Weekly Market Outlook (June 17-21)

UPCOMING EVENTS:

• Monday: PBoC MLF, New Zealand Services PMI, China Industrial Production and Retail Sales, Eurozone Wage Growth.
• Tuesday: RBA Policy Decisions, ZEW Eurozone, US Retail Sales, US Industrial Production.
• Wednesday: UK CPI, NAHB US housing market index, BoC meeting minutes.
• Thursday: New Zealand GDP, PBoC LPR, SNB policy decision, BoE policy decision, US housing starts and building permits, US jobless claims.
• Friday: Australia/Japan/Eurozone/UK/US Flash PMI, Japan CPI, UK Retail Sales, Canadian Retail Sales.

Monday

The PBoC is expected to leave the MLF rate unchanged at 2.50%. There does not appear to be any urgency to further ease policy in the context of improving economic data. The central bank is also likely to keep LPR rates unchanged at 3.45% for 1 year and 3.95% for 5 years on Thursday.

Tuesday

The RBA is expected to leave the Cash Rate unchanged at 4.35%. Recall that the central bank went a little crazy due to the lack of a clear improvement in inflation, saying that it could not rule out future changes in the cash rate.

The RBA’s forecasts were revised to show that rates are likely to remain at 4.35% until mid-2025. Recent data supports claims that policy remains unchanged as the monthly inflation report surprised to the upside and labor market data came in stronger than expected expected.

M/M US retail sales expected at 0.3% vs. 0.0% earlier, while the ex-Autos indicator is expected at 0.2% vs. 0.2% earlier. Consumer spending remained steady, which you’d expect given solid wage growth and a resilient labor market. We are getting some worrisome signals from UMich consumer sentiment that could suggest that consumer spending is likely to soften a bit.

Wednesday

UK CPI Y/Y expected at 2.0% vs. 2.3% earlier, while core CPI Y/Y is seen at 3.5% vs. 3.9% previously. The latest report was a bit of a disappointment for the BoE as services inflation, which the central bank is most concerned about, was much higher than expected at 5.9% y/y vs. BoE estimate of 5.5%.

The news won’t change the BoE’s upcoming decision on Thursday, but a surprisingly soft release should mean the market will price in a rate cut and tip the central bank’s decision to the dovish side.

Thursday

The SNB is expected to cut interest rates to 1.25%, although market prices are hovering around 60%, so it is more of a coin toss between 1.50% and 1.25%. The latest inflation rate was in line with the SNB’s estimate of 1.4% Y/Y (core 1.2% Y/Y).

The Swiss franc has seen a strong appreciation recently due to comments from Chairman Jordan where he said that if any inflation risk materialized it would most likely be associated with a weaker franc which could be countered by selling foreign exchange (buying CHF).

He also touched on the neutral interest rate (r*) and said they estimate it to be around 0%. So even if they cut rates, in theory their policy would still be restrictive, and if inflation were to pick up somewhat in the coming months, they could simply step in by buying Swiss francs.

The BoE is expected to leave Bank Rate unchanged at 5.25%. Recall that the last meeting was a little more dovish than expected, with Ramsden joining Dhingra in voting to cut rates and Governor Bailey making some dovish comments such as saying they might cut more than the market expected.

It’s pretty clear that the central bank is eager to cut, but it still wants a little more confidence before loosening the key interest rate. The tone is likely to be set by UK CPI the day before.

US Jobless Claims continues to be one of the most important reports to watch each week as it is a more timely indicator of the state of the labor market. Initial claims are still hovering around the low of the cycle, while continued claims remain firm around the 1800,000 level.

This led to an increasingly weaker market reaction as participants became accustomed to these numbers. Nevertheless, last week we saw a significant error in both initial and ongoing claims, although the culprit could only be a seasonal effect or measurement adjustment.

This week, initial claims are expected to be 240,000 vs. 242,000 previous, while at the time of writing there is no match for continuing claims, although the previous edition showed an increase to 1820,000 from 1790,000 previously.

Friday

Japan’s core CPI Y/Y is expected at 2.6% versus 2.2% previously. The Tokyo CPI saw all inflation rates increase compared to the previous month, so we could see the same thing happen for national values. Things shouldn’t change much for the BoJ at this point, as it will probably need a few more reports before deciding on another rate hike.

As a reminder, the central bank disappointed the market last week when it left things unchanged despite expectations of a reduction in bond purchases. Nevertheless, Governor Ueda, in a press conference, previously committed to a reduction immediately after the next session, mentioning that it would be “substantial”.

Friday will also be Flash PMI day with the markets as usual, with more focus on US data:

• Eurozone manufacturing PMI: 48.0 expected vs 47.3 previously.
• Eurozone Services PMI: 53.5 expected vs 53.2 previously.
• UK manufacturing PMI: 51.0 expected vs 51.2 earlier.
• UK Services PMI: Expected 53.2 vs. 52.9 earlier.
• US manufacturing PMI: 51.0 expected vs 51.3 earlier.
• US Services PMI: 53.5 expected vs 54.8 previously.