Original insights into market moving news

Week in Focus; week commencing 17 June 2019

  • MON: US hearing on further China tariffs.
  • TUE: RBA Minutes, German ZEW Sentiment, EZ CPI (Final), US Housing Starts.
  • WED: FOMC Monetary Policy meeting, CBRT Summary of the MPC meeting, BCB Monetary Policy meeting, Japan Trade Balance, UK & Canada CPI.
  • THU: BOE, BOJ, Norges Bank, Bank of Indonesia, UK Retail Sales, US Philly Fed.
  • FRI: EU Summit (EU top jobs decisions to be made), Quadruple Witching, Japanese CPI, Markit Services/Manufacturing flash PMIs, Canada Retail Sales, US Existing Home Sales.



The consensus expects the FOMC to keep the federal funds rate target unchanged at 2.25-2.50%; the implied probability of a rate cut is around 33%, according to money markets. While FOMC participants have indicated that the Fed is prepared to loosen policy in order to support the economy in the event it deteriorates due to trade risks, as Chair Powell stated recently, it may be too soon for the central bank to act at the June meeting, given it comes ahead of the 28-29 June G20, where a meeting between Presidents Trump and Xi is expected to set the tone of trade talks going forward (and by extension, the outlook for global growth). But some policymakers have floated the idea of an insurance rate cut, including Vice Chair Clarida, amid signs of a slowdown ahead (yield curve inversion is an oft cited ‘signal’). The notion of an insurance cut complicates the picture; the data is not yet signalling that the economy is hitting the buffers yet; while the NFP headline was a miss, the internals were quite encouraging (U6 at a cyclical low, wage growth remaining above 3%); inflation, however, is a little more tricky, since the most recent releases have not entirely corroborated the ‘transitory’ softness Chair Powell has previously categorised it as. (There is an argument that any rate cut would not really be about the data; it might be more a function of acting to prevent risks presented by trade fallouts). However, some Fed watchers like Tim Duy note that with the pace of headline jobs growth slowing, there will be less inflationary pressures in the pipeline, which may debase inflation expectations, forcing the Fed’s hands. Duy does not see a June rate cut, arguing that the FOMC’s dovish shift in 2019 probably does not have wide internal support yet; the median FOMC participant would likely prefer to see more data that confirms the slowdown in the labour market; financial stability concerns could be exacerbated by a ate cut while equities are within a few percentage points of record highs, while recent inflation readings do not unequivocally suggest that Powell was incorrect in describing low inflation as transitory. Accordingly, the June meeting may be more about signalling for the July meeting, where the probability of a rate cut is over 100%, indicating that markets are beginning to price a ‘double cut’ (i.e. By 50bps, as opposed to the ‘usual’ 25bps increment). The June meeting will also have updated economic projections, and post meeting conference with Chair Powell.


Analysts expect MPC members to once again stand pat on rates at 0.75% with a 9-0 vote split (according to all 75 analysts surveyed by Reuters). Next week’s meeting could be interesting, with policymakers providing some resistance to the belief that the MPC’s hands are tied by the fog of Brexit. This sentiment was triggered by recent comments from Chief Economist Haldane who stated that “acting early with a rate hike would ensure against the need for larger hikes in the future” and also suggested that “the time is approaching for when a small increase in rates would be prudent”. These comments were followed by an interjection by external member Saunders, who stated that “the BoE will likely need to return to a neutral policy stance sooner than the market expects”, adding that the “MPC doesn't necessarily need to keep rates unchanged until Brexit uncertainties are resolved”. Deputy Governor Broadbent struck a more measured tone, stating that he is “not very exercised about whether the market path of interest rates is the same as that expected by the BoE”. Slightly more pessimistically, external member Vlieghe, when asked whether he was in agreement that rates could need to rise faster than currently priced in by markets, the central banker noted global risks and that data has been “a little disappointing”. From the data perspective, the latest monthly GDP readings saw April M/M growth contract by 0.4% (Prev. -0.1%) with 3M/3M slowing to 0.3% (Prev. 0.5%) as the pre-Brexit stockpiling boost abated. Y/Y CPI ticked higher to 2.1% (Exp. 2.2%, Prev. 1.9%) with the core metric remaining at 1.8% (Exp. 1.9%); the headline boost was largely a by-product of an increase in a recently-introduced household energy price cap. The latest survey data, saw the manufacturing sector enter into contractionary territory, (49.4 vs. Prev. 53.1), as was the case for construction (48.6 vs. Prev. 50.5), whilst the all-important services industry remained in expansionary territory. Aside from data, one of the largest guiding forces for the UK economy remains the UK’s delayed withdrawal from the EU. Since the prior meeting, very little in the way of progress has been made with PM May stepping down from her post and the race to replace her still unresolved. With this in mind, and her successor’s approach to negotiating with the EU still unknown, MPC members will have little choice but to sit on their hands, for now.


The Bank of Japan is seen keeping rates unchanged at -0.10% and its 10-year JGB yield target at 0%; it is also seen keeping its asset purchases and ETF programmes unchanged. There will be some attention on what the BOJ makes of renewed trade tensions between US and China; this week, Governor Kuroda warned that if the FOMC were to cut rates, the BOJ has room to lower its own rates, while there is also scope to reduce the target for JGB yields and also boost its monetary base. “Expectations for a rate cut by the BOJ by the end of 2019 have risen markedly also, though not to the extent as those for a Fed rate cut,” Goldman Sachs says. “That said, the US job growth still looks healthy as a trend, beyond the short-term fluctuations. Also, while the yen has appreciated somewhat against the USD, the USDJPY rate remains generally firm. Furthermore, recession probability of the Japanese economy has subsided recently, according to our estimate.” The bank therefore believes that discussions on concrete additional easing measures at the meeting seem. At the post meeting press conference, Kuroda is likely to reiterate a willingness to act swiftly if necessary, though GS thinks this would be aimed at keeping market expectations of looser policy alive, in order to maintain favourable market conditions.


Consensus sees the Norges bank lifting rates by 25bps to 1.25%, in-line with the rate path signalled in May’s meeting. Nordea highlights that any uncertainty does not pertain to the rate move at this meeting, but rather the rate path. Nordea believes that the near-term path will be lifted while the longer-term outlook will be lower than the present path, and as such contain rate cuts in 2021/2022. The Banks clearly hawkish rate path is notable amidst the backdrop of global growth concerns, trade wars and as all other major central banks are pivoting dovishly; critically the Fed, which has around two and a half 25bps cuts priced in by year end. On the domestic front, there are multiple factors supporting a hike such as Norwegian oil investment forecasts coming in above the prior for both 2019 and 2020 alongside the regional network survey printing at 1.57 vs. Prev. 1.46; and stating that growth over the past three months has been the highest since Autumn 2012. However, the arguments for lower/unchanged rates are somewhat supported by the recent CPI data. May’s underlying CPI dropped to 2.3% vs. Prev. 2.6% Y/Y; Societe Generale caveat that overall, this results in a Q2 average of 2.45% which is 0.3ppts above the Norges Bank’s forecasts. As such, analysts view this as having no significant impact on next weeks’ rate decision, but it may be a minor consideration for the rate path and the timing of future hikes.


The BCB is seen keeping rates on hold at 6.50%, however, an argument is developing for rate cuts. Annualised inflation at 4.7% is above the BCB’s 4.25% target, but the recent inflation data showed M/M at 0.13%, the lowest monthly print since 2006, and short of the expected 0.2%. Ahead, base effects might take the Y/Y rate to 3.5% next month, Oxford Economics argues, and sees BCB cutting rates in Q4. Retail sales also disappointed, and global yields are falling, all supporting looser policy from Brazil. On the more positive side, pension reform expectations are building again. But ING says that the passage of fiscal reform is still uncertain, and therefore rate cuts would be premature, and could even hurt the BCB’s credibility, while failing to stimulate the economy. ING says a major dovish shift is possible as early as July, however, if the social security reform is approved; the bank sees the September meeting as the earliest opportunity.


The RBA will release minutes from its June meeting at 0230BST on Tuesday, in which the central bank lowered its Cash Rate for the first time since August 2016. Analysts widely expect further details on the recent shift in stance. Some have suggested that there will be only a limited market impact to the minutes due to a key speech from Governor Lowe on Thursday, with eyes on global growth outlook as well as the domestic labour market, given this week’s unexpected uptick in the jobless rate and disproportionate rise in full vs part time workforce breakdown, which underpinned the RBA’s easing expectations. “We note that broader measures of underutilisation have received relatively little attention lately in favour of the higher headline unemployment rate” says RBC, and thus the bank believes the speech may focus on a broader measure of slack. Finally, it goes without saying that participants will be looking for clues as to when the RBA will next cut rates, with July and August cut priced in at 50% and 100%+ respectively. On that note, NAB recently expanded its forecast to three total cuts this year, with the next cut seen in August, then November (Prev. June and August), while it’s also worth keeping in mind that notorious but influential RBA watcher McCrann stated that a ‘second rate cut is on the way, although precisely when is not clear’.


Ahead of the BoE rate decision, this week sees the release of the latest inflation (Wed) and Retail sales (Thu) metrics. On the inflation front, headline Y/Y CPI is forecast to fall to 2.0% from 2.1% with the core reading set to slip to 1.7% from 1.8%. Ahead of the release, Oxford Economics notes “the boost that we saw in April from the impact of the later Easter on airfares will unwind”, adding that “the recent softness in food prices is unlikely to persist, particularly given the recent weakening in the value of sterling”. For retail sales, all Y/Y and M/M headlines and core metrics are forecast to show declines from their prior’s with the release coming in the context of disappointing CBI and BRC reports with the press release from the latter noting “May’s staggering fall of 3% like-for-like is a stark reminder of the industry’s ongoing issues, which for many require urgent attention.”


The main data highlight from the Eurozone next week will be the flash June PMI readings on Friday with manufacturing forecast at 48.1 (Prev. 47.7), services at 53.0 (Prev. 52.9) and composite 51.7 (51.8). Ahead of the release, RBC highlight that the manufacturing component (which has remained in contractionary territory) since February will be a key focus for traders to see if global trade tensions show any sign of abating, however, the Canadian bank concedes that the best that can be hoped for is a stabilisation. As such, RBC notes that focus will “once again be on the services PMI and any sign that the weakness of the external sector is spilling over into the domestic economy”. Should the release fall short of expectations, increased attention will likely be placed on whether or not additional policymakers at the ECB continue to reinforce the Bank’s willingness to provide additional stimulatory measures to the Eurozone economy. If this comes to fruition, a further pushing back of market expectations for ECB normalisation becomes almost inevitable.


The Y/Y rate is expected to be steady at 2.0%, and the M/M rate is seen at 0.4%, matching the April print. Canadian bank RBC is below consensus, looking for 0.1% M/M, but sees the Y/Y rate rising a touch to 2.1%: “Seasonals should have little influence on balance, with higher travel services prices mostly offset by declines in clothing/footwear and autos,” the bank says. “Rent and airfares—sources of volatility in the past year—are not expected to be major factors, while food prices should be flat in the month.” For the BOC measures, base effects (a weak May 2018 reading) may see the trimmed and median core measures rising, after the decline in April, where the average stood at 1.9%.


Headline retail sales are seen at 1.0% M/M vs 1.1% prior, while the core retail sales rate is seen at 0.9% M/M against 1.7% prior. Auto sales fell 1.5% in the period, though this could be offset by the rise in gas station prices. RBC notes that good consumption data was much firmer in the national accounts than seen in the retail sales data in Q1, though the bank does not expect a repeat of this in Q2.