Key Events: Major Week for Central Bank Action!

Key Events

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In the US, Wednesday is a federal holiday. Otherwise, the main data releases are:

1. Retail sales – Tuesday. Consensus for the control group is 0.3% MoM vs -0.3% in April. This sounds reasonable: the series is noisy, and retail sales cover only goods and restaurant consumption. The more important economic data is 28 June’s personal spending.
2. S&P PMIs – Friday. Consensus for services is 53.4 vs 54.8 in April. These surveys have significant short-term market impact but have decoupled from hard economic data.
3. Housing starts – Thursday. Consensus is 1375k vs 1350k in April. The release will indicate whether the Q1 recovery in residential real estate is continuing.

In the Eurozone and UK, the main events will be:

1. UK May Inflation – Wednesday. Watch wage-intensive services inflation, particularly catering and accommodation. Both have overshot at the last month when adjusting for seasonals. Given wage rises there appear to have been frontloaded in March, the momentum behind further price rises may drop. If this happens, it will raise our currently low conviction for an August cut.

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1. South Africa disinflation to stall – Wednesday. Higher food and fuel prices leave risks skewed towards a higher YoY CPI print.

Central Banks in Action

1. PBoC to deliver 10bps MLF cut – Monday. A close call, but on balance we expect a 10bp MLF cut on Monday with high probability of an LPR cut on Thursday. A 10bp cut should be largely neutral RMB.
2. Fed Governor Kugler and St Louis Fed President Musalem – Tuesday. This will be Musalem’s maiden speech. We peg him as a hawk based on his economic background.
3. RBA on hold – Tuesday. CPI, national accounts, the labour market, Budget and the Fair Work Commission wage increase uncertainties have likely affected RBA forward guidance little. Expect rates on hold with the Board ‘not ruling anything in or out’.
4. Final cut from the NBH – Tuesday. Forint weakness will offset better-than-expected CPI and see a smaller 25bp cut – likely the last until next year.
5. Brazil Central Bank on hawkish hold – Wednesday. With market scepticism about fiscal trajectory and BRL weakness, BCB has no choice but a hawkish hold. The statement could mention willingness to raise rates if necessary.
6. BoE on hold – Thursday. The General Election, the consequent MPC silence on policy, and the overshoot in April inflation offer little incentive for a policy change. However, if May inflation (Wed.) shows a return to the BoE’s monthly outlook, that would support arguments for near-term easing. If so, the BoE could signal desire to ease policy in the near term.
7. SNB to deliver 25bp cut – Thursday. Core inflation details were weaker than expected, with rental prices and one-offs the only source of hawkishness. Worst case, the SNB will guide into a September cut.
8. Bank Indonesia on hold – Thursday. BI is concerned mainly about the IDR exchange rate. Its last hike was to stabilize FX. We expect no action at this meeting as the other tools seem sufficient for keeping a lid on USD/IDR.

Markets to Watch

• GBP/CAD at top of range with fragile drivers. Positioning is stretched, two-year rate differentials have reached decade-long resistance, data surprises are at an unsustainable level, and the oil market is set to tighten. We entered a 73×1.70 1 by 1.25 ratio 3M GBP/CAD put spread at 1.7537.
• USD/MXN and USD/BRL are both testing key resistance levels of 19.0 and 5.40 respectively. The weakness reflects domestic uncertainty and carry trade unwinds. The unwinds now seem to be coming from long-term accounts. We monitor the degree of position reduction and look to fade the sell-off once the dust settles.
• USD/KRW at top of range. USDKRW is close to testing 1400, which has been the top of its trading range in the last year and a level defended by the BoK. We are short and will stop out if 1400 fails to hold.
• OAT/Bund spread widening. Watch the headlines out of France; politics is dominating for good reason. There is a fat tail risk of far-right gains at the legislative election (second round: 7 July). Headlines on potential policy costing by the left-wing and right-wing parties could have an impact (expect increased spend from both), as will news on Macron’s difficulties coordinating with the left to head off the right.
• Continue to expect BoE dovishness vs the Fed. UK STIR has an important week with inflation and the BoE policy announcement. We expect few surprises, but that itself could be dovish. Signs of normalisation in the data would allow the BoE to signal easing. With the market pricing <50bp of cuts for the year, the bar for sounding dovish is low.

(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.)