Inflation Data In the Front Seat
- The US and EU inflation data take the spotlight today.
- Japan will disclose its FX intervention operation data for May.
- China’s May PMI print points to a sluggish growth outlook.
USD rebounded slightly from yesterday’s lows and Treasury yields are modestly lower. Today’s US April Personal Income and Outlays report can spark kneejerk moves in USD and Treasuries (1:30pm London).
US headline and core PCE are projected to remain at 2.7% y/y and 2.8% y/y, respectively. The Cleveland Fed’s inflation Nowcast model sees both headline and core at 2.7% y/y. Risks are skewed to the upside as PPI ex-trade, transportation, and warehousing (used in PCE calculations) accelerated to 4.4% y/y in April, matching the August 2023 high.
Meanwhile, US personal income is projected to rise 0.3% m/m vs. 0.5% in March and real personal spending is expected to be flat after rising 0.5% in March. We see downside risk to personal spending following the 0.3% m/m decline in control group retail sales in April.
Fed officials’ comments overnight did not move the needle on Fed funds futures. Dallas Fed President Lorie Logan (non-voter) noted that maybe “policy is just not as restrictive as we think it might have been relative to the level of interest rates before the pandemic”, adding “it’s really important to keep all options on the table”. For his part, New York Fed President John Williams believes there’s “ample evidence that monetary policy is restrictive in a way that helps us achieve our goals”. Fed funds futures continue to price-in roughly 80% probability of a first cut in November.
EUR will be guided today by the Eurozone May preliminary CPI data (10:00am London). Headline CPI is forecast to rise a tick to 2.5% y/y and core CPI is projected to remain a 2.7% y/y. Risks are skewed to the upside because the EU Harmonized inflation prints for Germany, France, and Spain overshot expectations. Regardless, the Eurozone disinflationary process is well on track and supports the case for the ECB to begin easing in June which is a headwind for EUR.
GBP/USD retraced part of yesterday’s gains and ignored encouraging UK economic data. UK nationwide house prices increased more than expected by 0.4% in May (consensus: 0.2%) after falling 0.4% in April to be up 1.3% year-over-year. Meanwhile, the Lloyds Business Barometer index surged to its highest level since November 2015 and suggests the BOE will not be in a rush to loosen policy. Interest rate futures continue to price-in a first 25bps BOE policy rate cut in November. The UK April money and credit data is up next (9:30am London).
USD/JPY is consolidating near recent lows around 156.60. Japan economic data released overnight were mixed. Tokyo May CPI inflation (a leading indicator of the national CPI) rose in line with consensus. Headline CPI pick-up four ticks to 2.2% y/y and core ex-fresh food rose three ticks to 1.9% y/y. Core ex-food & energy dipped a tick to 1.7% y/y (consensus: 1.8%), reinforcing the view that underlying inflation is in a firm downtrend and that the bar for an aggressive BOJ tightening cycle is high. The other data showed retails sales rose twice as much as expected by 1.2% m/m in April after falling by the same amount the previous month. However, industrial production unexpectedly declined 0.1% m/m in April (consensus: 1.5%) following a 4.4% increase in March.
Japan’s Ministry of Finance will disclose its FX intervention operation data for May today (11:00am London). The BOJ is suspected to have intervened to curtail JPY weakness on April 29 and May 1.
Canada’s Q1 GDP report will be a key input in next week’s Bank of Canada (BOC) policy rate decision (1:30pm London). Real GDP is expected to rise at a quarterly annualized rate of 2.2% in Q1. The BOC pencilled-in 2.8% growth driven by exports and consumption spending. The decline in retail sales volumes in February and March points to downside risk to the BOC’s forecast. Interest rate futures imply a 77% probability of a BOC rate cut on June 5.
China’s May PMI print points to a sluggish growth outlook. The official composite PMI fell to 51.0 vs. 51.7 in April and the manufacturing PMI surprisingly dropped below the 50 boom/bust threshold to 49.5 (consensus: 50.5, prior: 50.4). Also, growth momentum in the non-manufacturing sector unexpectedly slowed as the PMI dipped a tick to 51.1 in May (consensus: 51.5).
Structurally, China’s economy remains constrained by a huge debt overhang and a burst property bubble. With the PBOC still in easing mode and the Fed staying hawkish, downside pressure on CNY and CNH are intact.