• Fed officials are clearly pushing out the timing of the first hike; U.S. growth remains robust; weekly jobless claims will be of interest; Brazil kept rates steady at 10.5%, as expected
  
• BOE is expected to keep rates steady at 5.25%; ECB hawks are still controlling the narrative; SNB cut rates 25 bp to 1.25%; Norges Bank kept rates steady at 4.5%, as expected
  
• New Zealand reported solid Q1 GDP data; PBOC is still allowing the yuan to weaken; Indonesia kept rates steady at 6.25%, as expected

The dollar is firm ahead of the BOE decision. DXY is trading higher near 105.429 and remains on track to test the April-May highs near 106.50. The euro is trading lower near $1.0730, while sterling is trading lower near $1.27 ahead of the BOE decision (see below. USD/JPY is trading at a new high for this move near 158.45 and is on track to test the April high near 160.15. SNB is underperforming after the SNB cut rates 25 bp, while NOK is outperforming after Norges Bank delivered a hawkish hold (see below). Recent data support our view that the backdrop of persistent inflation and robust growth in the U.S. remains largely in place. The Fed sees the same and delivered a hawkish hold last week. However, the SNB cut underscores the widening economic and monetary policy divergences that support the U.S. dollar and that should continue in the coming weeks. In addition, the dollar should also continue to gain from any risk off impulses emanating from France.

AMERICAS

Fed officials are clearly pushing out the timing of the first hike. Barkin said “We will learn a lot more over the next several months.” Collins said “It is too soon to determine whether inflation is durably on a path back to the 2% target. We should not overreact to a month or two of promising news.” Logan said, “We’re going to need to see several months of that data to really have confidence in our outlook that we’re headed to 2%.” Kugler said “If the economy evolves as I am expecting, it will likely become appropriate to begin easing policy sometime later this year.” Musalem said “I will need to observe a period of favorable inflation, moderating demand and expanding supply before becoming confident that a reduction in the target range for the federal funds rate is appropriate. These conditions could take months, and more likely quarters to play out.”
The market has responded. There are currently around 10% odds of a cut in July, rising to around 70% in September and fully priced in for November. A second cut is nearly priced in for December. Kashkari, Barkin, and Daly speak today.

U.S. growth remains robust. The Atlanta Fed’s GDPNow model is tracking Q2 growth at 3.1% SAAR and will be updated today after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q2 growth at 1.9% SAAR and Q3 growth at 2.1% SAAR and will be updated tomorrow.

Regional Fed surveys for June continue rolling out. Philly Fed manufacturing is expected at 5.0 vs. 4.5 in May. Earlier this week, Empire manufacturing came in at -6.0 vs. -10.0 expected and -15.6 in May.

Weekly jobless claims will be of interest. That’s because initial claims will be for the BLS survey week containing the 12th of the month. These are expected at 235k vs. 242k last week. That was the highest since mid-August 2023 and pulled the 4-week moving average up to 227k, the highest since mid-September 2023. Elsewhere, continuing claims are reported with a one-week lag and are expected at 1.810 mln vs. 1.820 mln last week. That was the highest since mid-January. Bloomberg consensus for June NFP is 200k vs. 272k in May, while its whisper number stands at 208k.

Housing data will remain in focus. May building permits and housing starts are both expected at 0.7% m/m. May existing home sales will be reported tomorrow and are expected at -1.1% m/m vs. -1.9% in April. Yesterday, June NAHB housing market index came in at 43 vs. 46 expected and 45 in May.

Brazil COPOM kept rates steady at 10.5%, as expected. The bank stressed that “that monetary policy should continue being contractionary for sufficient time” as the uncertain global and domestic scenarios “require greater caution.” The vote was unanimous, which may put markets at ease. At the last meeting May 8, the bank cut rates 25 bp but the 5-4 split vote showed an internal battle may have been shaping up. The four dissents favored a larger 50 bp cut but have since tilted more hawkish, it seems. The bank raised its 2024 and 2025 inflation forecasts modestly to 4.0% and 3.4%, respectively. Of note, the swaps market is pricing in 125-150 bp of tightening over the next 12 months on Brazil’s worsening fiscal outlook.

EUROPE/MIDDLE EAST/AFRICA

Bank of England is expected to keep rates steady at 5.25%. Governor Bailey warned last month (before Prime Minister Sunak called a general election for July 4) that a June rate cut is “neither ruled out nor a fait accompli”. However, a surprise rate change during an election campaign is unlikely. Importantly, we anticipate the MPC vote split to remain 7-2 in favor of no rate cut, with Ramsden and Dhingra voting again for a 25 bp cut. We also expect the BOE to reiterate that “monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term.” There is no post-decision press conference today, nor are there updated macroeconomic projections. Our base case is for the BOE to start easing in August, which would further weigh on GBP. However, the risk is that the BOE pulls the trigger later because services inflation is running above the BOE’s projection. The market is pricing only 40% odds of a 25 bp BOE rate cut in August while a similar cut in September is 80% priced in.

Ahead of the decision, U.K. reported May CPI yesterday. Headline came in as expected at 2.0% y/y vs. 2.3% in April, core came in as expected at 3.5% y/y vs. 3.9% in April, and CPIH came in as expected at 2.8% y/y vs. 3.0% in April. Headline hit the 2% target for the first time since July 2021 and supports our view that the BOE should cut sooner rather than later. However, services inflation came in at 5.7% y/y vs. 5.5% expected and 5.9% in April and could inject a note of caution.

ECB hawks are still controlling the narrative. Knot said there’s a “strong case” for the ECB to make policy decisions only once a quarter, when new economic projections are available. He added that policymakers have “little experience” with easing monetary policy gradually. Knot said that with uncertainty still high and structural shifts in the global economy, a “data-dependent approach” is warranted. Thus, the ECB should “wait for incoming data, including new projections, and then decide accordingly. Given the current environment we still have to avoid any commitments on a specific future rate path.” And yet, that is exactly what Knot did! The market sees around 65% odds of a cut in September but has nearly priced in another cut in December.

Swiss National Bank cut rates 25 bp to 1.25%. Analysts polled by Bloomberg saw no change but were virtually split, while the market was pricing in nearly 70% odds of a cut. The SNB noted “underlying inflationary pressure has decreased again compared to the previous quarter.” President Jordan noted that the franc’s appreciation due to “political uncertainties in Europe” was adding to uncertainty about elevated inflation, adding that the bank remains “willing to be active in the foreign exchange market as necessary.” The SNB’s new inflation forecasts were tweaked lower and the benign inflation forecast leaves the door open for additional policy rate cuts, but the market pricing is in only 25 bp of easing over the next 12 months.

Norges Bank kept rates steady at 4.5%, as expected. The decision was unanimous. However, it was a hawkish hold as the Norges Bank pushed out the timing of a first rate cut to Q1 2025 from Q3 2024 previously. The bank’s new forecast indicates that the policy rate will remain at 4.50% through year-end before gradually being reduced. The Norges Bank said it is concerned with “the possibility that if the policy rate is lowered prematurely, inflation could remain above target for too long.” The market has virtually eliminated the small odds of a cut over the next six months and sees about 50 bp of total easing over the subsequent six months. With the Norges Bank looking for only 25 bp of cuts over the next year, there is room for marker pricing to converge towards the Norges Bank’s projection and offer NOK additional support.

ASIA

New Zealand reported solid Q1 GDP data. Growth came in a tick higher than expected at 0.2% q/q vs. -0.1% in Q4, while the y/y rate also came in a tick higher than expected at 0.3% vs. a revised -0.2% (was -0.3%) in Q4. Growth was driven by rental, hiring, real estate services, and electricity generation. While the data matched the RBNZ forecast, the details were soggy. The services industries (which accounts for 73% of the economy) fell 0.1% and real GDP per capita declined 0.3%. The decline in the ANZ Own Activity Outlook index to a ten-month low in May points to weaker growth ahead. The RBNZ has a first policy rate cut penciled in for Q3 2025, partly because New Zealand services inflation is receding slowly. In contrast, the market has fully priced in a cut this November. That’s about right in our view, which is a headwind for NZD.

PBOC is still allowing the yuan to weaken. USD/CNY traded at the highest since mid-November after the PBOC fix came in at the weakest since November. We continue to believe that the PBOC allows the yuan to weaken gradually along with the rest of EM, as any big moves in the currency will simply encourage more capital flight and weaken the yuan even more. USD/CNY should eventually retest the September high near 7.35. After that, there are no real chart points until you get to the old peg at 8.28, which seems too far away right now.

Bank Indonesia kept rates steady at 6.25%, as expected. Governor Warjiyo said the policy rate is “supported by strengthening monetary operations to bolster the effectiveness of rupiah stabilization and the inflow of foreign capital.” He added that BI will continue intervening in spot and derivatives FX as well as bond markets to smooth out volatility. Warjiyo said these measures should help return the rupiah to its “fundamental level” below 16,000 per dollar. He said recent rupiah weakness was largely due to corporate demand for dollars as well as investor concerns about the fiscal outlook.