Markets Continue to Tread Water Ahead of Core PCE Data

June 25, 2021
  • U.S. yields and the dollar remain subdued; we are agreement with Bullard and Kaplan's comments yesterday and look for tapering by end-2021; core PCE for May will be reported; President Biden announced a tentative infrastructure deal with a group of ten centrist Senators from both parties; Mexico took the plunge into the hawkish camp with a surprise 25 bp rate hike yesterday to 4.25%; Brazil quarterly inflation report reinforced the trajectory of hikes from the statement
  • BOE delivered a dovish hold; Europe ends the week on a quiet note
  • Japan reported June Tokyo CPI

The dollar continues to tread water ahead of key inflation data. DXY is modestly lower but has remained stuck all week just below 92.. The euro is having trouble breaking above $1.1950, while sterling remains heavy near $1.39 after the dovish BOE decision (see below). Lastly, USD/JPY continues to trade near 111. The March 2020 high near 111.70 is the next target, followed by the February 2020 high near 112.25 and the April 2019 high near 112.40.


U.S. yields and the dollar remain subdued. Yet we continue to stress that global liquidity is at an inflection point, as this week's hawkish central bank outcomes suggest. Czech Republic, Hungary, and Mexico all began normalizing policy this week. While it's mostly small countries (EM, UK, Canada) removing some accommodation, we think the Fed is on deck. If anything, the market’s muted reaction to its intensified tapering talk suggests the Fed will have more confidence to initiate the tapering process, as long-term yields remain low and inflation expectations have fallen.

We are agreement with Bullard and Kaplan's comments yesterday and look for tapering by end-2021. Rate hikes are a bit trickier but we see lift-off by end-2022. Of note, Bullard yesterday said he sees inflation “meaningfully” over the 2% target over the forecast horizon and sees risk of continued upside surprises. He admitted that his “dot” sees a hike at the end of 2022. Bullard has gone full circle from hawk to uber-dove and now back to hawk. Kashkari, Mester, Rosengren, and Williams all speak today.

The Fed’s preferred inflation measure core PCE for May will be reported. It is expected at 3.4% y/y vs. 3.1% in April. If so, it would be the highest since April 1992 and further above the 2% target. Of note, core PCE has not remained above the 2% target on a sustained basis since the 2004-2008 period, which is when the Fed last undertook a conventional tightening cycle. Personal income and spending will be reported at the same time and are expected at -2.5% m/m and +0.4% m/m, respectively. Final June University of Michigan consumer sentiment (86.5 expected) will also be reported.

President Biden announced a tentative infrastructure deal with a group of ten centrist Senators from both parties. The compromise plan calls for $579 bln in spending over five years and will focus mostly on “traditional” infrastructure projects. The White House said the plan includes a range of programs to boost investment in public transit, repair roads and bridges, build a network of 500,000 chargers for electric vehicles, and many others. The plan will be financed by a variety of revenue-raising measures, including stronger enforcement of tax collection from the wealthy, sales from the Strategic Petroleum Reserve, unspecified “public-private partnerships,” and the assumption that the infrastructure investment will lead to stronger economic growth. No tax hikes are being mentioned and so we expect at least another five Republican Senators to support it, giving them the needed 60 votes to pass. Of note, reports suggest there will be separate legislation that would spend more funds on what Biden has called “human infrastructure” that the GOP has so far opposed.

The U.S. growth outlook for Q2 remains strong. The Atlanta Fed’s GDPNow model forecasts Q2 growth at 9.7% SAAR vs. 10.3% previously, while the New York Fed’s Nowcast model currently shows Q2 growth at a more modest 3.7% SAAR vs. 4.2% previously and Q3 growth at 4.5% SAAR vs. 5.3% previously. Both models will be updated today. Of note, Bloomberg consensus sees 10.0% growth in Q2, easing to 7.0% in Q3 and 5.0% in Q4, all in SAAR terms. The Q1 revision yesterday saw growth steady at 6.4% SAAR but this is way in the rear-view mirror.

Weekly jobless claims data were mixed. Initial claims came in at 411k vs. 380k expected and a revised 418k (was 412k) the previous week, while continuing claims came in at 3.39 mln vs. 3.46 mln expected and a revised 3.534 mln (was 3.518 mln) the previous week. The continuing claims data were for the BLS survey week containing the 12th of the month and point to a solid job report next Friday. Of note, consensus for June NFP is currently at +695k vs. +559k in May and has been steadily ticking higher this past week.

Banco de Mexico took the plunge into the hawkish camp with a surprise 25 bp rate hike yesterday to 4.25%. The meeting came on the heels of a higher-than-expected inflation prints, with the bi-weekly headline CPI coming in just over 6.0% y/y. The decision was agreed by only three of the five members, so it was a close call. We suspect that the hawkish shift by the Fed gave the more vocal MPC members in Banxico the necessary cover to pull the trigger and get ahead of any risk of rising inflation expectations. Banxico’s and the market’s base case is still for current inflation pressures to prove transitory and to peak soon, meaning that we probably shouldn’t expect a protracted tightening cycle, not even close to what we will get in Brazil for example. Still, the peso reacted positively to the news, appreciating nearly 2% over the last two sessions.

Brazil central bank’s quarterly inflation report reinforced the trajectory of hikes from the statement. However, we don’t yet see a strong argument for increasing the size. The report bumped up its GDP growth forecast from 3.6% to 4.6% for this year and increased the inflation forecast for the entire horizon. It sees inflation peaking at 8.5% in August before drifting lower to close the year just below 6.0%. The bank then forecasts benign target-bound inflation readings at 3.5% for 2022 and 3.3% for 2023. Separately, the National Monetary Council announced a reduced inflation target for 2024, from 3.25% to 3.00%, with the usual +/- 1.5 percentage point range. No surprise here. Brazil reports mid-June IPCA inflation shortly. Headline inflation is expected at 8.16% y/y vs. 7.27% in mid-May. If so, this would be the highest since 2016 and further above the 2.25-5.25% target range.


Bank of England delivered a dovish hold. While no one was expecting any policy changes after it announced the start of tapering at its last meeting, the dovish tone took many by surprise. The bank warned against “premature tightening” due to its view that the spike in inflation is temporary, noting that “Financial market measures of inflation expectations suggest that the near-term strength in inflation is expected to be transitory.” The bank reiterated that it does not intend to hike rates until inflation has risen above the 2% target for a sustained period. This was the last meeting for Chief Economist Haldane, who again was the lone vote to cut the size of QE to GBP825 bln. Despite the dovish hold, the short sterling futures strip still suggests some odds of the first hike in Q4 2021, rising significantly in Q1 and priced by Q2 2022. Elsewhere, the CBI reported firm results of its June its distributive trade survey, with retailing reported sales coming in at 25 vs. 11 expected and 18 in May.

Europe ends the week on a quiet note. Germany reported firm GfK July consumer confidence, coming in at -0.3 vs. -4.0 expected and a revised -6.9 (was -7.0) in June. ECB’s Hernandez de Cos speaks. Virtually all of these ECB speakers this week were in the dovish camp and so we got a lot of headlines downplaying the need to slow asset purchase. Despite the cyclical pickup in the eurozone economy, policymakers remain concerned about removing accommodation too early.


Japan reported June Tokyo CPI. Headline inflation was flat y/y vs. -0.3% expected and -0.4% in May, while core (ex-fresh food) was flat y/y vs. -0.1% expected and -0.2% in May. The readings suggest upside risks to the national CPI when it is released July 20. While price pressures are ticking higher, Japan stands out as one of the few nations that are not experiencing significantly higher inflation. Next BOJ meeting is July 15-16. No change is expected then. There will be new macro forecasts but there are unlikely to be any significant changes. The latest ones from the April meeting see targeted core inflation is seen at 0.1% for FY2021, 0.8% for FY2022, and 1.0% for FY23, which was just added to the forecast horizon. Recent inflation data suggest no substantive changes in the forecasts are necessary. The bottom line is that inflation is likely to remain below the 2% target through FY23 and so the BOJ has signaled that it intends to keep policy accommodative until FY24 at least. That message won’t change at the July meeting.

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