estimates. Canada’s trade balance for April is also due to be released, and the forecasts points to an increasing surplus. Following the nation’s current account balance, which turned positive and marked the widest surplus since the second quarter of 2008, this, combined with decent employment report on Friday, could keep expectations over more tightening by the BoC elevated, and thereby allow participants to keep buying Loonies.
On Wednesday, during the Asian session, Japan releases its final GDP numbers for Q1, with the forecasts suggesting a small downside revision, to -0.3% qoq from -0.2%. A negative GDP rate is very unlikely to alter BoJ officials’ plans of maintaining an ultra-loose monetary policy for now. Later in the day, we have the UK construction PMI for May, which is expected to have slid fractionally, to 58.0 from 58.2, and the final print of Eurozone’s GDP for Q1, which is expected to just confirm its preceding estimates.
On Thursday, the central bank torch will be passed to the ECB. Interest rates are not expected to be touched, but we believe that this will be a very important meeting, as it will set the stage for the Bank’s next couple of moves.
A couple of weeks ago, President Christine Lagarde said that the ECB is likely to take its deposit facility rate out of the negative territory by the end of September and could lift it further if needed. Given that the deposit rate is at -0.50%, we initially believed that this means two quarter-point liftoffs, one in July and one in September, and actually, some other ECB officials also supported that view.
However, last week, Eurozone’s preliminary CPI data showed that headline inflation accelerated to 8.1% yoy from 7.4%, at a time when the forecast was at 7.7%, while the core rate rose to +3.8% yoy from 3.5%. This may have sparked speculation of more aggressive action by the ECB, perhaps that the size of the July hike may be 50bps. Even if the officials hike by 25bps in July, they could hint a bigger increase for September.
A hawkish narrative by policymakers could help the euro recover some more ground, especially against currencies the central banks of which are expected to stay ultra-loose, like the yen. However, we doubt that it could keep outperforming its US counterpart for long, especially after several Fed officials expressed the view that they are not in support of a break in rate hikes after summer, at least at the moment and with the data they have in hand. After all, the US economy is in a better shape than the Eurozone, which could allow Fed officials to keep delivering double hikes, despite some worries over a slowdown recently. In order to start examining the case of stronger advances in EUR/USD we would like to have clearer and more convincing evidence that inflation in the US is easing and headed back towards the Fed’s 2% target. The CPI data on Friday may be a good starting point. Now, in case the ECB disappoints, the common currency is likely to come under an immediate selling pressure.
As for the rest of Thursday’s events, the only data set worth mentioning is China’s trade balance for May, with the surplus expected to have increased to USD 58.00bn from 51.12bn. This could be positive for the broader market sentiment, especially amid relaxing COVID-related restrictions in the world’s second largest economy, and especially if Chinese inflation eases on Friday.
Finally, on Friday, besides the Chinese inflation data, which we already mentioned, later in the day, we have two more top-tier data sets due to be released, and those are the US CPIs for May, and Canada’s unemployment report for the same month.
Getting the ball rolling with the US, the headline rate is expected to have held steady at 8.3% yoy, but the core one is seen declining to +5.9% from 6.2%. This could revive some speculation that the Fed could slow, or indeed pause, its hiking process after summer, but, in our view, it is too early to say with certainty something like that.
After all, the Fed appears committed to deliver two more double hikes in June and July, and as for the subsequent meetings, we will get a lot more data before arriving to safer conclusions. Even officials themselves noted in their prior gathering, according to the minutes, that it is too early to be confident that inflation has already peaked. We prefer to take things day by day, and as we already noted, the dollar could continue sliding for a while more, but on the first fresh sign that inflation could turn up again, or on fresh comments dismissing the likelihood of a post-summer break by the Fed, the currency could turn up again.
Now, flying to Canada, the unemployment rate is forecast to have held steady at 5.2%, while the net change in employment is forecast to show that the economy has added 24.0k jobs, more than the 15.3k added in April. At last week’s 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. In our view, the most important takeaway from this gathering was that the Bank reiterated its willingness to “act more forcefully if needed”. So, with that in mind, a decent employment report could allow the Loonie to keep adding to gains for a while more.
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