U.S. yields are stabilizing as markets digest last week’s FOMC decision; Fed tightening expectations remain elevated; there is a full slate of Fed speakers this week and all should sound hawkish; with recession fears rising, May Chicago Fed NAI Tuesday takes center stage; Canada reports some key data; BOC tightening expectations remain elevated
French President Macron’s coalition failed to win an outright majority in parliamentary elections this weekend; eurozone data highlight will be preliminary June PMI readings Thursday; ECB tightening expectations remain elevated; U.K. data highlight will be May CPI data Wednesday; BOE expectations have picked up after it promised more forceful action at last week’s meeting; Norges Bank meets Thursday and is expected to hike rates 25 bp to 1.0%.
Japan data highlight will be May national CPI readings Friday

AMERICAS

U.S. yields are stabilizing as markets digest last week’s FOMC decision. The 10-year yield ended the week near 3.23%, up from Thursday’s low near 3.18% but well below last week’s peak near 3.50%. Elsewhere, the 2-year yield ended the week near 3.18%, up from Thursday’s low near 3.08% but well below last week’s peak near 3.45%. While we acknowledge that this month’s run up in yields was getting a bit overdone in terms of the pace, we continue to believe that the direction remains intact. When all is said and done, we believe monetary policy divergences remain the dominant driver for FX. As the U.S. economic outlook remains the strongest and the Fed the most hawkish relative to its DM peers, the dollar uptrend should remain intact.

Fed tightening expectations remain elevated. WIRP suggests a 75 bp hike at the next meeting July 27 is 85% priced in, while 50 bp hikes at the subsequent meetings September 21 and November 2 are fully priced in. Looking ahead, the swaps market is pricing in 275 bp of tightening over the next 12 months that would see the policy rate peak near 4.50%, up from 3.75% at the start of last week and 3.0% at the start of this month.

There is a full slate of Fed speakers this week and all should sound hawkish. Bullard speaks Monday, followed by Barkin and Mester Tuesday. Powell delivers his semi-annual testimony before the Senate Wednesday followed by the House Thursday. Barkin, Evans, and Harker also speak Wednesday, followed by Bullard and Daly Friday. Over the weekend, Waller said he backs a 75 bp hike at the July meeting and stressed that “The Fed is ‘all in’ on re-establishing price stability.”

With recession fears rising, May Chicago Fed National Activity Index Tuesday takes center stage. It is expected to remain steady at 0.47. If so, the 3-month average would fall slightly to 0.43 vs. 0.48 in April. Still, it would remain far above the -0.7 threshold that would signal an imminent recession.

Housing data will remain in focus as weakness in that sector persists. May existing home sales will be reported Tuesday and are expected at -3.7% m/m vs. -2.4% in April. May new home sales will be reported Friday and are expected at 0.2% m/m vs. -16.6% in April. Last week, May building permits came in at -7.0% m/m and housing starts came in at -14.4% m/m. Yet that's what Fed tightening is supposed to do and should come as no surprise with mortgage rates rising sharply.

Preliminary June S&P Global PMI readings will be reported Thursday. Headline manufacturing is expected at 56.0 vs. 57.0 in May, services is expected at 53.7 vs. 53.4 in May. If so, the composite PMI would likely fall from 53.6 in May. All the PMI readings are slowing but at this point are falling from rather lofty pandemic recovery levels to ranges that are considered more normal. Regional Fed manufacturing surveys for June will continue rolling out. Kansas City Fed reports Thursday and is expected at 15 vs. 23 in May. Last week, Empire came in at -1.2 and Philly Fed came in at -3.3 and so there are downside risks to the Kansas City reading.

Canada reports some key data. May CPI data Wednesday will be the main focus. Headline is expected at 7.3% y/y vs. 6.8% in April, while common core is expected at 3.4% y/y vs. 3.2% in April. Ahead of that, April retail sales data Tuesday will be of interest. Headline sales are expected at 0.8% m/m vs. 0.0% in March, while sales ex-autos are expected at 0.6% m/m vs. 2.4% in March.

Bank of Canada tightening expectations remain elevated. A 50 bp hike at the next meeting July 13 is fully priced in, with nearly 70% odds of a 75 bp move. Looking ahead, the swaps market is pricing in 225-250 bp of tightening over the next 12 months that would see the policy rate peak between 3.75-4.0%, down from 4.0% last week but up from 3.0% at the start of this month.

EUROPE/MIDDLE EAST/AFRICA

French politics bear watching as President Macron’s coalition failed to win an outright majority in parliamentary elections this weekend. Early results suggest the coalition will wine 200-260 seats out of 577 total. Leftist coalition Nupes is projected to win 149-200 seats, while center-right Republicans and their allies are set to win 60-80. However, the big winners appear to be the far right National Rally, projected to win as many as 102 seats, the most ever for the party. Macro will have to cobble together a working majority in parliament in order to pass his legislative agenda. While that seems very possible, the rise of the far right is concerning and bears watching.

Eurozone data highlight will be preliminary June PMI readings Thursday. Headline manufacturing is expected at 53.8 vs. 54.6 in May, services is expected at 55.5 vs. 56.1 in May, and the composite is expected at 54.0 vs. 54.8 in May. Looking at the country breakdown, the German composite is expected at 53.0 vs. 53.7 in May and the French composite is expected at 56.4 vs. 57.0 in May. Italy and Spain will be reported with the final readings.

Some important confidence surveys will be reported by member countries. The most important one is June German IFO business climate Friday. Headline is expected at 92.7 vs. 93.0 in May, with current assessment seen falling half a point to 99.0 and expectations seen rising half a point to 87.4. Ahead of that, France reports June business confidence Thursday. Italy reports June consumer and manufacturing confidence Friday as well.

ECB tightening expectations remain elevated. WIRP suggests a 25 bp hike July 21 is fully priced in. Then, 50 bp hikes are now priced in for the subsequent three meetings on September 8, October 27, and December 15 that would take the deposit rate to near 1.25% by year-end. Looking ahead, the swaps market is now pricing in 275 bp of tightening over the next 24 months that would see the deposit rate peak near 2.25% vs. 2.0% at the start of last week and 1.75% before the ECB meeting. There are plenty of ECB speakers this week. Muller, Visco, Centeno, Kazaks, Lagarde, and Lane all speak Monday. Rehn speaks Tuesday. Nagel and Villeroy speak Thursday.

U.K. data highlight will be May CPI data Wednesday. Headline is expected at 9.1% y/y vs. 9.0% in April, core is expected at 6.0% y/y vs. 6.2% in April, and CPIH is expected at 7.9% y/y vs. 7.8% in April. If so, headline would be the highest since March 1982. And it’s likely to get worse, as the Bank of England raised its forecast for peak inflation this year to “slightly above” 11% to reflect the planned increase in the household energy price cap in October.

Bank of England expectations have picked up after it promised more forceful action at last week’s meeting. WIRP suggests a 50 bp hike move at the August 4 meeting is nearly 70% priced in, but are fully priced in for the subsequent meetings September 15 and November 3. Looking ahead, the swaps market is now pricing in 250 bp of tightening over the next 12 months that would see the policy rate peak near 3.75%, up from 3.5% at the start of last week and 2.5% in late May. Haskel and Mann speak Monday, followed by Pill and Tenreyro Tuesday. Cunliffe speaks Wednesday, followed by Pill and Haskel Friday. Of note, Saunders, Mann, and Haskel dissented last week in favor of a larger 50 bp move.

Other important U.K. data will be reported. Preliminary June PMI readings and public sector net borrowing will be reported Thursday. Manufacturing is expected at 53.7 vs. 54.6 in May, services is expected at 53.0 vs. 53.4 in May, and the composite is expected at 52.7 vs. 53.1 in May. May retail sales will be reported Friday. Headline sales are expected at -0.7% m/m vs. 1.4% in March, while sales ex-auto fuel are expected at -0.9% vs. 1.4% in March. Any further weakness in the data would add to sterling selling pressures. U.K. CBI releases the results of its June surveys. Industrial trends survey will be reported Tuesday, with total order expected at 20 vs. 26 in May and selling prices expected to remain steady at 75. Distributive trades survey will be reported Thursday, with retailing reported sales expected at -10 vs. -1 in May. June GfK consumer confidence will also be reported Thursday and is expected to remain steady at -40.

Norges Bank meets Thursday and is expected to hike rates 25 bp to 1.0%. However, nearly a quarter of the analysts polled by Bloomberg look for a larger 50 bp move. After all, 50 is the new 25. At the last meeting May 5, the bank kept rates steady but reaffirmed that a hike this week was “most likely” and noted that “If there are prospects of persistently high inflation, the policy rate may be raised more quickly than indicated by the policy rate forecast in the March Report.” New macro forecasts and an updated rate path will be released at this meeting. The March rate path suggested a longer, greater tightening cycle ahead as the bank saw the policy rate peaking near 2.5% in 2024 vs. 1.75% previously. Compare this with the swaps market, which is pricing in 200 bp of tightening over the next 24 months that would see the policy rate peak near 2.75%.

ASIA

Japan data highlight will be May national CPI readings Friday. Headline is expected to remain steady at 2.5% y/y, while core (ex-fresh food) is expected to remain steady at 2.1% y/y. Of note, core ex-energy is expected to remain steady at 0.8% y/y. Preliminary June PMI readings and May department store sales will be reported Thursday. The Bank of Japan sent a clear signal last week that it will maintain ultra-loose policy for the foreseeable future. What is implicit in this is a weaker yen, as monetary policy divergences are set to widen as the Fed continues hiking. Minutes of the April policy meeting will be released Wednesday.