Macroeconomics: The Week Ahead: 17 – 21 June

The Week Ahead – Preview: 

The new week brings a busy run of US and China activity indicators (Retail Sales, Industrial Production and Housing/Property), UK inflation, G7 and India Flash PMIs and other surveys, Japan Orders, Trade and National CPI, BoE and RBA policy meetings, China’s MTLF and LPR decisions, and the minutes of the BoC’s rate cut meeting. The BoE and RBA headline a busy run of central bank policy meetings, with the SNB, Norges Bank, Brazil’s BCB, Chile’s BCC, Hungary’s MNB and Bank Indonesia are also on tap with rate decisions, and there is a plentiful array of central bank speakers. The Eid al-Adha (Feast of the Sacrifice) holiday in Islamic countries (Monday through Wednesday) and the US Juneteenth on Wednesday will dampen trading volumes. A lighter week for commodity events has the Energy Institute’s annual Statistical Review of World Energy, various monthly USDA Livestock reports and JPM’s Energy, Power and Renewables conference. As last week amply demonstrated, politics has a habit of throwing a big spanner in the works of market sentiment, with France’s unexpected general election elbowing its way past both the UK and US elections to the centre of attention, and this week also putting the spotlight again on Italy, after last week’s relatively successful G7 meeting, with the potential launch of an ‘excessive deficit procedure’ for Italy, and indeed Poland though PM Tusk will doubtless swat this away with the 4% of GDP per annum that the govt is spending on defence due to Russia’s invasion of Ukraine. Monday’s informal EU leaders’ summit will be notable for the extent to which other EU leaders indirectly express their concerns about the risks posed by the French elections, as was evident at last week’s G7 meeting. It is worth pondering on the risks of a full-scale debt crisis, in so far as some 70% of French voters are apparently intending to vote for far-right and far-left parties, i.e. for more govt spending in a country which already has the highest level of govt spending among developed countries. 

** China – Monday brings both the PBOC’s MTLF operation and the run of activity indicators. The consensus sees no change in the 1-yr MTLF rate (2.50%), though there are a good many forecasters looking for a 10 bps cut in response to the run of weak inflation and credit data, and the likelihood of weak activity data to be published after its operation. But the PBOC has emphasized CNY stability, and with the currency under continued pressure, both due to the economy, the Fed continuing to kick an initial rate cut further down the road, as well as being aware that it is credit demand and lack of consumer and business confidence rather than rates, it will likely err on the side of caution. Retail Sales are expected to pick up to 3.0% y/y from 2.3%, boosted by retailer discount wars in response to weak demand, rather than property sector stimulus measures, and the y.t.d. measure is indeed seen slipping to 3.9% y/y from 4.1%. Industrial Production is expected to slow to 6.2% y/y from 6.7%, thanks in the main to adverse base effects, though hold at 6.3% y.t.d., mirroring an unchanged 4.2% for Fixed Asset Investment. Property data will remain abject, with Investment forecast to fall -10.0% y/y (vs. prior -9.8%), and Property Sales likely little better than last month’s -31.1% y/y. The week ending Loan Prime Rate fixings are seen unchanged at 3.45% (1-yr) and 3.95% (5-yr), though very much contingent on the outcome of the MTLF operation. Per se concerns about China’s economic outlook will remain very much alive.

** U.S.A.: last week’s mix of lower than expected inflation readings and unexpected drop in Michigan Sentiment prompted markets to largely dismiss the hawkish lean of the FOMC forecasts, and put the focus on this week’s activity data. Retail Sales are forecast to show a meagre 0.2% m/m rebound in headline terms, and a more robust 0.4% m/m bounce on core metrics, with stores and auto retailers’ price cuts in response to weaker demand expected to have given a boost. The rebound in the ISM’s Production sub-index and a solid 0.5% m/m rise in Manufacturing Hours imply a modest upside risk to forecasts of a 0.3% m/m rise for both Industrial Production (vs. prior flat) and Manufacturing Output (vs. prior -0.3%), with above seasonal average temperatures likely to have boosted Utilities, perhaps offset by some weakness in mining & extraction. The run of housing data are expected to see the NAHB Housing Market Index stabilize at 45, after May’s tumble, while Housing Starts are seen accelerating to a 1.380 Mln SAAR pace, predicated on the continued strength in Building Permits (median 1.460 Mln SAAR), while the steep 7.7% m/m fall in April Pending Home Sales underpins expectations of a further -2.2% m/m drop in Existing Home Sales. Overall, if forecasts are correct, the run of data will likely underpin perceptions that high for longer rates are restraining activity, which would be above all reinforced if Initial Claims were to extend their modest run higher to 242K last week, though the consensus looks for a dip to 235K.  The NY and Philly Fed Manufacturing surveys are also due.

** G7 / India ‘flash’ PMIs – Outside of an expected mean reversion type fall in the US Services PMI (53.4 s. 54.8) after May’s jump, PMIs are seen improving modestly in the Eurozone, whereby Manufacturing would still remain in contraction, while Services expand modestly (final French readings may capture reaction to the election more than the flash readings), while UK and US readings see a modest Manufacturing expansion, and reasonably solid Services growth. India’s PMIs should continue to show a robust expansion in both Manufacturing and Services, and only minimal reaction to the election result.

** U.K.: Just ahead of the MPC meeting, May CPI is expected to post a 0.4% m/m rise, which thanks to base effects would see the y/y rate drop back to 2.0% y/y from 2.3%, with easing food and goods price continuing to pace the fall. But after April’s upside surprises, all eyes will be on Core (median 3.5% y/y vs. 3.9%) and above all Services (median 5.5% y/y vs. 5.9%), both still uncomfortably high, but at least resuming prior downtrends. Friday’s Retail Sales are expected to post a 1.6% m/m rebound after falling -2.3% and -0.2% in prior months, echoing the smaller than expected 0.4% y/y rebound in the BRC Retail Sales measure, reflecting less of a drag from poor weather, a boost for low income households from the rise in the National Living Wage, but also continued restraint due to the cost of living crisis ‘hangover’ and high for longer rates. The MPC meeting is severely constrained by the general election campaign, per se the vote is likely to remain 7-2 in favour of holding rates at 5.25%, and the statement likely little changed, with particular emphasis placed on incoming data in terms of rate cut timing. As previously noted, the MPC may well be quite relieved that it is constrained at this meeting, with the run of recent data proving rather mixed in terms of the inflation, wage and growth outlooks. It will be interesting to see if weekend polls for the general election, which variously suggest Reform UK 1 pt ahead of the Conservatives, and near oblivion for the Conservatives (one poll suggesting just they may only win 72 of the 650 seats in Parliament) prompt any market reaction.

** Eurozone – A very light week for data will keep the focus on the French elections. Eurozone CPI is seen unrevised at 0.2% m/m 2.6% y/y headline and 2.9% y/y core, while Germany’s ZEW survey is forecast to show Expectations rising to 49.5 from 47.1, but with the steep decline in Eurozone stock indices over the past week the risks of a much weaker than expected outturn look to be quite high, depending on data collection timing, while the Current Conditions index is expected to remain very weak, but improving to -65.0 from -72.3. The same applies to French Business and Manufacturing Confidence that are both seen unchanged at 99.

** Australia: the RBA is seen holding rates at 4.35% on Tuesday, and will likely retain a hawkish bias, after higher than expected April CPI (though the May MI Inflation Gauge tumbled to 3.1% y/y from 3.7%) and May Employment, while GDP came in weaker than expected at 0.1%. Of note will be whether a rate hike was discussed again, given that Governor Bullock noted at the last meeting that the RBA was not in the business of micro-managing rates in response to incoming monthly data.

** Central banks: the SNB Norges Bank, Bank Indonesia and Brazil’s BCB are all expected to hold rates at 1.5%, 4.5%, 6.25% and 10.50% respectively. For the SNB, inflation has been in line with forecasts at 1.4% y/y, and per se should also see it keep its CPI forecasts unchanged, per se obviating any need to change rates at this meeting. Norges Bank will likely continue to signal no change in rates before year end, given that underlying (core) CPI remains rather sticky (last 4.1% y/y vs. expected 3.9%), and its own regional network survey upgraded estimates for Q2 GDP to 0.2% q/q vs. prior flat, markets nevertheless continue to anticipate two cuts by year end. Bank Indonesia will be disappointed that the IDR has now given up most of the gains that followed its unexpected 25 bps hike in April, but with inflation set to remain within its 1.5-3.5% target range, and the IDR doing no worse than other regional currencies in response to the Fed opting for ‘high for longer’, it will probably stick with FX intervention and other instruments to defend the IDR. Brazil’s BCB is seen holding rates having cut rates by 325 bps since last August, and likely taking a rather hawkish turn in its rhetoric, despite real rates at around 6.1% being far higher than its assumption of a neutral rate of 4.5%, with rising market concern about fiscal policy reflected in the recent decline in the BRL, as well as the Fed’s high for longer stance underpinning the decision. The question is whether it hints at the possibility of a rate hike, if the situation deteriorates.

There are just 7 S&P 500 companies reporting this week, with earnings highlights for the week as compiled by Bloomberg News likely to include: Accenture, Ashtead Group, CarMax, Darden Restaurants, KB Home, Kroger and Lennar.  Govt bond supply is quite plentiful, with the US, UK, Germany, France, Spain, Belgium, Japan, China, Australia and Canada all holding auctions.