The dollar mounted a broad-based recovery last week on the back of strong U.S. data. CHF, JPY, and GBP outperformed while NOK, AUD, and CAD underperformed. While the U.S. economy is undoubtedly slowing, there are still pockets of strength and so the Fed is likely to deliver a hawkish hold this week. With the BOC and ECB joining the ranks of the easing, monetary policy divergences continue to move in the dollar’s favor.

AMERICAS

Two-day FOMC meeting ends Wednesday with an expected hawkish hold. At the May 1 decision, the Fed acknowledged the worsening inflation outlook by noting that “In recent months, there has been a lack of further progress toward the Committee's 2% inflation objective.” The Fed reiterated that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.” With inflation measures still running hot, we do not expect the Fed to shift its tone at this meeting. Recall also that the Fed announced that it would slow QT beginning in June to $60 bln per month vs. $95 bln previously.

Of course, Chair Powell’s press conference comes with the usual dovish risks. After the balanced Fed statement in May, recall that Powell came out full dove and said, “I think it’s unlikely that the next policy rate move will be a hike.” He then went on to say that rate cut timing will depend on the data, adding that unexpected weakening in the labor market could warrant a cut. It was painfully clear from that press conference that Powell was still itching to cut rates, and most likely remains so. Once again, it will all come down to the data.

Updated macro forecasts will be released. Of particular interest will be the Dot Plots, where we expect a hawkish shift across the entire forecast horizon. Growth and unemployment forecasts are likely to remain largely unchanged, while PCE and core PCE forecasts will likely be nudged higher for 2024. Williams speaks Thursday. Goolsbee and Cook speak Friday.

May inflation data take center stage. CPI will be reported Wednesday. Headline is expected to remain steady at 3.4% y/y, while core is expected to fall a tick to 3.5% y/y. Super core accelerated to 4.9% y/y in April, the highest since April 2023. Of note, the Cleveland Fed’s inflation Nowcast model sees headline at 3.36% y/y and core at 3.55% y/y. Looking ahead to June, the model sees headline at 3.29% y/y and core at 3.66% y/y.

PPI will be reported Thursday. Headline is expected at 2.5% y/y vs. 2.2% in April, while core is expected at 2.5% y/y vs. 2.4% in April. Keep an eye on PPI ex-trade, transportation, and warehousing. This measure goes into the calculation of PCE and rose to a cycle high 4.4% y/y in April.

University of Michigan reports preliminary June consumer sentiment Friday. Headline is expected at 73.0 vs. 69.1 in April. If so, it would be the first improvement since March but would fall short of that month’s cycle high of 79.4 and would be consistent with softer household spending activity. Keep an eye on 1- and 5 to 10-year inflation expectations, which have been moving higher and should keep the Fed cautious. While consumer confidence measures softened in recent months, continued job growth should continue to fuel consumption.

U.S. growth remains solid. Atlanta Fed's GDPNow model is now tracking Q2 growth at 3.1% SAAR, up from 2.6% previously. Next update comes June 18 after the data. NY Fed's Nowcast model is tracking Q2 growth at 1.9% SAAR vs. 1.8% previously. We also got its first estimate for Q3 at 2.0% SAAR. Both will be updated Friday.

EUROPE/MIDDLE EAST/AFRICA

The European Parliament will publish the results of the 2024 European elections Sunday. However, it may take weeks before political alliances are shaped. Based on the polls, we see two realistic scenarios. Scenario 1: a right-leaning assembly that includes the center-right European People’s Party (EPP), the populist Identity and Democracy (ID), and the more moderate populist European Conservative and Reformists (ECR). Scenario 2: a centrist “super grand coalition” that includes the EPP, center-left Socialists and Democrats (S&D) and Renew Europe (RE). A coalition composed of the Eurosceptics ID and ECR parties could complicate or delay the progress towards deeper Eurozone integration.

Many remain puzzled by the ECB’s “hawkish cut.” It’s hard to imagine any major central bank cutting rates whilst raising its inflation forecasts and yet here we are. Despite the hawkish tone, the market still sees around 75% odds of a 25 bp cut September 12, followed by around the same odds for another cut December 12. In our view, the ECB has room to deliver those cuts because eurozone inflation is in a firm downtrend and the recovery in economic activity remains subdued. With the Fed likely to deliver a hawkish hold this week, the monetary policy divergences will continue to widen.

BOE quarterly inflation attitudes survey will be reported Friday. Expectations here and in the DMP survey have been trending lower, offering the BOE some support for starting the easing cycle sooner rather than later.

Monthly U.K. data dump begins. Labor market data will be reported Tuesday. Average weekly earnings ex-bonuses are expected to rise a tick to 6.1% y/y in April and track above the Bank of England’s Q2 projection of 5.1% y/y. Faster wage growth will keep the BOE cautious from easing too early.

Real sector data will be reported Wednesday. GDP is expected to stagnate after growing 0.4% m/m in March. Risks are skewed to the downside because of the weather-related slump in April retail sales volumes. Elsewhere, IP is expected at -0.1% m/m vs. 0.2% in March, services is expected at -0.1% m/m vs. 0.5% in March, and construction is expected flat m/m vs. -0.4% in March.

Norway reports May CPI Monday. Headline is expected at 3.3% y/y vs. 3.6% in April, while underlying is expected at 3.9% y/y vs. 4.4% in April. Overall, inflation is tracking marginally lower than the Norges Bank’s forecast but is still well above the 2% target, suggesting the bank is in no rush to loosen policy. Indeed, the Norges Bank pointed out last month that “the data so far could suggest that a tight monetary policy stance may be needed for somewhat longer than previously envisaged.” Next meeting is June 20, and no change is expected then. However, updated macro forecasts should give some clues as to when it may start easing.

Sweden reports May CPI Friday. Headline is expected at 3.4% y/y vs. 3.9% in April, CPIF is expected at 2.1% y/y vs. 2.3% in April, and CPIF ex-energy is expected at 2.6% y/y vs. 2.9% in April. At the last meeting May 8, the Riksbank started the easing cycle with a 25 bp to 3.75% and noted that inflation is approaching the 2% target while economic activity is weak. The Riksbank underscored its dovish forward guidance by saying that “If this outlook still holds, the policy rate could be cut two more times during the second half of the year, in line with the March forecast.” Next meeting is June 27, and no change is expected then. However, a 25 bp cut in August is fully priced in.

ASIA

Two-day Bank of Japan meeting ends Friday with an expected hold. All economists surveyed expect the BOJ to keep the policy rate target at 0 to 0.10%. The swaps market implies nearly 15% odds of a 10 bp hike this week, rising to over 70% odds in July. The BOJ will likely start or announce plans to begin reducing the amount of JGB purchases from the current roughly JPY6 trln per month pace. BOJ Governor Ueda noted recently that “it is appropriate for the Bank to reduce the amount of its JGB purchases as it proceeds with its exit from large-scale monetary easing.” Nevertheless, the bar for an aggressive BOJ tightening cycle is high because Japan underlying inflation is in a firm downtrend.

Revised Q1 GDP data will be reported Monday. We see downside risks after weak capex data were reported for Q1.

April current account data will be reported Monday. The adjusted surplus is expected at JPY2.08 trln vs. JPY2.011 trln in March. However, the investment flows will be of more interest. The March data showed that Japan investors stayed net buyers of U.S. bonds (JPY1.048 trln) for the fourth straight month and for seven of the past eight months. Japan investors stayed net sellers (-JPY188 bln) of Australian bonds for the third straight month and turned net buyers of Canadian bonds (JPY56 mln) for the first time after eight straight months of net selling. Investors remained net sellers of Italian bonds (-JPY115 bln) for the third straight month. Overall, Japan investors stayed total net buyers of foreign bonds (JPY407 bln) for the seventh time in eight months. With Japan yields likely to move higher in 2024, it’s possible that Japan investors will stop chasing higher yields abroad, but it hasn’t happened yet.

BSI Q2 business conditions survey will be reported Thursday. Conditions for large companies have been trending lower in recent quarters.

Australia highlight will be May jobs data Thursday. Consensus sees 30k jobs added vs 38.5k in April, while the unemployment is seen a tick lower at 4.0%. If so, this would remain below the lower end of the RBA’s estimated full employment range of 4.0-5.75% and in line with the RBA’s projection. Overall, the labor market is easing very gradually, thereby curbing expectations the RBA will cut rates this year.