Written Commentary
- Digesting UK inflation & PSNB, South Korea Exports, BoJ policy minutes and speakers; awaiting Powell testimony and busy run of Fed speakers, South Africa CPI, Canada Retail Sales & UK CBI Industrial Trends; Czech and Brazil rate decisions; German 27 & 30-yr, US 10-yr debt sales
- UK CPI heaps further rates pressure on BoE with broad based rise, even if PPI underlines little sign of pipeline inflation; recession risk also rising as rate expectations ratchet higher
- Powell testimony unlikely to veer far from last week’s FOMC messaging, hawkish but also maintaining data dependency room for manoeuvre
** PLEASE NOTE: there will be no commentary tomorrow due to holiday
EVENTS PREVIEW
The UK dominates the data schedule with CPI and other inflation indicators, PSNB, ONS House Prices and the CBI Industrial Trends surveys; there are also the rise in Korean Exports and EU-27 auto sales to digest, along with the BoJ April minutes, ahead of South Africa’s CPI and Canadian Retail Sales. The central bank schedule is dominated by the Fed, with Powell’s semi-annual testimony, various Fed governor nomination hearings and a slew of other Fed speakers. the Bank of Canada publishes the minutes of its June policy meeting, with rate decisions in Czechia and Brazil expected to see no change, though the BCB is expected to hint strongly at an initial rate cut in Q3. Govt bond supply takes the form of German 27 & 30-yr, and a generally unloved US 20-yr.
** U.K. – May CPI **
CPI came in above forecasts for a fourth consecutive month at 0.7% m/m, to leave the y/y rate unchanged at 8.7% y/y against a forecast of 8.4%, with core CPI rising to a new high of 7.1%, vs. forecasts of an unchanged 6.8%. The details underlined the breadth of pressures in Services and non-discretionary area, with Food 0.9% m/m, Household Goods 1.1% m/m, Clothing & Footwear 1.3% m/m, Recreation 0.7% m/m, & Restaurants & Hotels 1.0% m/m each adding 0.1 ppt to the m/m rise, and Communication also rising 0.9% m/m, and a strong contribution from airfares & used car prices. The only crumb of comfort for the MPC was further clear signs from the PPI data that pipeline pressures continue to ease. The risk of a 50 bps rate hike at tomorrow’s MPC meeting is now considerable, given the breadth of price pressures and the already reported wages pressures, and markets may well start to price the risk of a peak beyond the already painful 6.0% that was discounted ahead of the data. But with that rises the probability of a rates induced recession, particularly given restrictive stance of fiscal policy, with the PSNB data showing public sector debt now stands at 100.1% of GDP for the first time since 1961.
** U.S.A. – Powell testimony and Fed speakers **
Neither Powell, nor the nominees and array of other Fed speakers are likely to stray from the hawkish bias at last week’s FOMC meeting, but will be keen to maintain the room for manoeuvre that was also inherent in the somewhat contradictory messages from the dot plot hike and the actual rate pause, as well as underlining data dependency, and taking stock of the cumulative rate hikes. It will be interesting to see if Powell is asked any testing questions about the shift from May’s FOMC meeting press conference assessment in which he suggested rates were probably ‘sufficiently restrictive’ to last week’s assertion that rate cuts are probably a ‘couple of years out’. The latter looks to be a tactical ploy to push back on markets anticipating a rate pivot, after all central banks should have learnt the hard lesson of their very mistaken ‘transitory inflation’ and ‘low rates for a long time’ narrative in 2021.
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