In the absence of any major drivers, the dollar saw broad-based weakness against the majors last week. NOK, AUD, and NZD outperformed while SEK, JPY, and EUR underperformed. We believe the dollar rally remains intact as the U.S. economy remains robust and the Fed this week is likely to either deliver a hawkish surprise or a skip coupled with a commitment to hike in July.
AMERICAS
The big takeaway from last week is that global interest rates are going even higher for even longer. Both the RBA and BOC delivered hawkish surprises and hiked rates after pausing their tightening cycles earlier this year. Both banks highlighted persistent price pressures and resilient economies as factors behind the hikes. The SNB delivered a hawkish message and Norway also reported much higher than expected inflation in May, leading to increased tightening expectations for both of these banks. Does this all sound familiar? It should, as the exact same factors are in play here in the U.S. The cumulative impact was that expected terminal rates for virtually every major central bank are now at the cycle highs.
The two-day FOMC Meeting ends Wednesday with a decision. Consensus sees rates kept steady after several Fed officials highlighted a skip, though a few analysts look for a 25 bp hike. However, WIRP suggests over 30% odds of a hike that rise to near 90% in July. Rate cuts are no longer priced in by year-end. Forward guidance will be key. We see solid odds of a hawkish surprise but if rates are kept on hold, we would expect fairly explicit language highlighting a hike at the next meeting and the Dot Plots would have to be adjusted higher. The jobs data has thrown a spanner in the works and it will be a very close call. We suspect CPI data Tuesday (see below) will be the ultimate determinant of the decision Wednesday. Updated macro forecasts will be released. If the Fed is serious about the skip, Growth and inflation forecasts will likely be raised, while unemployment forecasts will likely be lowered. As a point of reference, the OECD just released updated forecasts for the U.S. that see growth at 1.6% in 2023 and 1.0% in 2024 and inflation at 3.9% in 2023 and 2.6% in 2024.
Ahead of the decision, May CPI and PPI data be in focus. CPI will be reported Tuesday. Headline is expected at 0.2% m/m and 4.1% y/y vs. 0.4% and 4.9% in April, respectively, while core is expected at 0.4% m/m and 5.2% y/y vs. 0.4% and 5.5% in April, respectively. Of note, the Cleveland Fed’s Nowcast model shows headline rising 0.2% m/m and 4.1% y/y and core rising 0.45% m/m and 5.3% y/y. PPI will be reported Wednesday. Headline is expected at -0.1% m/m and 1.5% y/y vs. 0.2% and 2.3% in April, respectively, while core is expected at 0.2% m/m and 2.9% y/y vs. 0.2% and 3.2% in April, respectively. We’ve seen some upside surprises in global inflation data lately and we see risks here of the same.
May retail sales Thursday will also be important. Headline is expected at -0.1% m/m vs. 0.4% in April and ex-autos is expected at 0.1% m/m vs. 0.4% in April. The so-called control group used for GDP calculations is expected at 0.2% m/m vs. 0.7% in April. Of note, the Atlanta Fed’s GDPNow model is currently tracking 2.2% SAAR growth in Q2, steady from the previous reading. Next model update will come Thursday after the data.
Regional Fed manufacturing surveys will start rolling out. Empire and Philly Fed surveys will both be reported Thursday. Empire is expected at -15.1 vs. -31.8 in May, while Philly Fed is expected at -13.0 vs. -10.4 in May. May IP will also be reported Thursday and is expected at 0.1% m/m vs. 0.5% in April. Global manufacturing remains under pressure but for now, strong services activity is offsetting that weakness.
Jobless claims will be reported Thursday. Initial claims are expected at 250k and will be closely watched after they spiked to 261k last week, the highest since October 2021. The last time they spiked, it was due to fraudulent claims in Massachusetts and subsequently fell. Other labor market indicators suggest continued robustness.
Other minor data will be reported. May budget statement will be reported Monday and is expected at -$236.0 bln vs. -$176.2 bln in April. May import/export prices, April business inventories, and April TIC data will all be reported Thursday. Preliminary June University of Michigan consumer sentiment will be reported Friday and the headline is expected at 60.1 vs. 59.2 in May. 1-year inflation expectations are seen down a tick at 4.1% while 5- to 10-year expectations are seen steady at 3.1%.
EUROPE/MIDDLE EAST/AFRICA
The two-day ECB meeting ends Thursday with a decision. It is expected to hike the deposit rate 25 bp to 3.50% and to confirm that all APP reinvestments will end this month. At the last meeting, President Lagarde estimated that the halt of APP reinvestments will average EUR25 bln per month and so it’s almost double the current pace of EUR15 bln per month. Forward guidance will be key. While the hawks remain vocal, recent trends in the economy have allowed the doves to control the narrative. Looking ahead, another 25 bp hike is priced in for either July or September. Odds of one last 25 bp hike after that top out near 15% in September. New macro forecasts will be released and we suspect the growth outlook will be revised up and the inflation outlook will be revised up. Villeroy speaks Thursday and then Holzmann and Villeroy speak Friday.
Eurozone reports some key data. April IP will be reported Wednesday and is expected at 0.9% m/m vs. -4.1% in March, while the y/y rate is expected at 0.7% vs. -1.4% in March. Trade data will be reported Thursday and a surplus of EUR5 bln is expected vs. EUR17.0 bln in March. Final May CPI data will be reported Friday.
Germany remains a source of weakness. Its June ZEW survey will be reported Tuesday. Expectations are expected at -13.1 vs. -10.7 in May, while current situation is expected at -42.0 vs. -34.8 in May.
The monthly U.K. data dump begins. Labor market data will be reported Tuesday. The unemployment rate for the three months ended in April is expected to rise a tick to 4.0%, while average weekly earnings are expected to rise three ticks to 6.1% y/y. April GDP, IP, services, construction, and trade data will all be reported Wednesday. GDP is expected at 0.2% m/m vs. -0.3% in March, IP is expected at -0.1% m/m vs. 0.7% in March, services is expected at 0.3% m/m vs. -0.5% in March, and construction is expected flat m/m vs. 0.2% in March.
Bank of England tightening expectations remain elevated ahead of next week’s meeting. WIRP suggests a 25 bp hike is fully priced in, with nearly 25% odds of a larger 50 bp move. Hikes are priced in for August, September, and November that would see the policy rate peak near 5.5%. Mann speaks Monday. Greene and Bailey testify before Parliament and Dhingra speaks Tuesday. Cunliffe speaks Thursday. The BOE releases its inflation attitudes survey Friday.
Sweden reports May CPI Wednesday. Headline is expected at 9.4% y/y vs. 10.5% in April, CPIF is expected at 6.7% y/y vs. 7.6% in April, and CPIF ex-energy is expected at 7.8% y/y vs. 8.4% in April. If so, headline would be the lowest since July 2022 but still well above the 2% target. At the last Riksbank meeting April 26, it hiked rates 50 bp to 3.5% and noted that “It is important for confidence in the inflation target that inflation falls clearly this year. To ensure that this happens, the policy rate needs to be raised further.” Forward guidance shifted more hawkish as the policy rate was seen peaking at 3.65% in Q2 2024 vs. 3.33% in Q4 2024 in the February forecasts and staying there through Q2 2025. However, that path suggests only one more 25 bp hike and will likely be shifted more hawkish again. WIRP suggests a 25 bp hike is fully priced in for the June 29 meeting, with only 10% odds of a larger 50 bp move.
ASIA
The two-day Bank of Japan meeting ends Friday with a decision. Reports last week suggested the bank is unlikely to tweak its Yield Curve Control this week as it sees no urgency to move given the recent improvement in the functioning of the JGB market and the current shape of the yield curve. That said, BOJ officials do recognize that inflation is running higher than expected and that could lead the bank to boost its inflation forecasts in its updated macro forecasts. Even then, Governor Ueda noted last week that “There is still a little distance to attaining the 2% price target in a stable and sustainable manner. Therefore, our stance is to continue with monetary easing patiently.” WIRP suggests less than 10% odds of liftoff in either June and July, rising to around 20% in September, 40% in October, and 55% in December.
Ahead of the decision, Japan reports some key data. May PPI and machine tool orders will be reported Monday. PPI is expected at 5.6% y/y vs. 5.8% in April. May trade and April core machine orders will be reported Thursday. Exports are expected at -1.2% y/y vs. 2.6% in April, imports are expected at -10.2% y/y vs. -2.3% in April, and orders are expected at -8.3% y/y vs. -3.5% in March.
Australia highlight will be May jobs data Thursday. Consensus sees 15.0k jobs added vs. -4.3k in April, with the unemployment rate seen steady at 3.7%. Ahead of that, June Westpac consumer confidence and May NAB business confidence will be reported Tuesday.
RBA tightening expectations remain elevated after last week’s hawkish surprise. WIRP suggests 20% odds of a hike July 4, rising to 80% August 1 and fully priced in September5. Odds of a second hike top out near 50% in Q4.
New Zealand reports key Q1 data. Current account data will be reported Wednesday and is expected at -9.0% of GDP vs. -8.9% in Q4. GDP data will be reported Thursday and is expected at -0.1% q/q vs. -0.6% in Q4, while the y/y rate is expected at 2.6% vs. 2.2% in Q4.
Unlike the other two central banks in the dollar bloc, the RBNZ does not appear close to hiking rates again. At the last meeting May 24, the bank hiked rates 25 bp but signaled that it was the end of the tightening cycle and not a pause, as Governor Orr noted “All of the committee were comfortable with the forward path that had interest rates holding around 5.5%.” It remains to be seen whether the RBNZ is eventually forced to restart the tightening cycle but for now, WIRP suggests only 10% odds of a hike July 12 but rise to over 25% August 16 and topping out over 50% October 4.
