The Growth Chronicles

June 21, 2024

The Growth Chronicles

  • The spotlight today is on growth momentum with the release of June PMI readings for the EU, UK, and US.
  • UK retail sales soar in May. But likelihood of BOE rate cut in August still in play.
  • Japan reports cooler than expected inflation in May.

 

USD is retreating from yesterday’s high. USD rallied yesterday and Treasuries briefly sold-off after the June Philadelphia Fed manufacturing business outlook survey showed firms reported increases in prices.

More importantly, the Fed’s policy divergence with other major central banks deepened in support of a firm USD. Yesterday, the Swiss National Bank (SNB) delivered a dovish cut, and the Bank of England (BOE) delivered a dovish hold. Specifically, the SNB trimmed slightly its longer-term inflation forecasts opening the door for an additional rate cut by year-end. Meanwhile, the BOE’s minutes showed that higher-than-expected UK services inflation may not deter the BOE from easing in August.

Monetary policy divergence also underpins a higher NOK versus SEK. The Norges Bank delivered a hawkish hold yesterday. The Norges Bank pushed out the timing of a first rate cut to Q1 2025 from Q3 2024 previously and penciled-in just one 25 bp cut in the next twelve months. In contrast, the Riksbank started easing in May and expects to cut the policy rate two more times during the second half of the year.

Today, the June PMI readings for the US, EU, and UK will show whether growth momentum still favors the US economy. If so, bond yield spreads between the US and other major economies can widen further in support of the cyclical USD uptrend. However, weaker US growth momentum will likely hold-back USD strength in the near-term.

The Eurozone HCOB preliminary composite PMI is expected to rise three ticks to 52.5 (9:00am London). France and Germany’s PMIs are released earlier (8:15am and 8:30am London, respectively). The UK S&P Global preliminary composite PMI is projected to remain at 53.0 (9:30am London). The US S&P Global preliminary composite PMI is forecast to fall a full point to 53.5 (2:45pm London).

GBP/USD ticked-up slightly following the outstanding UK May retail sales report. Retail sales volumes surged 2.9% m/m (consensus: 1.8%) following a -1.8% print in April (revised from -2.3%). Excluding volatile automotive fuels, retail sales also overshot expectations rising 2.9% m/m (consensus: 1.8%) and April’s decline was revised lower to -1.4% from -2.0%. The BOE will welcome the recovery in consumer spending activity. Nonetheless, as long as the UK’s disinflationary trajectory is intact, we expect the BOE to pull the easing trigger in August which can further weigh on GBP. The swaps market sees 64% odds of an August BOE rate cut.

USD/JPY is firmer near 159.00, roughly one big figure away from its April 29 pre-intervention high of 160.17. Japan’s May CPI and June PMI prints suggest the bar for an aggressive Bank of Japan (BOJ) tightening cycle is high.

Japan underlying inflation is in a firm downtrend and nearing the bank’s 2% target. Annual core CPI (ex-fresh food & energy) slowed more than expected to 2.1% (consensus: 2.2%, prior: 2.4%), the lowest rate since September 2022. Also, the pick-up in annual headline and core (ex-fresh food) CPI inflation undershot forecast. Headline and core (ex-fresh food) CPI rose to 2.8% (consensus:2.9%, prior: 2.5%) and 2.5% (consensus: 2.6%, prior: 2.2%), respectively, on higher utility fees for electricity and gas.

Furthermore, the Jibun Bank Flash Japan composite PMI shows business activity stalled in June reflected by the neutral 50.0 print. The services PMI fell to 49.8 from 53.8 in May consistent with a modest contraction in economic activity and the manufacturing PMI eased three ticks to 50.1.

Bottom line: the BOJ is unlikely to tighten more than is currently priced-in. The swaps market implies a policy rate of 0.40% over the next 12 months. As such, Japan real bond yields will remain negative and a drag on JPY.

CAD will partly be driven today by Canada’s April retail sales report (1:30pm London). Statistics Canada’s advanced retail indicator suggests sales increased 0.7% m/m after falling -0.2% in March. Overall, the economy is slowing and supports further easing by the Bank of Canada. The swaps market implies 58% odds of a July policy rate cut.

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