- The market still does not believe the Fed; Chair Powell’s testimony before Congress this week will be key; regional Fed surveys for June will continue rolling out; housing data will be closely watched
- ECB officials appear split; former U.K. Prime Minister Johnson’s political career may be over; Hungary is expected to keep the base rate steady at 13.0%
- Japan officials express concern as the yen continues to weaken; RBA released the minutes of its June meeting; China commercial banks cut their LPRs, as expected; Taiwan reported soft May export orders
The dollar is hanging on to recent gains as the U.S. returns from holiday. DXY is trading flat near 102.50 after two straight up days. The euro is trading flat near $1.0930 while sterling is trading lower near $1.265. USD/JPY traded at a new high for this move near 142.25 before falling back to trade near 141.60 currently after Finance Minister Suzuki’s comments (see below). AUD is the worst performing major after RBA minutes were less hawkish than expected (see below). The FX market has been choppy this past week and much of that is due to Fed (mis)communication. Officials this week are likely to put up a united hawkish front and help the dollar get further traction. However, a larger dollar recovery may have to wait until next week, when key U.S. data are expected to show continued strength in June. Stay tuned.
AMERICAS
The market still does not believe the Fed. Yes, one more rate cut is about 70% priced in for July with the odds rising to 90% in September. However, the second hike that was flagged in the Dot Plots is simply nowhere to be seen in the market pricing, at least not yet. To do so, Fed speakers will have their work cut out for them. On Friday, Waller and Barkin did their part. Waller said “We’re seeing policy rates having some effects on parts of the economy. The labor market is still strong, but core inflation is just not moving, and that’s going to require probably some more tightening to try to get that going down.” Elsewhere, Barkin said “I want to reiterate that 2% inflation is our target, and that I am still looking to be convinced of the plausible story that slowing demand returns inflation relatively quickly to that target. If coming data doesn’t support that story, I’m comfortable doing more.”
Fed Chair Powell’s testimony before Congress this week will be key. He appears before the House Financial Services Committee tomorrow and the Senate Banking Committee Thursday. Besides Powell’s testimony, there is an unusually high number of Fed speakers this week. All are expected to maintain the hawkish tone that we believe was the compromise reached for the skip. Bullard, Williams, and Barr speak today.
Regional Fed surveys for June will continue rolling out. Philly Fed non-manufacturing index will be reported today. Kansas City Fed manufacturing index will be reported Thursday and its services index will be reported Friday.
Housing data will be closely watched. May building permits and housing starts are expected at 0.6% m/m and -0.1% m/m, respectively. Yesterday, June NAHB housing market index came in at 55 vs.51 expected and 50 in May. This was the sixth straight month of improvement to the highest since July 2022.
EUROPE/MIDDLE EAST/AFRICA
ECB officials appear split. Rehn warned that “The rise in consumer prices in the euro area is slowing, but not to the extent desired. Inflation excluding energy and food is falling only gradually.” Guindos said “There is not doubt inflation will ease. Underlying prices, however, could face more limitations in the that slowdown.” Schnabel said “We need to remain highly data-dependent and err on the side of doing too much rather than too little.” On the other hand, Simkus said “Keeping in mind all the uncertainties and risks, it’s still too early to assess the need for a hike in September.” Lane said “September is so far away, let’s see in September.” Kazamir said “I’m waiting for September for a more comprehensive view and analysis of the cumulative effect of all our measures on inflation and the economy.” WIRP suggests a 25 bp hike is 90% priced in July 27, with odds of another 25 bp hike in September around 60% and topping out around 90% in Q4. This rate path would take the peak deposit rate up to 4.0% vs. 3.75% seen at the start of last week.
Former U.K. Prime Minister Johnson’s political career may be over. While it’s always risky to count him out, a comeback was made all the more difficult after Parliament stripped him of the right to full access to Parliament that’s accorded to former MPs. After a five hour debate by the Privileges Committee that found Johnson committed “serious contempt,” Parliament voted 354-7 to approve the findings of the “Partygate” report. After resigning his Parliamentary seat earlier this month, it’s hard to see how Johnson could ever return to the political arena.
National Bank of Hungary is expected to keep the base rate steady at 13.0%. At the last meeting May 23, the bank kept the base rate on hold. However, it cut the more important 1-day deposit rate 100 bp to 17.0% on May 24 and signaled it was the start of a gradual easing cycle. This despite inflation still running well above 20%. The swaps market is pricing in cuts in the base rate over the next three months totaling 125 bp, followed by another 100 bp over the subsequent three months. This strikes us as way too aggressive given how stubbornly high inflation remains. Such an aggressive rate path would likely weight on the forint, which in turn would push up imported inflation.
ASIA
Japan officials expressed concern as the yen continues to weaken. USD/JPY traded at a new high for this move near 142.25 before comments from Finance Minister Suzuki led to a reversal. He said he’s closely watching the FX market on a daily basis and noted that exchange rates be determined by market forces. That said, Suzuki added that it’s desirable for the FX market to move in a stable manner. Japan cannot have its cake and eat it too; if the BOJ continues to run easy monetary policy, then monetary policy divergences argue for a weaker yen. The main reason FX intervention worked last fall was that it was accompanied by heightened expectations of BOJ liftoff in 2023. Since then, it’s become clear that Governor Ueda is just as dovish as Kuroda was and the bank is nowhere near removing accommodation even as the Fed continues to be as hawkish as ever. There will be more official jawboning and the FX market will remain jumpy but at the end of the day, USD/JPY is heading higher. Break of the late November high near 142.25 would target the 145 area.
Reserve Bank of Australia released the minutes of its June meeting. At that meeting, it unexpectedly hiked rates 25 bp to 4.10% and so after a pause in April, the RBA delivered back to back hawkish surprises. The minutes showed that “The recent data suggested that inflation risks had shifted somewhat to the upside. Given this shift and the already drawn-out return of inflation to target, the board judged that a further increase in interest rates was warranted.” However, there was no mention of the need for further rate hikes, which the market took as being less hawkish than expected and so RBA tightening expectations fell a bit. WIRP suggests 35% odds of a hike July 4 vs. 50% at the start of this week and is nearly priced in for August 1. Odds of another 25 bp hike in Q4 top out near 80% after being fully priced in at the start of this week. Later on, Deputy Governor Bullock warned that unemployment will have to rise toward 4.5% vs. 3.6% currently in order for inflation to return to target. However, she added that “We are data dependent. We are not actually on a pre-set path. We are basically watching very closely what’s going on.” Updated macro forecasts will come at the August meeting.
China commercial banks cut their Loan Prime Rates, as expected. The 1-year and 5-year LPRs were both cut 10 bp to 3.55% and 4.20%, respectively. With the economy slowing , there is likely to be growing pressure on policymakers to inject fiscal stimulus to help complement modest monetary stimulus. At this point, China is facing deflation risks and should be stimulating the economy. The problem is that sharply rising debt loads really limits the ability of policymakers to push the usual levers to boost the economy. As such, we expect the mainland economy to continue underperforming expectations.
Taiwan reported soft May export orders. Orders came in at -17.6% y/y vs. -21.3% expected and -18.1% in April. While slightly better than expected, the underlying message still suggests little relief for shipments over the next six months. Korea reports trade data for the first twenty days of June tomorrow. There’s no question that China reopening has done little for regional trade and activity. Making things more difficult for Taiwan and Korea is the weak yen, which is helping Japanese exports maintain their competitiveness. For instance, the JPY/KRW cross is trading near the lows from mid-2015 while the TWD/JPY cross is trading near multi-decade highs.
