Monday: It was a US holiday, so it was a pretty dull trading day. We had again some ECB speakers talking about a rate hike in July and another one in September, if the data suggested so.
ECB’s Kazimir (hawk) confirmed the support for a rate hike in July while keeping an open mind on September. Later, ECB’s Simkus (hawk) said that he has no doubt that rates will be raised in July and that they are close to the end of their rate hike cycle, so there’s no need to rush with September assessment.
ECB’s Lane (dove) expects inflation to come down fairly quickly to their 2% target in the next two years and acknowledged that they need to be data dependent. He also confirmed a July hike with another one in September being an open question. ECB’s Schnabel (hawk) said that the risks to the inflation outlook are tilted to the upside and a monetary policy stance that errs of the side of determination insures against costly policy mistakes. In fact, she added that risks of both a de-anchoring of inflation expectations and weaker monetary policy transmission suggest that there is a limit to how long inflation can stay above 2%.
She’s saying that inflation staying high for too long increases the risk of inflation expectations getting de-anchored requiring eventually a more aggressive tightening and a worse recession. In fact, she concluded that they need to keep raising interest rates until they see convincing evidence that developments in underlying inflation are consistent with a return to the 2% target.
The US NAHB Housing Market Index came at 55 vs. 51 expected. This is the first time the index prints above the 50 level (indicating expansion) since July 2022.
Tuesday: The PBoC has cut its LPR rates by 10 bps as expected bringing the 1 year LPR to 3.55% and the 5 year LPR to 4.20%.
The RBA minutes showed that the central bank decided to hike as the persistence of high inflation raises the risk of inflation expectations de-anchoring. In fact, they highlighted the risk that “wages and prices could become implicitly indexed to past high inflation”. They are also wary of the risk that the lags from the past tightening could lead to a sharper economic slowdown. Finally, they reaffirmed their willingness to do what is necessary to bring inflation to target.
RBA’s Deputy Governor Bullock said that the economy and employment need to grow below trend for a while. She also suggested that an unemployment rate of 4.5% would be the right balance to bring inflation back to target without significant economic pain. She highlighted that the current labour market is tight and above estimates of full employment, and that entrenched inflation would lead to higher rates and a deeper recession. Finally, she added that higher rates are the only tool the RBA has to curb inflation.
ECB’s Vujcic (hawk) said that core inflation pressures remain in the euro area and while acknowledging that they have to consider the risks of doing too much versus doing too little, he added that sometimes a soft landing is not possible.
ECB’s Villeroy (Neutral) said that the duration of the terminal rate is more important than the level and that future rate decisions are data-dependent.
ECB’s Simkus (hawk) added to his comments earlier in the week that he wouldn’t be surprised if the bank hiked in September as they need to provide very credible monetary policy to make sure that they fulfil their mandate.
US Housing Starts surged by most in three decades coming at 1.631M vs. 1400M expected, while Building Permits came at 1.491M vs. 1.420M expected. Housing Starts can be volatile but given the NAHB index on Monday, it’s pretty clear that the housing market is roaring back, which may indicate that the Fed might have not done enough.
Fed’s Jefferson said that he remain focused on bringing inflation back to the 2% target and that the Fed must remain attentive to inflation, banking-sector and geopolitical uncertainty.
Later on, Fed’s Cook confirmed that she’s also focused on inflation until the job is done and has consistently supported Fed work to lower inflation.
Wednesday: BoJ’s Minutes showed that the current monetary easing should be maintained. Later on, BoJ’s Adachi acknowledged that inflation has risen faster than he expected but added that it’s too early to tweak monetary policy as there are upside and downside risks to their price outlook and longer-run downside risk appears to be bigger. BoJ’s Ueda further added to Adachi’s comments confirming that they will patiently maintain easy policy to achieve their 2% target. The BoJ looks too scared of deflation as they’ve been fighting against it for decades.
The UK CPI report has again beat estimates across the board with the CPI Y/Y coming at 8.7% vs. 8.4% expected and the Core CPI Y/Y rising to a new high at 7.1% vs. 6.8% expected. The market now sees the terminal rate at 6% by the end of the year.
ECB’s Kazimir said that the September hike will depend on the data and that they would need to have core inflation under control to stop tightening.
Fed Chair Powell during his testimony to Congress pretty much repeated what he said last week during the FOMC press conference. He said that the process of getting inflation back to the 2% target has a long way to go and that they remain data-dependent with more rate hikes probably being appropriate if the economy performs as expected. The next day he added that they haven’t seen much progress in the way of services inflation and that headline inflation has come down largely due to food and energy, not principally a function of monetary policy. He added that his forecasts are similar to the committee’s forecasts as he believes two more rate hikes are expected for this year.
ECB’s Nagel (hawk) said that he’s confident inflation will get back to target and that there is still a way to go until then and that’s why they have to be stubborn because inflation is stubborn. Later on, ECB’s Schnabel (hawk) added that domestic inflation is driven by profits and wages.
Fed’s Cook (dove) said that the Fed is not there yet on getting inflation back to target and that there’s the risk that economic growth could slow.
Fed’s Goolsbee (dove) said that the decision last week was a close call for him and that it’s perfectly appropriate to have a reconnaissance mission now. He still hasn’t decided on what to do in July and acknowledged that he won’t gain enough info in 6 weeks, but he will still learn something more.
BoC’s Minutes showed that the Governing Council agreed to assess need for further hikes based on data and that they were concerned that the disinflationary momentum seemed to be waning with the 3 month trend of core inflation not showing a downward trend.
Fed’s Bostic (hawk) said that he wants to give the economy more time to adjust to rate hikes before doing more, adding that policy hasn’t been restrictive long enough for effects to hit. He acknowledged that there’s a risk that inflation rebounds but it’s not his base case.
Thursday: BoJ’s Noguchi said that what's most important is to ensure momentum for wage growth becomes trend, by maintaining easy policy and that the inflation expectations of the Japanese public are yet to be anchored at 2%.
The SNB hiked interest rates by 25 bps as expected bringing it to 1.75% adding that additional hikes cannot be ruled out to ensure price stability. SNB’s Governor Jordan said that there is a danger that inflation becomes entrenched above the 2% level as underlying inflation pressures have risen further.
The BoE surprised with a 50 bps hike vs. 25 bps expected bring the bank rate to 5.00%. Again, Tenreyro and Dhingra voted for no change. BoE’s Governor Bailey (hawk) said that they are not signalling what will come next on rates and that they are not seeking to precipitate the economy into a recession, but it was absolutely imperative that the BoE raised rates. As other central banks, they remain data-dependent.
US Jobless Claims missed expectations again coming at 264K vs. the previous upwardly revised 264K figure. Continuing Claims, which is an indicator of hard it is for people to find jobs after being unemployed, beat expectations printing at 1759K vs. 1782K expected and 1772K prior.
Fed’s Bowman (hawk) said that additional hikes will be needed as core inflation has essentially plateaued since the fall of 2022. Later, Fed’s Barkin (hawk) repeated that inflation is still too high despite falling from its peak and that demand is still elevated compared with its pre-pandemic trend. He confirmed that he would be content with more rate hikes if inflation is not progressing toward their goal but he won’t prejudge the July meeting.
Friday: It was the PMIs day with a slate of releases you can see below:
- Australia Manufacturing PMI 48.6 vs. 48.4 prior and Services PMI 50.7 vs. 52.1 prior.
- Japan Manufacturing PMI 49.8 vs. 50.6 prior and Services PMI 54.2 vs. 55.9 prior.
- France Manufacturing PMI 45.5 vs. 45.7 prior and Services PMI 48.0 vs. 52.5 prior.
- Germany Manufacturing PMI 41.0 vs. 43.2 prior and Services PMI 54.1 vs. 57.2 prior.
- Eurozone Manufacturing PMI 43.6 vs. 44.8 prior and Services PMI 52.4 vs. 55.1 prior.
- UK Manufacturing PMI 46.2 vs. 47.1 prior and Services PMI 53.7 vs. 55.2 prior.
Japan CPI Y/Y came at 3.2% vs. 4.1% expected and 3.5% prior. The Core CPI Y/Y printed at 4.3% vs. 4.4% expected and 4.1% prior.
ECB’s de Cos (dove) said that they will hike again in July, but can’t say what they will do afterwards.
Fed’s Bostic (dove) said that he expects the jobless rate to rise from historically low level and that he favours no more rate hikes for the rest of the year.
Fed's Daly (hawk) said that two more rate hikes this year is a "very reasonable" projection but it will depend on the data. She continued that the risks of overtightening and undertightening are about balanced and that it's prudent to slow the pace of hikes as they approach their destination. She also added that community contacts are worried that housing has hit a bottom and that rents are reaccelerating.
The S&P Global US Manufacturing PMI came at 46.3 vs 48.5 expected, while Services PMI printed at 54.1 vs. 54.0 expected. The big divergence between the Manufacturing Sector and the Services Sector continues and for Core inflation to ease the latter should go in the opposite direction.
The highlights for next week include:
- Canada CPI on Tuesday
- US Jobless Claims on Thursday
- EZ CPI and US Core PCE on Friday
That's all folks, have a great weekend!
