Weekly Outlook: May 18 — May 22: RBA and Fed Minutes, UK and Canada CPIs, EZ PMIs

There are no central bank meetings on this week’s agenda, but we do get the minutes from the latest RBA and FOMC policy gatherings, from which we may get more clues as to how willing these two Banks are to expand (or not) their easing efforts. We also get the UK and Canadian CPIs for April, as well as preliminary PMIs for May from the Eurozone, the UK and the US.

On Monday, there are no major indicators or events scheduled to be released. The only one worth mentioning is Japan’s GDP for Q1, which is already out. The data revealed that the Japanese economy contracted 0.9% qoq, officially slipping into a technical recession. However, the actual print was better than the -1.2% qoq forecast and, perhaps, that’s why we didn’t have a major market reaction.

During the Asian morning today, Asian indices traded in green territory, and this may have been due the slowdown in both infected cases and deaths from the coronavirus during the weekend. This may have raised hopes that the easing of restrictive measures would help the globe to slowly emerge from recession.

On Tuesday, during the Asian morning, we get the minutes from the latest RBA policy decision. At that gathering, the Bank kept its cash rate and the target of its 3-year government bond yields at 0.25%, with officials noting that they have scaled back the size and frequency of their bond purchases. However, they added that they are prepared to scale up these purchases if deemed necessary.

Following the disappointment in Australia’s employment data for April, we will scan the minutes to see how willing officials were to scale back up their QE purchases. A dovish flavor may raise speculation that this can be done as soon as at the June gathering and may hurt the Aussie. On the other hand, if the minutes suggest that scaling back up QE will be considered only under extreme circumstances, then the Aussie is likely to gain, and perhaps outperform currencies, the central banks of which are expected to proceed with further stimulus in the months to come, like the pound and the Kiwi.

During the European morning, we get the UK employment data for March. The unemployment rate is expected to have increased to 4.4% from 4.0%, while average weekly earnings including bonuses are expected to have slowed to +2.7% yoy from +2.8%. The excluding bonuses rate is anticipated to have slid to +2.6% yoy from +2.9%.

The case for a notable rise in the unemployment rate is supported by the KPMG and REC UK report on Jobs for the month, which noted that both permanent placements and temp billings fell at the steepest rates since 2009. In the report, it was also noted that the increasingly uncertain outlook and reduced demand for staff weighed on pay growth, which supports the case for declines in both the official earnings’ rates.

From Germany, we have the ZEW survey for May. The current conditions index is expected to have improved somewhat, but to have remained into negative waters. Specifically, it is expected to have increased to -87.8 from -91.5. The economic sentiment index is also expected to have risen, to 33.5 from 28.2. The overall picture with regards to the coronavirus suggests a flattening curve since early April and thus, a somewhat more optimistic view by analysts appears more than normal to us.

In the US, building permits and housing starts, both for April, are due to be released. Expectations are for both permits and starts to have declined to 1.0mn and 0.950mn from 1.35mn and 1.22mn respectively.

On Wednesday, we get more minutes, this time, those from the latest FOMC gathering. Back then, the Committee kept interest rates unchanged at the 0–0.25% range and hinted that more stimulus may be delivered if judged necessary. “We will continue to use powers proactively until we’re confident that the US is solidly on the road to recovery”, Fed Chair Powell noted. He also added that economic activity will likely drop at an “unprecedented pace” in Q2, which suggests that they are more likely to act again than not.

We will look into the minutes for clues of how likely further action is, and what form it could take, but we don’t expect them to prove a major market mover this time around. After all, we got an updated view on monetary policy by several Fed officials recently, including Fed Chair Powell last week, who warned over an “extended period” of weak growth and stagnant incomes due to the pandemic, but who also made it clear that he and his colleagues are unlikely to push interest rates below zero. Remember that a couple of weeks ago, investors have started to price in such a likelihood by pushing the yields of the Fed funds futures into the negative territory. Still, they assign a nearly 60% chance for interest rates to turn negative by summer next year.

As for Wednesday’s data, the UK CPIs for April are due to be released during the early European morning. The headline rate is expected to have fallen to +0.8% yoy from +1.5%, while the core one is anticipated to have slid to +1.4% yoy from +1.6%. The fact that the core rate is expected to have declined by less than the headline one suggests that this may be due to the collapse in oil prices. However, this data is unlikely to change speculation over the BoE’s monetary policy plans. At its latest meeting, the Bank kept its policy unchanged, but noted that the current QE is set to reach its target at the beginning of July. This, combined with officials’ readiness to take further action if needed, suggests that a QE expansion may be on the cards at the June meeting.

Eurozone’s final CPIs for April are also coming out, but as it is always the case, they are expected to confirm their initial estimates.

We get more inflation data for April later in the day, this time from Canada. The headline CPI rate is expected to have fallen into the negative territory, to -0.1% yoy from +0.9%, while no forecast is available for the core rate. Similarly to the UK CPIs, due to the collapse in oil prices, we expect the Canadian core rate to have slid by less than the headline rate. At its prior gathering, the BoC announced an expansion of its QE purchases, and a potential negative inflation rate, combined with further slide below the Bank’s objective of 2% in the core metric, may increase speculation for more easing by this Bank and thereby bring the Canadian dollar under selling interest.

On Thursday, we get the preliminary PMIs for May from the UK and the US. No forecast is available for the UK numbers, while in the US, both the manufacturing and services indices are expected to have rebounded, to 37.8 and 30.0 from 36.1 and 26.7 respectively. The US existing home sales for April are also coming out and the forecast points to a 19.4% tumble after an 8.5% decline in March.

Finally, on Friday, during the Asian morning, we have New Zealand’s retail sales for Q1 and Japan’s National CPIs for April. No forecast is available for New Zealand’s data, neither for Japan’s headline CPI. The core rate is expected to have slid to -0.1% yoy from +0.4%.

During the European morning, we get more retail sales data, this time from the UK. Headline sales are forecast to have tumbled 16.5% mom after declining 5.1%, while core sales are forecast to have fallen 15.0% mom after sliding 3.7%. This would drive both the yoy rates down to -22.2% and -18.6% from -5.8% and -4.1% respectively. However, bearing in mind that the yoy rates BRC retail sales monitor rebounded to +5.7% from -3.5%, we would consider the risks of the official prints as tilted to the upside.

Later, we get preliminary PMIs for May from several Euro-area members, as well as from the bloc as a whole. Both Eurozone’s manufacturing and services indices are expected to have rebounded to 38.0 and 25.0, after hitting record lows at 33.4 and 12.0 respectively. This will drive the composite PMI up to 24.0 from 13.6. Although this data would point to an improvement, all readings would still be well below the boom-or-bust barrier of 50.0, and thus, they are unlikely to provide a massive boost to the euro.

When they last met, ECB policymakers eased the conditions of their TLTROs and introduced a new series of non-targeted pandemic emergency long-term refinancing operations (PELTROs), staying ready to adjust all of their instruments, as appropriate, to ensure that inflation moves towards their aim in a sustained manner. With that in mind, we believe that the PMIs could keep the door for further stimulus wide open.

Canada’s retail sales for March are also coming out. Headline sales are expected to have tumbled 10.0% mom after rising 0.3%, while the core rate is anticipated to have risen to -5.0% mom from -15.6%.


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