A Drama Free Week? / June Surveys In Focus

Monday 20th is Juneteenth, a public holiday in the US.

US Key Points

• Chair Powell’s testimonies to Congress are to give a sense of political pressure on Fed.
• Home sales are to convey slowdown rather than market collapse.

Europe Key Points

Jump to Europe section

• June PMIs are the main data point across Europe, coming alongside updated consumer and manufacturing confidence surveys and the German IFO Business survey.
• In the UK, May CPI is expected to rise further above to above 9% YoY, representing a MoM deceleration (to 0.6%) following April’s Ofgem price cap rise.
• There is no shortage of ECB and BoE speakers this week.

US

Fed

My key takeaways from the Fed meeting are:

• The SEP still shows the Fed still expects most disinflation to come from factors outside monetary policy.
• Short-term inflation prints are now driving Fed policy.
• Therefore, a switch to a more proactive policy will require overwhelming evidence that the current policy is failing, which will likely be unavailable until 2023.
• Meanwhile the Fed is likely to follow the markets. Based on my inflation and growth view, my base case scenario is for the markets to guide the Fed to an end-2022 FFR of about 3.8%.

The most important public speaker of the week will be Powell who is delivering the Humphrey Hawkins testimonies.  These will give us a sense of how much political pressure the Fed is under and what Fed policy moves could be expected from the GOP if, as it seems likely, it takes control of the House and possibly the Senate in November. Ultimately, it is political pressure, either from elected official or from the public that will drive the Fed to tackle inflation in earnest and this week Humphry Hawkins testimonies will give us a sense of where we are in this process.

I will also be watching Bullard and Mester speeches closely.  They are the 2 hawks speaking this week and I will be looking for a sense of whether they truly believe the SEP policy scenario will be enough to bring inflation back to target.

As of this writing the other speakers will be Evans, Daly, Barkin and Harker i.e. doves/centrist.  Daly is delivering a talk to the hawkish Shadow Open Market Conference so the Q&A could be interesting.

Data

I expect this week’s poor retail sales number to reflect a switch away from non-durables goods to services consumption rather than overall consumption weaknesses.  We’ll find out when the full consumption data is released on 30 June.

The Covid data continues to show cases, test positivity and hospital use flattening. The data looks more and more like describing an endemic disease rather than a pandemic.

This week the data is likely to give us a breather. The more interesting release is new home sales that, given the ongoing talk of real estate market weaknesses, will give us a sense of where we are at.  The consensus expects the number to move sideways, following about a one third decline since end-2021.  We will also get existing home sales, where the consensus expects a continued decline.  These matter less from a GDP perspective since they measure transfers of existing housing stock rather than demand for new houses.  My sense of the housing markets is that we are dealing with a much-needed slowdown rather than a pre-GFC-like collapse.

Other data to monitor include unemployment claims that have been creeping up since end-Q1 but remain in line with the pre-pandemic historical averages of about 225k.  This looks to me as another instance of data signaling that the economy is moving back to trend, rather than heading into a recession.

Other key data include the S&P PMIs, the Chicago Fed national activity index, the current account balance, and the KC Fed business survey.

Events/Political Developments

The US continues to work its way through primaries, with mixed results for candidates supported by former President Trump.

Links to New York Fed POMOs/TOMOs:  Repos, Treasury, MBS, CMBS

Europe

Surveys Expected To Continue Declines

PMIs are the biggest of a slew of surveys out this week across Europe. Preliminary services and manufacturing numbers for June will be released on Thursday. The market right now is looking for a continued decline across the readings. The numbers all remain above the important 50 expansion/contraction level, but the declining outlook is still important (Charts 1 and 2). Last month saw surprise drops in UK readings, particularly in the services number. Although this drop was later pared in the final number, the UK trajectory of services PMIs remains poor compared to its peers. Elsewhere, European countries will see European Commission surveys across consumer, economic and manufacturing confidence, while the UK sees new GfK consumer confidence numbers. Again, the downward trajectory, particularly in the forward-looking orders and employment components are important to watch out for. In the UK, the downward trajectory may see some modest offset from the multiple June bank holidays due to the Queen’s Jubiliee.

UK CPI

UK CPI (Wednesday) is the main hard data point in the UK. Expectations are for a deceleration in the MoM component compared to April’s jump (driven by the Ofgem price cap rise), but for YoY reading to stay elevated above 9%. ‘Core’ will be important to watch, with market expectations right now looking for a slight YoY decline.

ECB & BoE Speakers

Following the ECB’s surprise meeting and the BoE’s rate hike last week, there will be much for policy setters to discuss. For now, the ECB seems more focused on preventing credit spreads blowing out, which may continue to steal the limelight this week. There is little hard data for them to react to, but expect any surprises on the survey front to generate some reaction. Of particular interest will be the ECB’s Lane and Lagarde (both on Monday).

On the BoE side, it will be interesting to hear from all sides. From the hawks, (Jonatha Haskel and Catherine Mann speak Monday) we will be listening out for hints that they may want to go faster than 50bp per meeting as the market is currently pricing in 50bp per meeting until December. From the doves (Silvana Tenreyro speaking Tuesday , Jon Cunliffe speaking Wednesday) it will be important to hear how much they have shifted from their previous position that no more hikes were needed. Finally, from the moderates, we hear again from Chief Economist Huw Pill (Friday). Coming after the CPI and survey releases, it will be important to understand what signs of second round inflation he will need to see to back a 50bp hike.

Other G20 Countries

This week the RBA and BoJ are releasing their minutes.  In addition, the RBA’s Lowe and the BoJ’s Amamya are speaking.

Key data releases this week include CPI in Canada and Japan, PMIs in Australia and Japan, and China’s current account.

Links to BOJ Rinban , BOE OMO

COVID-19 Monitoring

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank. He holds a BA in Economics from Durham University, and an MSc in Economics & Social History from the University of Oxford.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)