- More Fed officials are revealing their June Dots; May retail sales data will be the highlight; Chile is expected to cut rates 25 bp to 5.75%.
- Germany reported a mixed June ZEW survey; Hungary is expected to cut rates 25 bp to 7.0%.
- BOJ Governor Ueda hinted at a July hike; RBA delivered a hawkish hold
The dollar is firm ahead of retail sales data. DXY is trading higher near 105.487 and remains on track to test the April-May highs near 106.50. The euro is trading lower near $1.0720, while sterling is trading lower near $1.2685. USD/JPY is trading higher near 158.10 despite hints of a July hike from BOJ Governor Ueda (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. Overall, recent developments underscore the widening economic and monetary policy divergences that support the U.S. dollar and that should continue this week. In addition, the dollar should also continue to gain from any risk off impulses emanating from France.
AMERICAS
More Fed officials are revealing their June Dots. Recall that at last week’s meeting, 4 saw no cuts, 7 saw one cut, and 8 saw two cuts. Harker said, “If all of it happens to be as forecasted, I think one rate cut would be appropriate by year’s end.” Over the weekend, Kashkari confirmed that he also sees one cut this year. The market sees 65% odds of a September cut and becomes fully priced in for November, with nearly 80% odds of a second cut in December. Barkin, Collins (twice), Logan, Kugler, Musalem, and Goolsbee speak today.
May retail sales data will be the highlight. Headline is expected at 0.3% m/m vs. flat in April, while ex-autos is expected to remain steady at 0.2% m/m. The so-called control group used for GDP calculations is expected at 0.5% m/m vs. -0.3% in April. Of note, the y/y rates remain fairly robust. While there has been some softening, consumer spending is still supported by robust demand for labor and positive real wage growth. May IP and April business inventories will also be reported today.
Regional Fed surveys for June continue rolling out. New York Fed services will be reported today and stood at 3.0 in May. Yesterday, Empire manufacturing survey kicked things off and came in at -6.0 vs. -11.3 expected and -15.6 in May. Philly Fed manufacturing will be reported Thursday and is expected at 4.8 vs. 4.5 in May.
Chile central bank is expected to cut rates 25 bp to 5.75%. However, the market is split. Of the 20 analysts polled by Bloomberg, 1 sees steady rates, 14 see a 25 bp cut, and 5 see a larger 50 bp cut. At the last meeting May 23, the bank cut rates 50 bp to 6.0% by a unanimous vote and said that the policy rate would continue to fall. Inflation in Chile has been sticky around 4% since April, while the peso has weakened nearly 6% since that last decision. This argues for caution by the central bank. The market is pricing in 125 bp of total easing over the next 12 months that would see the policy rate bottom at 4.75%.
EUROPE/MIDDLE EAST/AFRICA
Germany reported a mixed June ZEW survey. Expectations component came in at 47.5 vs. 50.0 expected and 47.1 in May, while current situation came in at -73.8 vs. -65.0 expected and -72.3 in May. Confidence measures have been rising in recent months, which is consistent with a further modest recovery in eurozone GDP growth. However, the rise seems to be leveling out a bit. Indeed, ZEW official said “Both the sentiment and the situation indicators stagnate. These developments must be interpreted in the context of a constant situation indicator for the eurozone as a whole.”
ECB officials remain cautious about further easing. Despite this, the market sees 65% odds of a cut in September and has nearly priced in another cut in December. Vujcic, Cipollone, Guindos, Knot, and Villeroy all speak later today.
National Bank of Hungary is expected to cut rates 25 bp to 7.0%. However, 5 of the 25 analysts polled by Bloomberg look for a larger 50 bp cut. At the last meeting May 21, the bank cut rates 50 bp and Deputy Governor Virag noted that the base rate will be between a 6.75-7.00% by end-June, adding that room for rate cuts in the second half of this year is “very, very limited.” The swaps market sees the policy rate at 7.00% over the next three months, falling to 6.75% over the next 12 months.
ASIA
Bank of Japan Governor Ueda hinted at a July hike. He said “The reduction of bond buying and a policy rate hike are separate issues. There is a good chance for the policy rate to be raised, depending on data and information over the economy, inflation and financial conditions.” Recall at this month’s meeting, the bank said it would announce a reduction in its bond-buying at the July meeting. Friday’s Japan May CPI data will guide the BOJ’s July policy rate decision. The market now sees 35% odds of a hike next month vs. fully priced in at the start of June.
Reserve Bank of Australia delivered a hawkish hold. As widely expected, the RBA left the cash rate at 4.35% and reiterated that “the Board is not ruling anything in or out.” Importantly, Governor Bullock confirmed during her press conference that the Board discussed the option of raising rates while the case for a rate cut was not considered. The RBA remains concerned about the inflation backdrop suggesting the bar for easing policy is still high. It noted “inflation remains above target and is proving persistent” and emphasized again that “the Board expects that it will be some time yet before inflation is sustainably in the target range.” The RBA added a new line that states it “will do what is necessary” to return inflation to target. AUD can edge higher versus CAD because unlike the Bank of Canada, the RBA is in no rush to cut rates.
