- MON: German Trade Balance (May), EZ Sentix Index (Jul); US Independence Day.
- TUE: RBA Announcement, South Korean CPI, EZ/UK/US Final Services and
Composite PMI (Jun), US Durable Goods R (May). - WED: FOMC Minutes. German Industrial Orders (May), EZ Retail Sales (May), US
ISM Services PMI (Jun). - THU: ECB Minutes, Australian Trade Balance (May), Swiss Unemployment (Jun),
Canadian Trade Balance (May), US ADP National Employment (Jun), EIA STEO. - FRI: US Labour Market Report (Jun), Canadian Labour Market Report (Jun).
NOTE: Previews are listed in day-order
RBA Announcement (Tue):
The RBA is expected to increase rates for a third consecutive meeting
next week with the central bank forecast to deliver another 50bps hike in the
Cash Rate Target to 1.35%. As a reminder, the RBA raised rates by 50bps to
0.85% (exp. 25bps increase) at its meeting last month and noted inflation had
increased significantly, while it is committed to doing what is necessary to
ensure inflation returns to target over time. The Bank added that the Board
expects to take further steps in the process of normalising monetary conditions
over the months ahead, with the size and timing of future interest rate
increases to be guided by incoming data and the assessment of the outlook for
inflation and the labour market. Since that meeting, RBA Governor Lowe has
sounded more hawkish on inflation which he suggested could hit 7% by Christmas
and does not believe it will drop until Q1 next year, while he stated it is
unclear how high rates will need to go, but suggested 2.50% was a reasonable
level. Furthermore, Lowe noted they discussed a 25bps or 50bps hike at the June
meeting and expect to discuss the same options this month as well. This subsequently
saw markets price out the chance of a more aggressive move and supports the
view that the central bank will maintain the current pace of 50bps which
Westpac expects for both July and August, while Goldman Sachs forecasts the RBA
to move by 50bps at each meeting through September.
FOMC Minutes (Wed):
At its June meeting, the Fed lifted rates by 75bps to 1.50-1.75%, and
said it continued to anticipate that ongoing hikes would be appropriate, adding
that it was strongly committed to returning inflation to its 2% objective. A
key statement change saw the line “with appropriate firming in the stance of
monetary policy, the Committee expects inflation to return to its 2% objective
and the labour market to remain strong” removed and replaced with “the Committee
is strongly committed to returning inflation to its 2% objective.” The
statement gave no explicit signal regarding the size of the Fed’s July move,
although officials have been suggesting that it is likely to be a debate
between a 50bps and a 75bps rate hike. Money markets appear to be tilting
towards the latter, even after the May PCE report showed inflationary pressures
continue to cool. The updated economic projections pencil in rates rising to
3.25-3.50% by the end of this year; that implies the possibility of a 75bps
hike in July, followed by a 50bps hike in September, and then 25bps at its
November and December meetings. However, it could also be interpreted as three
50bps rate rises followed by a 25bps move. The forecasts see rates peaking at
3.75-4.00% in 2023, implying a front-loaded hiking cycle with the prospect of a
further two 25bps rate rises next year. The Fed then envisages rates falling
back in 2024. Fed’s Bullard, who votes in 2022, recently said that the
Committee’s playbook may look similar to the 1994 cycle, where aggressive rate
hikes were then followed by rate cuts the next year; the minutes will be looked
at to see if this is a widely held view on the Committee. Elsewhere, the
Committee raised its estimate of the neutral rate marginally to 2.5% from 2.4%,
which still implies that policy will move into restrictive territory by the end
of this year. Accordingly, the FOMC revised down its projections of growth to
1.7% this year vs its 2.8% forecast made in March, and has pencilled in growth
at the same rate next year, before rising in 2024 to the longer-run growth rate
of 1.9%. The projections suggest a soft landing, something Powell said in the
Q&A that he still thinks can be achieved, but did concede that outside
events have made it harder.
US ISM Services PMI (Wed):
The consensus expectation looks for the non-manufacturing ISM headline
to print 55.7 in June from 55.9 in May. However, analysts note difficulties in
using the S&P Global PMI data as a proxy, the services reading for June saw
the headline fall by just shy of 2 points to 51.6, signalling another softening
in the rate of output expansion at service providers. S&P said the pace of
increase was the slowest since January’s Omicron-induced slowdown. The report
noted weaker growth in business activity, driven by a decline in new orders.
The report also said that client demand had dropped for the first time since
July 2020, and at the steepest pace for over two years, while total new sales
were weighed by the quickest decrease in new export orders since December 2020.
Regarding the inflation metrics, average cost burdens increased markedly,
underpinned by soaring supplier, material, fuel, transportation and wage costs.
S&P said the rate of input price inflation was the softest for five months
and eased notably from May, but was much quicker than the series average.
“Similarly, the pace of output charge inflation softened and was the slowest
since March 2021,” and “although firms continued to pass-through hikes in costs
to clients, some mentioned concessions were made to customers.” Notably, the
data revealed that services providers’ backlogs of work fell for the first time
in two years, and that had a knock-on effect on the employment sub-index, which
fell to the lowest level in four months. “Inflationary pressures, hikes in
interest rates and weaker client demand all dampened service provider
expectations for output over the coming year,” S&P said, “sentiment
remained positive, but was at its lowest level since September 2020.”
ECB Minutes (Thu):
As expected, the ECB opted to stand pat on rates with the deposit rate,
main refi and marginal lending rates held at -0.5%, 0% and 0.25% respectively.
On rates, the ECB announced its intention to tighten by 25bps at the July
meeting. Beyond July, policymakers stated they will consider a larger increment
in interest rate hikes if the medium-term inflation outlook persists or
deteriorates. On the balance sheet, as expected, the Governing Council
announced its decision to end net asset purchases under the APP as of July 1st.
Note, the policy statement offered no fresh guidance on how it could deal with
the issue of market fragmentation as it commences its rate hiking cycle. The
2022 inflation outlook was upgraded to 6.8% from 5.1% with 2024 inflation seen
above target at 2.1% vs. prev. view of 1.9%. At the accompanying press
conference, President Lagarde was pressed further on how the Bank intends to
deal with fragmentation, to which she noted that the Bank can utilise existing
tools, such as reinvestments from PEPP and, if necessary, deploy new
instruments. Later in the press conference, Lagarde noted that there is no
specific level of yield spreads that would be a trigger for an
anti-fragmentation policy. When it comes to the decision-making process,
Lagarde stated that policymakers were unanimous in their views. From a more
medium-term perspective, the President was questioned on where the Governing
Council judges the neutral rate to be, however, she remarked that this issue
was deliberately not discussed. As ever, given the time lag between the
announcement and the publication of the accounts, traders will take greater
guidance from recent data points and commentary from officials. Furthermore,
when it comes to the issue of fragmentation, the ECB carried out an ad-hoc
meeting to address the matter and therefore the account will offer little in
the way of insight on that front.
Australian Trade Balance (Thu):
The May trade balance is expected at a surplus of AUD 10.60bln from
April’s AUD 10.495bln. Some desks highlight that over the past 12 months, the
Aussie monthly trade surplus has averaged around AUD 10.5bln. For the month,
both export and imports are expected to have gained. Westpac suggests coal
exports likely led the gains – on both a price and volume basis, whilst
services exports likely rallied on the national border reopening. Imports
likely rose – “This likely reflected both higher volumes, to meet rising
domestic demand, and higher prices, on a lower AUD and the surge in global
energy costs”, Westpac concludes.
US Labour Market Report (Fri):
Analysts expect the rate of job additions will continue to cool in June,
with the consensus looking for 295k payrolls to be added; that would be lower
than May’s 390k, which is lower than recent averages too (3-month average 408k,
6-month average 505k, 12-month average 545k). With Federal Reserve officials
emphasising that their focus will be on bringing inflation down, there is less
focus on the labour market for now, with the Street more focussed on how
aggressive normalisation of monetary policy will hit growth, and subsequently
the jobs market. Analysts see the jobless rate holding at 3.6% in June; the
Fed’s recently updated projections see the jobless rate ending this year at
3.7%, rising to 3.9% next year, and then 4.1% in 2024; combined with that, GDP
is expected to grow just 1.7% this year and next, below the trend rate. These
forecasts clearly acknowledge that the aggressive rate hikes will weigh on
growth and the labour market ahead, but officials have been talking-up the
strength of the economy, noting that the jobs market is strong at the moment.
As has been the case for many months now, traders will be carefully watching
measures of wage growth for signs of how the ‘second round’ effects are faring:
average hourly earnings are expected to rise 0.3% M/M, matching the May rate.
Fed officials have recently been suggesting that the debate in July will be
between 50bps and 75bps, and any upside surprise in the wages data will
embolden calls for the Fed to raise rates by 75bps again on July 27th.
Currently, money markets are assigning an approximately 70% chance that rates
will be lifted by the larger increment, but if this metric were to surprise to
the downside, it could help pricing tilt back into the 50bps bucket.
This article originally appeared on Newsquawk.
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