Drivers for the Week Ahead

  • The FOMC begins a two-day meeting Tuesday with decision to be delivered Wednesday
  • The US retail sales data are a game changer
  • Bank of England meets Thursday; the Tory leadership race continues this week
  • Bank of Japan meets Thursday; eurozone June flash PMIs will be reported Friday
  • Norges Bank meets Thursday and is expected to hike rates 25 bp to 1.25%
  • Several EM central banks meet this week; Korea reports trade data for the first 20 days of June Friday

The FOMC begins a two-day meeting Tuesday with decision to be delivered Wednesday afternoon. No change is expected, though WIRP suggests an 18% chance of a cut then. New Dot Plots and staff forecasts will be released. Most observers are looking ahead to the July 31 meeting for the first cut, but it will all depend on the data. If consumption remains firm and momentum carries over into Q3, the Fed will likely remain on hold then as well.

The media embargo ends with Powell’s post-meeting press conference. On Friday, Brainard and Mester will attend a “Fed Listens” event in Cincinnati while Daly hosts a podcast. Before the embargo began, most officials seemed comfortable with steady rates. Since then, the May data support this view. Inflation has come in lower than expected, but Friday’s retail sales data was the most important reading and it does not support a rate cut.

The regional Fed manufacturing surveys for June begin Monday with the Empire survey. Philly Fed is next on Thursday. Other US data reports this week include April TIC data Monday and May housing starts and building permits Tuesday. Q1 current account, May leading index, and weekly jobless claims will be reported Thursday. Friday brings June Markit PMIs and May existing home sales.

The US retail sales data are a game changer. With strong May sales and significant upward revisions to April, Q2 is now looking pretty good. Atlanta Fed GDPNow has Q2 growth at 2.1% SAAR, up from 1.4% last week. NY Fed Nowcast has Q2 growth at 1.4% SAAR vs. 1.0% previously. It also raised its Q3 reading to 1.7% SAAR from 1.3% previously. While a slowdown from Q1 (3.1% SAAR) was to be expected, markets will be particularly sensitive for signs of a larger than expected drop-off.

Bank of England meets Thursday. No change is expected. Indeed, nothing is expected ahead of the October 31 Brexit deadline. We would go so far to say that the next hike is looking increasingly doubtful to the short sterling futures market. There, the next hike isn’t fully priced in until Q3 2023.

Earlier that day, the UK reports May retail sales. Headline sales are expected at -0.8% m/m, while sales ex-auto fuels are expected at -0.5% m/m. Ahead of that, the UK reports May CPI and June CBI industrial trends Wednesday. Both headline and CPIH are expected a tick lower at 2.0% y/y and 1.9% y/y, respectively.

The Tory leadership race continues this week. Boris Johnson dominated the first round vote last week, winning 114 votes from his party vs. 43 for runner-up Jeremy Hunt. Seven candidates go on to the second round, with Gove (37 votes), Raab (27), Javid (23), Hancock (20), and Stewart (19) rounding out the field.

Bank of Japan meets Thursday. Ahead of that, Japan reports May trade Wednesday. Exports are expected to contract -7.8% y/y while imports could eke out a 0.2% y/y gain. May national CPI, department store sales, and June flash manufacturing PMI will be reported Friday. Headline inflation is expected to ease to 0.7% y/y from the 0.9% peak in April, while ex-fresh food is expected to ease to 0.8% y/y from the 0.9% peak in April.

Eurozone June flash PMIs will be reported Friday. The headline composite reading is expected to rise to rise to 52.0 from 51.8 in May, driven by expected improvements in both the manufacturing and services components. France is expected to improve while Germany is expected to worsen. While the eurozone economy is stabilizing, the ECB should be prepared to add more stimulus in the coming months.

Canada reports May CPI Wednesday. Ahead of that, May existing home sales will be reported Monday, followed by April manufacturing sales Tuesday. April retail sales will be reported Friday. Jobs data have remained firm. Next BOC meeting is July 10, no change is expected then. However, odds of a cut rise as we move into Q4.

RBA releases its minutes Tuesday. June flash PMI readings will be reported Friday. Data have been coming in soft, fanning expectations of more rate cuts this year. Next policy meeting is July 2 and no change is expected then. WIRP suggests nearly 60% odds of a cut then, but we suspect the RBA will wait until the August 6 meeting.

New Zealand reports Q1 current account data Wednesday, followed by Q1 GDP Thursday. Last week, May manufacturing PMI sank to 50.2. This was the lowest reading since 2012 and points to continued softness in the economy. RBNZ just cut rates 25 bp in May and so another cut at the next meeting June 26 seems too soon. WIRP shows odds of a cut then at around 20%. We think a cut at the August 7 meeting is more likely.

Norges Bank meets Thursday and is expected to hike rates 25 bp to 1.25%. Even though May came in slightly lower than expected, Norges Bank has flagged a hike this month as likely followed by another hike before year-end. However, it sees the policy rate topping out at 1.75%, which suggests only one more hike in the cycle next year.

Several EM central banks meet this week. These include Brazil (Wednesday), Indonesia, Taiwan, the Philippines (all on Thursday), and Colombia (Friday). Of these, only the Philippines is expected to cut rates. However, we see a chance of a dovish surprise from Indonesia.

Korea reports trade data for the first 20 days of June Friday. This will be the first glimpse of global economic activity in June and it won’t be pretty. US-China trade tensions continue to weigh on trade, with no near-term relief in sight.