Newsquawk Week Ahead Preview: Highlights include US CPI, China CPI, ECB, RBA
- MON: Chinese Services PMI Final (May).
- TUE: RBA Announcement; EZ Sentix (Jun); EIA
STEO. - WED: RBI Announcement; NBP Announcement;
Japanese GDP Final (Q1); EZ Employment Final (Q1) and GDP (Q1 Revisions). - THU: ECB Announcement; Chinese Trade Balance
(May). - FRI: CBR Announcement; Chinese Inflation (May);
Norwegian CPI (May); US CPI (May); Canadian Labor Market Report (May);
University of Michigan Prelim (Jun).
NOTE:
Previews are listed in day-order
RBA Announcement
(Tue):
The RBA is expected
to continue hiking rates, and analysts expect a 25bps increase to the Cash Rate
Target, taking it to 0.60% from the current level of 0.35%; OIS fully priced in
a 25bps hike, and imply that there is probability for a more aggressive move.
As a reminder, the central bank surprised markets at its last meeting by
delivering a larger-than-expected increase of 25bps (exp. 15bps), and stated
that further rises in interest rates would be required in the period ahead,
adding that it was committed to doing what is necessary to ensure that
Australian inflation returns to target over time. Minutes from that policy
meeting noted that the Board considered three options: a 15bps, a 25bps and a
40bps rate rise, ultimately coming to the conclusion that a 15bps increase
would have been inconsistent with the historical practice of changing the Cash
Rate in 25bps increments, while an argument for a 40bps increase could be made
given the upside risks to inflation and current very low level of interest
rates. Governor Lowe has also kept the door open regarding the pace of rate
increases, recently stating that he does not preclude bigger or smaller rate
moves in the future, and that the Board was not on a pre-set path. As such,
there are varied expectations for the upcoming meeting. Goldman Sachs anticipates
the RBA will lift rates by 50bps at its next two meetings; Westpac has upgraded
its call for June to a 40bps hike from a prior view of 25bps; AMP Capital
expects the RBA to stick with a 25bps move; ANZ Bank suggested that a 40bps RBA
hike in June will likely be discussed, but caveated that a Wage Price Index of
+1.0% would be needed to trigger a 40bps move, and this failed to materialise
with the Wage Price Index softer than expected at 0.7% vs. Exp. 0.8%.
RBI Announcement
(Wed):
Although India’s central
bank is expected to lift rates, there are a wide range of views regarding how
far the MPC will increase its Repurchase Rate (currently at 4.40%, Reverse Repo
Rate at 3.35%, Cash Reserve Ratio at 4.50%). The RBI surprised markets with a
rate hike during an off-cycle meeting last month, raising the Repurchase Rate
by 40bps via a unanimous decision, and also increased its Cash Reserve Ratio by
50bps. MPC members unanimously decided to remain accommodative, while focusing
on the withdrawal of accommodation, to ensure that inflation remains within the
target going forward, while supporting growth. Since that decision,
policymakers have made clear that rates will continue moving higher. Governor
Das noted that it broadly wants to increase rates in the next few meetings, and
that “the expectation of a hike is a no-brainer”. The Governor also said that a
reason for the off-schedule meeting last month was to avoid a much stronger
move at the upcoming meeting, while MPC member Varma said more than a 100bps
rate increase is needed very soon. These intentions to tighten policy by the
central bank are not too surprising given the surging inflationary environment;
the latest CPI data rose to 7.79% vs. Exp. 7.5% (Prev. 6.95%), for instance, a
level above the central bank’s 2-6% tolerance range, and has divided analysts’
forecasts between hikes of 25bps-75bps for next week.
ECB Announcement
(Thu):
Since its previous
meeting, Eurozone inflation has continued to pick up, with the headline rising
from 5.9% Y/Y to 7.4% Y/Y in April, and then extending to 8.1% in May. This has
struck a sense of alarm at the central bank, which has resulted in an
increasingly hawkish tone from members of the Governing Council. A blog post in
May penned by President Lagarde deviated from her usually non-committal stance;
she now expects “net purchases under the APP to end very early in the third
quarter. This would allow us a rate lift-off at our meeting in July”.
Furthermore, she added that “we are likely to be in a position to exit negative
interest rates by the end of the third quarter”, going on to state that “even
when supply shocks fade, the disinflationary dynamics of the past decade are
unlikely to return”. This was viewed as giving the green light for purchases
under APP to cease as of July 1st, paving the way for rate hikes at the July
and September meetings, analysts said. Note, despite the pressing need to move
on rates, the current sequencing between asset purchases and rate hikes means
that a hike to the deposit rate will not take place at the June confab. For
some of the more hawkish voices on the GC, such as Austria’s Holzmann, the
recent inflation metrics emphasise the need for a 50bps hike. However, this is
an issue that is unlikely to be resolved at the upcoming meeting given that the
discussion around the magnitude of a hike will likely be a feature of the July
gathering. In terms of market pricing, at the time of writing, the market looks
for around 120bps of tightening this year, which would imply 25bps hikes at the
four meetings after June, with an increasing likelihood of a 50bps hike at one
of those meetings. Given the need for flexibility and lack of certainty
surrounding the Eurozone outlook, it is hard to see how much vindication market
participants will get for the aforementioned rate path. We will also be
presented with the latest batch of macro projections from the Bank which will
inevitably see an upgrade to the current 5.1% forecast for 2022 inflation. Of
potentially greater interest will be the more medium-term forecasts and how
they align with the Bank’s 2% target. Finally, reporters will likely use the
Q&A segment to question Lagarde on reports over a “new tool” designed to
combat fragmentation in the Eurozone as the ECB begins to normalise policy.
That said, it is unlikely that Lagarde will give much away on this front and
instead stress the flexibility of existing tools.
Chinese Trade
Balance (Thu):
May’s trade balance
is expected to have contracted modestly to a surplus of USD 50.65bln (prev. USD
51.12bln). Lockdowns and port backlogs during the month are likely to have
adversely affected the data. Since then, however, China has taken measures to
stabilise the headwinds caused by its COVID situation on supply chains,
cautiously lifting restrictions into June. Ahead, analysts will also be eyeing
trade developments between the US and China; Deputy US Treasury Secretary
Adeyemo this week said that the Biden Administration was considering whether to
cut some tariffs on Chinese goods, whilst this sentiment was also echoed by
Deputy US Trade Representative Bianchi, who suggested that all options were on
the table regarding tariff decisions on Chinese imports, while the USTR is
seeking strategic realignment with China and a tariff structure that makes
sense.
Chinese
Inflation (Fri):
Inflation is
expected to have eased in May, with the annual rate of consumer prices forecast
at 1.8% Y/Y (prev. 2.1%), while annual PPI is seen at 7.7% Y/Y (prev. 8.0%).
The month was restricted by lockdowns in Beijing and Shanghai, which have eased
since. Further, the expected downside also comes alongside reports that China
has been purchasing Russian oil at a discount – thus addressing one of the main
drivers of the cost-of-living increases across almost all nations. On the flip
side, desks have been flagging that the rally in pork prices that began in
mid-March may continue.
CBR Announcement (Fri):
Some believe that
less hawkish policy from Russia’s central bank has helped to stabilise the
growth outlook. A Reuters poll saw economic forecasts improve in May despite
the sanctions being slapped on the country in wake of its aggression against
Ukraine. On the prices front, the Reuters poll suggested that inflation is seen
rising from 8.4% in 2021 to 16.4% by the end of this year, with analysts
cutting their view from forecasts made in April, when the consensus expected
inflation would rise to above 20% this year. The poll said that this should
continue to give the CBR space to lower rates further; it cut its key rate by
300bps to 11.00 in an unscheduled May meeting, and analysts think that rates
could fall to 8.00% by the end of this year (in April, there was an expectation
that rates would eventually fall to 10.5% this year).
US CPI (Fri):
As seen by the
market’s response to the April data, slowing annual rates of inflation may not
be enough to fuel ‘peak inflation’ narratives, with traders seemingly wanting
to see downside in the monthly metrics too. For the May report, the street
looks for core CPI prices to rise 0.5% M/M, slowing from the +0.6% pace in
April; the headline measure of CPI is seen picking up, however, to +0.7% M/M
from the +0.3% seen in April, buoyed by food and energy components as gasoline
prices continue to rise, and amid supply chain disruptions brought on by Russia’s
aggression in Ukraine. Credit Suisse writes “the gap between CPI and PCE
airfares (which is based on PPI) has now closed,” and the bank expects “strong
summer travel and a continued shift from goods to services spending to support
an elevated level of airfares, but growth should slow sharply from its elevated
readings in the past two months.” Analysts will also continue to monitor the
component for used vehicle prices; CS notes that the Manheim data for wholesale
prices in May picked up, which could suggest that the declines seen in the last
three CPI reports are unlikely to be repeated in May. CS also thinks that
shelter prices will remain firm, while risks for goods inflation are tilted
towards the upside given supply chain disruptions due to lockdowns in China.
“Overall, we expect YoY inflation likely peaked in March, but monthly inflation
readings are likely to stay uncomfortably above the Fed’s target in coming
months,” the bank writes, “the Fed is set on raising rates by 50bps at the June
and July meetings, but is looking for signs of deceleration in inflation to
support shifting to 25bps in September.”
This article
originally appeared on Newsquawk.