Original insights into market moving news

Week in Focus; week commencing 10 June 2019


  • WEEKEND: G20 finmin/cbank heads meet.
  • MON: US to impose tariffs on Mexico; UK Tory leadership campaign starts; Japan GDP; UK GDP, Manufacturing; Canada housing.
  • TUE: EIA STEO, UK jobs report
  • WED: China CPI, US CPI, CBRT.
  • FRI: IEA oil report, CBR.


Ahead of the leaders’ summit on 28-29 June, G20 finance ministers and central bank officials will meet on the weekend at Fukuoka in Japan, with attention on a meeting between US Treasury Secretary Mnuchin and PBOC Governor Yi Gang. The meeting is a constructive sign, amid the breakdown in negotiations between the two sides, although the bar for expectations is low. However, this week, Senator Rubio introduced a Bill addressing US-listed foreign companies, whose audits are restricted from US regulators (China A Shares for instance), which might present another obstacle in talks, Morgan Stanley thinks. Ahead of the meeting, Gang said talks would be difficult, and on the currency situation, said no CNY exchange rate number is more important than others, warning that there was plenty of that policy room for the PBOC to use if the trade wars intensify further. It is worth keeping an eye out whether Mnuchin meets with his Chinese counterpart Liu Kun, which could be taken as a positive (they are set to appear on a panel on tax policy, though whether a one-to-one meeting will transpire still remains to be seen).


Headline CPI is seen paring a touch to 1.9% Y/Y vs 2.0% prior, with the M/M rate seen +0.1% in May vs +0.3% in April. The core measure is seen unchanged at 2.1% Y/Y, with the monthly figure seen picking up a touch to +0.2% M/M. Real earnings growth is seen +0.2% M/M rebounding from -0.4% M/M prior. UBS is slightly below consensus on the core measures, and sees +0.15% M/M (to 2DP), which would be the fourth straight 0.15% or less reading. Although the Fed’s preferred measure of inflation is PCE/core PCE prices, the data will be framed in the context of recent Fedspeak, where some voting members have expressed concerns with weak inflationary pressures, with some murmurs of insurance rate cuts to pre-emptively address risks, as well as cushion against trade war fall-out. A downside surprise would likely see these calls grow louder, which may bolster market pricing for Fed rate cuts.


Headline retail sales growth is seen at 0.6% M/M in May vs -0.2% prior; the core measure is seen rising at a pace of 0.3% M/M vs 0.1% prior; the control group is expected at 0.4% M/M vs 1.1%. The headline could see a boost from decent auto sales numbers in the month (17.4mln annualised vs 16.4mln prior), which could buoy the headline by 0.9ppts, RBC says. However, gasoline prices softness could weigh on the ex-autos measure. “That said, retail control (ex-autos, gasolines, building materials) should look better at 0.7% on the heels of flat read in April, which was really a function of significant monthly volatility of late,” the bank says. Additionally, weekly same-store retail figures augur well, picking up over the last month through the early part of June, raising the possibility of a sequential bump in the monthly numbers. RBC notes that more broadly, aggregate incomes at above 5% Y/Y coupled with near-cycle-high consumer confidence should continue to support retail activity in the near-term.


From a UK perspective, this week sees the release of GDP, production and trade metrics on Monday with the domestic labour market report due for release on Tuesday. From a growth perspective, Monday’s figures will be monthly numbers (as opposed to quarterly) for April and thus offer the first insight into the UK’s GDP performance in Q2. RBC also highlight that the release will provide the first monthly data after the UK’s intended departure from the EU and therefore “should provide a good guide as to how much contingency planning for that event was distorting growth in recent months”. In terms of expectations, the Canadian Bank looks for the 3M/3M growth rate to modestly slow to 0.4% from 0.5% as the impact of touted ‘pre-Brexit’ stockbuilding dissipates. On the labour front, Tuesday’s jobs report is set to see headline wage growth fall to 3.0% from 3.2% with the ex-bonus metric forecast to slip to 3.1% from 3.3% with Oxford Economics noting “with January’s strong 3.9% single month rise dropping out of the headline comparison, the three months to April is likely to have seen a further deceleration”. More broadly, the unemployment rate is forecast to remain at 3.8% with Oxford Economics highlighting that the “uncertain economic environment incentivising firms to expand though extra employment rather than often irreversible investment”.


The SNB is expected to keep policy unchanged on June 13th (3-month Libor target at -0.75%, with the target range kept between -1.25% and -0.25%). However, it is worth noting that the June and December meetings contain a press conference, as such we may get further insight into the bank’s normalisation policy and rate path; with UBS now expecting the first hike to occur in December 2020 rather than March 2020 as the SNB are unlikely to move before the ECB (more prudent following the ECB pushing out their forward guidance to H1 2020 in their June meeting). SNB is likely to retain their assessment that the situation to the FX market remains fragile and that the exchange rate is highly valued; along with their willingness to intervene. Turning to data points, UBS see the bank’s 2019 GDP projection of 1.5% to remain on target after Switzerland’s Q1 growth printed at 1.7% vs. Exp. 1.0% YY. Regarding inflation, UBS are forecasting a slightly higher revision to 2019’s forecast given the recent modestly upbeat inflation prints. Recent risk-off global trade has driven the CHF to its strongest vs. the EUR since July 2017 (EUR/CHF recent lows of 1.1119), which Capital Economics see as a reason for headline inflation to fall. The Franc’s strength is especially notable for the press conference, as President Jordan has stated that raising rates amidst the backdrop of stable rates elsewhere would lead to currency appreciation and thus harm the domestic economy. In focus given the current easing-bias priced in for the Fed; as such, the recent CHF strength will likely feature in the presser.


Analysts see China CPI rising 0.1% M/M, matching the prior pace; the Y/Y rate is seen edging up to 2.7% from 2.5%. Higher food prices are likely to have nudged the Y/Y rate up, and Morgan Stanley sees slightly higher risks of 2.8%, which would be a 15-month high. “The key driver was higher pork and fruit prices – high-frequency data shows that pork inflation has likely picked up to 20% YoY in May (vs. 14% in April) due to reduced hog supply amid a swine flu outbreak, and wholesale price growth of fresh fruit has surged to 32% YoY in May (vs. 13% in April), as adverse weather last year led to reduced supply.” These combined could boost headline CPI by around 0.4ppts the bank says, however, it adds that it could be partly offset by weaker oil prices, where the ex-food and energy, core CPI is seen steady at 1.7%, amid a weak labour market.


Citi sees Chinese FX reserves declining by USD 24bln, leaving them at around  USD 3.071trln. The bank says yuan depreciation might have led to a negative FX valuation effect of around USD 4.5bln through 27/May. "The resumption of the trade war has led to a 3% M/M depreciation of CNY, and the PBOC seems to have intensified FX intervention in May," adding that specifically, "the tumbling of Chinese equity markets also saw a USD 9.4bln of capital outflow from stock connects between Hong Kong and the Mainland."


Both aggregate financing and new yuan loans are seen rising. Citi suggests that the wait and see monpol stance after the April Politburo meeting has already reversed to an easing bias again. Citi sees new total social financing at 1.6trln yuan and TSF growth might have accelerated to 10.7% Y/Y.


Given the PBOC moves to ensure sufficient liquid as trade wars resumed, injecting some CNY 552bln of liquidity via OMO and MLF operations, M2 money supply is seen ticking up by 0.2ppts to 8.7% Y/Y. The targeted RRR cut has also injected some CNY 280bln of permanent liquidity, analysts note. Citi notes that some of this liquidity injection will be offset by fiscal deposit increase.


There will be added attention on May's Aussie jobs report given the RBA’s last two statements concluded that “the Board will continue to monitor developments in the labour market closely” when deliberating on rate policy. The Street looks 17.5k jobs to be added in May, from 28.4k in April (3-month average 19.6k, 6-month average 26.1k), though participation is seen remaining at 65.8%, and the jobless rate seen ticking lower by 0.1ppt to 5.1%. Overall, house views seem to be skewed towards a downside surprise, citing an easing effect following a solid April print and forward-looking indicators suggesting recent softening in the labour market.  


The Street expects the Russian Central Bank to cut its benchmark rate by 25bps to 7.50% on Friday. In April, the central bank flagged risks of a rate cut, although analysts were sceptical that these would come before September. However, ING argues that a number of factors has led to raised expectations for June: Global markets are now confident in a more dovish Fed stance; risks to RUB exchange rate have failed to materialise, with the RUB stable in May, supported by foreign portfolio inflows into OFZs (around USD 3bln); CPI continued to undershoot expectations, falling from 5.2% Y/Y in April to 5.1% in May, while prelim June data hints at further downside. Households’ inflationary expectations also seem to have moderated, ING says, adding that only a very strong negative external surprise could stop the cut next week. The key is forward guidance. “We expect some downward revision in the CBR’s CPI outlook for year-end 2019, which is currently 4.7-5.2%, higher than our 4.6% forecast,” ING says, “this would confirm the downward mid-term trend in CPI and the key rate, however, a number of risks could still prevent the CBR from being too aggressive in the way to the terminal rate, which we see at 6.5% and to be reached in 2020.” Risks include the recent drop in the oil prices, re-ignition of US-China tensions, the local dividend season where up to USD 9bln could be converted into FX, as well as the USD 5-6bln monthly FX interventions presenting persisting risks to RUB; CPI slowdown; and ING also points to slowdown in RUB retail and corporate deposits which might increase risks of re-dollarization.