Monday: BoE’s Haskel (hawk) said that further rate hikes cannot be ruled out. BoE’s Mann (hawk) highlighted that wage increases above 4% would make it a challenge to return CPI to 2%.
Tuesday: The UK employment report beat across the board with the unemployment rate down to 3.8% vs. 4.0% expected and the prior negative employment numbers revised to reflect a gain. The worst part for the BoE is the wage growth rate. The average weekly earnings came at 6.5% vs. 6.1% expected with the prior release revised upward from 5.8% to 6.1%. The average weekly earnings ex-bonus printed at 7.2% vs. 6.9% expected and the prior reading was revised to 6.8% from 6.7%. BoE’s Mann just a day before highlighted how wage increases above 4% would make it hard to return to the 2% inflation target, so the BoE has a lot of work to do here as high inflation is becoming entrenched.
BoE’s Greene said that it’s reasonable to expect inflation to come down fairly quickly but getting back to the 2% target will be hard. He doesn’t like the idea of stop-start monetary policy as it may end up with a much higher terminal rate and a worse recession. He also added that the MPC must act proactively on inflation dynamics (a bit late for that).
The PBOC lowered the 7-day reverse repo to 1.9% vs. 2.0% prior for the first time since August 2022 as policymakers are worried about the China’ recovery. Moreover, the same day it lowered also the standing lending facility (SLF) by 10 bps.
The US CPI missed expectations on the headline measure with the Y/Y figure at 4.0% vs. 4.1% expected and the M/M at 0.1% vs. 0.2% expected. The problem is that Core CPI, which is what the market is probably focused on now, came in line with expectations with the Y/Y reading at 5.3% and the M/M at 0.4%. Core inflation looks stuck at a higher level compared to the previous three decades.
BoE’s Governor Bailey (hawk) commented on the labour market data defining it as “very tight”. BoE’s Dhingra (dove) said that inflation is still far too high compared to their 2% target but urged patience saying that it will take time for the full effects of the rate hikes to impact the economy. Dhingra (and Tenreyro) are the most dovish members in MPC and have voted to keep rates unchanged at the last meeting.
Wednesday: The US PPI Y/Y has come down further to 1.1% vs. 1.5% expected, while the M/M figure printed at -0.3% vs. -0.1% expected. The Core PPI Y/Y decreased to 2.8% vs. 2.9% expected, while the M/M figure came in at 0.2% vs. 0.2% expected. We saw some dovish but contained reaction in the markets given the FOMC risk a few hours later.
The Fed delivered on expectations with a slightly hawkish surprise keeping interest rates unchanged at 5.00-5.25% but adding 50 bps to the terminal rate in the Dot Plot. The FOMC vote was unanimous. This looked more like a jawboning move to avoid a dovish interpretation to their pause. Growth for 2023 was revised up to 1% from 0.4% in March, unemployment revised down to 4.1% vs. 4.5% previously and the Core PCE was revised to 3.9% vs. 3.6% before. Further out the Fed revised interest rates upward by 30 bps in 2024 and 2025. The Fed decided to pause because it would “allow the committee to assess additional information and its implications for monetary policy”. In the press conference, Fed Chair Powell indicated that the July meeting is “live”, but everything will depend on the incoming set of data.
Thursday: The PBOC cut the Medium-term Lending Facility (MLF) rate by 10 bps from 2.75% to 2.65%. A similar move on the LPR rates is expected next Tuesday.
The ECB raised interest rates by 25 bps bringing the deposit rate to 3.5% as widely expected. The central bank also raised its inflation projections and lowered the growth forecasts. Moreover, the ECB confirmed that it would stop reinvesting the proceeds of its Asset Purchase Program (APP) from July to bring down its balance sheet by 25 bn/month. President Lagarde signalled that “another hike in July is likely” unless there was a “material change” to the economic data. Later in the day, as it usually happens, an “ECB sources” report said that the central bank will debate a September hike in the summer.
US Jobless Claims missed again forecasts coming at 262K vs. 249K expected and the prior number was revised slightly higher to 262K from 261K. Continuing Claims, which are an indicator of how hard it is for people to find work after losing their jobs, increased to 1775K vs. 1776K expected, up 20K from the previous 1755K revised reading.
The US Retail Sales in May increased by 0.3% vs. -0.1% expected, while the control group printed at 0.2% vs. 0.2% expected. The Y/Y reading was 1.6% vs. 2.2% expected and the previous downwardly revised 1.2% rate. Note that these are nominal figures, if we adjust for inflation retail sales Y/Y have been negative for the 7th consecutive month, which is the longest streak since 2009.
Friday: The BoJ kept everything unchanged as widely expected with the interest rate at -0.10%, the 10-year JGB yield target around 0% and the tolerance band at +/-0.5%. The central bank said that the economy is picking up but expects the core consumer inflation to slow towards the middle of the current fiscal year (around September/October). Later in the day, BoJ’s Governor Ueda said that they have not changed policy because Japan’s inflation is not sustainable, and more time is needed to meet the 2% inflation target. He also added that negative impacts from US rate hikes could come out later on including possibility of economic downturn.
Below a slate of ECB members’ comments this morning. The TL;DR is that they have not yet reached the peak in rates and will hike by 25 bps in July, while the September hike will be data-dependent.
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ECB’s Nagel (hawk)
- There is still a long way from an “all-clear” on inflation.
- Core inflation is proving to be stubbornly high.
- Still a long way to reach the inflation target.
- We may need to keep hiking rates after the summer break.
ECB’s Vasle (hawk)
- We will need to continue with gradual tightening.
- I believe in additional 25 bps hike before the summer break (July).
- Decision on rate hike after the summers is data dependent.
ECB’s Simkus (hawk)
- Too early to say what the ECB will do in September.
- We are closer to the end of the tightening cycle.
- We need to hike rates in July.
- I don’t see rate cuts at the start of the next year.
ECB’s Rehn (hawk)
- The GC will continue to follow a data-dependent approach.
- We will ensure that the key ECB interest rates will be brought to levels adequately restrictive to achieve a timely return of inflation to the 2% target.
- Rates will be raised in July at least.
ECB’s Muller (hawk)
- ECB’s rates have not yet reached the peak.
- Inflation remains too fast.
- What happens after July is purely speculation.
ECB’s Holzmann (hawk)
- What happens after summer depends on data.
ECB’s Centeno (dove)
- Interest rates are in restrictive territory and should stay there for some more time after the summer.
- The overwhelming majority of inflationary shocks, if not all, are now almost reversed.
- The reversal of the shocks will reach final consumer prices eventually. If it doesn’t happen, there is the risk of interest rates going up again.
ECB’s Wunsch (hawk)
- We need to see a sustainable drop in core inflation.
- Could hike again in September unless there’s a substantial drop in core inflation.
- Core inflation holding around 5% could necessitate a rate hike in September and possibly beyond.
- We’re not yet seeing beginning of slowdown in core inflation.
ECB’s Villeroy (hawk)
- Nobody should rush to a premature conclusion about our calendar nor about our terminal rate.
- We are data driven.
- Monetary policy is working, and inflation has peaked.
- I am confident the ECB will meet the inflation goal in two years.
- The ECB has covered most of ground on rates.
- The duration of high interest rates matters more than the level and the persistence matters more than the peak.
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Fed’s Waller (hawk) said that financial stability is essential for the Fed to meet its mandate, but monetary policy should not be altered due to ineffectual management at a few banks. Monetary policy and financial stability tools are separate and distinct. He also added that the US economy is still ripping along and that the policy lags are not the same as they used to be because of the reliance on forward guidance. He went on complaining that core inflation is not coming down like he thought it would and that it’s disturbing that it’s not moving, concluding that more tightening might be required.
Fed’s Barkin (hawk, non-voter) said that the pandemic may have boosted the labour market resilience and that inflation remains too high and stubbornly persistent. He added that slowing the pace of hikes gives more time to evaluate the data and that he would be comfortable doing more if the data warrants it. He went on saying that higher rates may create the risk of a more significant slowdown, but the experience of the 70s shows that the Fed should not back off its inflation fight too soon.
The University of Michigan Consumer Sentiment report printed at 63.9 vs. 60.0 expected and 59.2 previous. The current conditions index came at 68.0 vs. 65.1 expected and 64.9 previous and the expectations index was at 61.3 vs. 55.2 expected and 55.4 previous. The 1 year inflation expectations tumbled to 3.3% vs. 4.1% expected and 4.2% previously, while the 5-10 year inflation expectations were at 3.0% vs. 3.0% expected and 3.1% previous. Overall, a goldilocks report.
Next week will be more tranquil on the data front:
- The US is on holiday on Monday for Juneteenth.
- The PBOC is expected to cut the LPR on Tuesday.
- The UK CPI will be released on Wednesday.
- On Thursday we will have the SNB and the BoE rate decisions, the US Jobless Claims report and Fed Chair Powell’s Testimony.
- Finally, on Friday we will see the S&P Global PMIs.
That’s all folks, have a great weekend!
