Drivers for the Week of June 13, 2021

Here's a look at the main drivers in Developed Markets this week.
  • U.S. rates continue to fall despite ongoing upside surprises in inflation; the two-day FOMC meeting ends with a decision Wednesday afternoon; May PPI will be reported Tuesday; May retail sales data Tuesday will be the data highlight of the week; June Fed manufacturing surveys will start to roll out; Canada reports some key data
  • It’s a quiet week for the eurozone; the euro has been soft since the dovish ECB hold last week; the U.K. has another key data week; SNB meets Thursday and is expected to keep rates steady at -0.75%; Norge Bank meets Thursday and is expected to keep rates steady at 0%.
  • The two-day BOJ ends with a decision Thursday; Japan reports May trade and April core machine orders Wednesday; RBA minutes will be released Tuesday; Australia reports May jobs data Thursday

The dollar is building on its recent gains. DXY is up for the fourth day out of the past five and is trading back near the June 4 high around 90.627. After that is the May 13 high near 90.907 and then the May 5 high near 91.436. The euro is trading heavy in the wake of the dovish ECB decision just below $1.21 and a clean break below would set up a test of the May 13 low near $1.2050 and then the May 5 low near $1.1985. Sterling is trading just above $1.4, while USD/JPY is starting to creep higher towards 110 after being stuck around 109.50 all last week. That the dollar is gaining despite lower U.S. yields (see below) is noteworthy. We believe the fundamental story favors the dollar and that this week’s U.S. data and FOMC meeting may be key for the next leg up in the greenback.

AMERICAS

U.S. rates continue to fall despite ongoing upside surprises in inflation. The 10-year yield is trading around 1.46% currently after trading as low as 1.43% late last week. There are many factors being cited with regards to the ongoing UST rally: strong foreign demand, strong domestic demand from fully-funded U.S. pension funds, heightened confidence in the Fed, and abundant liquidity as the Treasury reduces its cash balances. We suspect it is a combination of all these and then some. Yet when all is said and done, it is hard to justify U.S. yields remaining this low for much longer. There are plenty of potential triggers this week for a reversal in yields.

The two-day FOMC meeting ends with a decision Wednesday afternoon. We will be writing a preview Monday and we warn of a hawkish surprise. Is the Fed close to hiking? No. However, we see potential for a hawkish shift in the Dot Plots that moves median expectations for the first hike into 2023. We also believe that tapering may actually be mentioned in the official statement after informal discussions began at the last meeting in April. Lastly, the Fed will have to acknowledge the much higher than expected inflation numbers and reaffirm its commitment not to let inflation get out of hand. For now, the markets believe the Fed but we suspect this trust will start to fray after several more months of very high inflation.

May PPI will be reported Tuesday. Headline inflation is expected to remain steady at 6.2% y/y, while core is expected to rise to 4.8% y/y from 4.1% in April. After last week’s upside miss for CPI, there are clearly upside risks to these PPI readings. The Fed continues to say this spike in inflation is transitory. However, food and energy prices are soaring and are already feeding into higher core inflation. Of note, the Fed’s preferred inflation measure core PCE came in at 3.1% y/y in April, the highest since July 1992 and above the 2% target.

May retail sales data Tuesday will be the data highlight of the week. Headline sales are expected to fall -0.6% m/m vs. a flat reading in April, while sales ex-autos are expected to rise 0.4% m/m vs. -0.8% in April. The so-called control group used for GDP calculations is expected to fall -0.4% m/m vs. -1.5% in April. Sales are expected to soften as stimulus payments feed through. However, the labor market is probably in better shape than what the data is saying and so we think there are some upside risks to the retail sales data.

The U.S. growth outlook for Q2 remains strong. The Atlanta Fed’s GDPNow model forecasts Q2 growth at 9.3% SAAR vs. 9.4% previously, while the New York Fed’s Nowcast model currently shows Q2 growth at a more modest 4.2% SAAR vs. 4.4% previously. The New York Fed model also estimated Q3 growth and it currently stands at 5.3% SAAR vs. 5.4% previously. Of note, Bloomberg consensus sees 9.2% growth in Q2, easing to 6.8% in Q3 and 4.8% in Q4, all in SAAR terms. With more fiscal stimulus in the pipeline, the U.S. economic outlook remains strong.

June Fed manufacturing surveys will start to roll out. The Empire survey kicks things off Tuesday and is expected at 22.0 vs. 24.3 in May. Philly Fed follows up Thursday and is expected at 31.0 vs. 31.5 in May. May IP will also be reported Tuesday and is expected to rise 0.6% vs. 0.5% in April. The U.S. manufacturing sector remains strong.

Weekly jobless claims data Thursday should show continued healing of the labor market. Initial claims are expected to fall to 360k from 376k the previous week, while continuing claims are expected to fall to 3.421 mln vs. 3.499 mln the previous week. Both are at post-pandemic lows as claims data continue to edge lower each week. This week’s initial claims data will be for the BLS survey week containing the 12th of the month. If claims continue to fall, then another solid NFP number is likely. Of note, continuing claims are reported with a one week lag and so it will be the data next week that will be for the survey week.

Other minor data will fill out the week. April business inventories (-0.1% m/m expected) and TIC data will be reported Tuesday. May building permits (-0.2% m/m expected), housing starts (4.5% m/m expected), and import/export prices will be reported Wednesday. May leading index (1.3% m/m expected)will be reported Thursday.

Canada reports some key data. Highlight will be May CPI Wednesday. Headline inflation is expected to pick up a tick to 3.5% y/y, while common core inflation is expected to pick up a tick to 1.8% y/y. April manufacturing sales (-1.1% m/m expected) will be reported Monday, followed by May housing starts and existing home sales Tuesday and wholesale trade sales (-0.9% m/m expected) Wednesday.

EUROPE/MIDDLE EAST/AFRICA

It’s a quiet week for the eurozone. ECB asset purchases for the week ending June 11 will be reported Monday. Net purchases were EUR20.6 bln for the week ending June 4 vs. EUR20.0 bln for the week ending May 28 and EUR21.7 bln for the week ending May 21, and so it seems that the ECB is aiming for net purchases to average around EUR20 bln per week. Gross purchases were EUR21.3 bln for the week ending June 4 vs. EUR25.0 bln for the week ending May 28 and EUR23.7 bln for the week ending May 21.

The euro has been soft since the dovish ECB hold last week. With accelerated purchases to continue through Q3, we suspect the euro will have trouble getting much traction. Eurozone reports April IP Monday and is expected to rise 0.4% m/m vs. 0.1% in March. April trade data will be reported Tuesday, while May new car registrations will be reported Thursday.

The U.K. has another key data week. Last week’s data dump was mixed, with weakness in IP and construction output warranting further study. This week, labor market data will be reported Tuesday. May CPI data will be reported Wednesday, with headline inflation expected to pick up to 1.8% y/y vs. 1.5% in April and CPIH expected to pick up to 1.8% y/y vs. 1.6% in April. May retail sales will be reported Friday, with headline sales expected to rise 1.6% m/m vs. 9.2% in April and sales ex-auto fuel expected to rise 1.4% m/m vs. 9.0% in April. BOE tightening expectations have picked up as the recovery picks up steam. Of note, 

U.K. Prime Minister Johnson will reportedly delay the final stage of reopening. The official announcement will be made Monday as to whether the remaining curbs will be lifted as planned on June 21.

Swiss National Bank meets Thursday and is expected to keep rates steady at -0.75%. At its last meeting on March 25, the bank softened its language on the need to intervene in FX markets but still characterized the franc as still “highly valued.” It pledged to continue FX interventions “as necessary” rather than the stronger language introduced last year to intervene “more strongly.” Since March 25, CHF has gained 4.4% vs. USD and 1.6% against EUR. As such, the SNB may harden its language again on the need to intervene. The policy rate is likely to remain at -0.75% for the foreseeable future as SNB President Jordan stressed in March that “We have to continue with our expansionary monetary policy. The economic environment has to change considerably before we can think about changing monetary policy.”

Norge Bank meets Thursday and is expected to keep rates steady at 0%. The bank delivered a hawkish hold at the March 18 meeting and confirmed that stance at its last meeting on May 6. Rates were kept at zero but the bank updated its rate path in March to show hikes starting in Q4 2021 and the policy rate near 1.0% by mid-2023 and 1.5% by end-2024. That path was reaffirmed at the May meeting and should be reaffirmed this week. Last week, Norway reported headline inflation at 2.7% y/y vs. 2.9% expected and 3.0% in April, while underlying came in at 1.5% y/y vs. 2.0% expected and actual in April. The softer inflation readings suggest there is no need for the Norges Bank to get even more hawkish this week.

ASIA

The two-day Bank of Japan meeting ends with a decision Thursday. At the last decision April 27, it delivered a dovish hold as new forecasts were unveiled. The bank sees targeted core inflation at 0.1% (0.5% previously) for FY2021, 0.8% (0.7% previously) for FY2022, and 1.0% for FY23, which was just added to the forecast horizon. 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. There won’t be updated forecasts until the July 15-16 meeting and so this one is just a placeholder with no changes expected.

Earlier in the week, Japan reports May trade and April core machine orders Wednesday. Exports are expected to rise 50.9% y/y vs. 38.0% in April, while imports are expected to rise 26.5% y/y vs. 12.8% in April. Orders are expected to rise 2.5% m/m vs. 3.7% in March. Ahead of the decision Thursday, May national CPI will be reported that same day. Headline inflation is expected to pick up a couple of ticks to -0.2% y/y, while core (ex-fresh food) is expected to pick up a tick to flat y/y. The latest BOJ forecasts see targeted core inflation at 1.0% in FY23,suggesting no hikes until FY24 at the earliest.

RBA minutes will be released Tuesday. At that June 1 meeting, all policy settings were left unchanged and the RBA repeated existing forward guidance that rate hikes won’t be seen until 2024 “at the earliest.” Governor Lowe said that “Despite the strong recovery in the economy and jobs, inflation and wage pressures are subdued. The board is committed to maintaining highly supportive monetary conditions to support a return to full employment in Australia and inflation consistent with the target.” Lowe added that “An important ongoing source of uncertainty is the possibility of significant outbreaks of the virus, although this should diminish as more of the population is vaccinated. The board continues to place a high priority on a return to full employment.” The bank reaffirmed that it will decide at the next meeting July 6 whether to extend Yield Curve Control and shift its target from the April 2024 bond to the November 2024 bond. Governor Lowe speaks Wednesday.

Australia reports May jobs data Thursday. Consensus sees a 30k gain, which would basically reverse the -30.6k drop in April. Elsewhere down under, New Zealand reports Q1 current account data Wednesday. The deficit is expected to widen to -2.1% of GDP from -0.8% in Q4. Q1 GDP data will be reported Thursday, with growth expected at 0.5% q/q vs. -1.0% in Q4. Next RBNZ meeting is July 14 and no change is expected then after it delivered a hawkish hold at the last meeting May 26. The bank caught markets off guard then by projecting the first rate hike in H2 2022. The bank sees the average OCR rising to 0.67% by end-2022, implying 1-2 hikes, and then to 1.78% by mid-2024, the end of the forecast period.

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