Key points to watch out for:
- This week, central banks will be very present with the Reserve Bank of Australia, the Swiss National Bank and the Bank of England.
- No cuts are anticipated, but there is room for surprises
- Retail sales will stand out in the U.S.
- Other data of interest, including PMI indices and CPI in the UK
Reserve Bank of Australia in trouble
The Reserve Bank of Australia (RBA) will be in the spotlight on Tuesday, June 18, when it is due to meet to make policy decisions for the month of June. Like its counterparts around the world, the RBA’s monetary policymakers expected their job to be much easier this year. However, the dark economic outlook coupled with inflation volatility has complicated the task of the monetary policy path.
Inflation has been rising gradually throughout the year, with monthly CPI rising to 3.6% y-o-y in April, reversing much of the noticeable drop seen in 2023. For its part, the labor market appears to be showing signs of tightening once again. However, questions about the strength of the overall economy have deterred rate hikers. GDP barely grew by just 0.1% during the first three months of the year.
At the May meeting, rate hikes were considered, although policymakers ultimately judged the risks to inflation estimates to be balanced. It is possible that the June statement will adopt a similar tone and that the policy rate will be maintained.
However, although in recent weeks investors have ruled out any possibility of a rate hike, the inflation trend in Australia remains more worrisome than in other countries and it may be too early to rule out a rate hike.
However, it is possible that a policy change will be made before the August meeting, when the new economic projections will be known. How long it takes for inflation to move back within the RBA’s 2-3% target range will be vital to any future rate decision.
In the meantime, any kind of reaction from the Australian dollar could be short-lived in a context where the fog continues about interest rate estimates in both the country and the United States.
Will the SNB cut again?
The Swiss National Bank surprised most investors when it cut rates in March, the first major central bank to do so in this cycle. Markets estimate about a two-thirds chance of another 25 basis point cut on Thursday, June 20, when the SNB meets to discuss quarterly issues.
However, the latest data do not point to the urgency of easing monetary policy so soon after the last move. GDP rose more than estimated in the first quarter and inflation accelerated to 1.4% for the month of April and remained unchanged for May.
The SNB has an inflation target between 0 and 2.0% and, should Swiss currency weakness be added to the equation, policymakers can afford to wait before cutting again. The outgoing president, Thomas Jorden, even pointed this out in recent remarks, in which he stated that the exchange rate is the likely source of inflation risks tilted to the upside.
Should the SNB keep rates unchanged at 1.50% and cast doubt on the estimate of a September cut, the franc could extend its latest attempt at a rebound against the US dollar.
Bank of England: dodging political crisis
The Bank of England will make a final policy determination this week hours later than the SNB, and it looks like it will be a non-event. The current general election campaign in the UK means that the Bank will not do or say anything that could affect voters with respect to any political leanings.
In reality, this could signal a relief for policy makers, who need more time to analyze the inflation outlook. Although UK CPI fell to 2.3% y-o-y in April, wage growth has been stable at 6.0% y-o-y, while services inflation has not fallen much from its peak levels. However, the labor market is clearly weakening, with the unemployment rate rising for four months in a row in March.
In August, not only will there be a new government in Downing Street with a new economic agenda, but the BoE will also be able to access updated forecasts. Consequently, it is likely that monetary policymakers will not even find it necessary to change their statement in June, focusing attention on the incoming data.
On Wednesday, June 19, the CPI figures for May will be released, which will then be followed on Friday, June 21, by retail sales figures for the same month, as well as preliminary PMI estimates for June.
Investors have currently set a near 40% chance of a cut for August, while a 25 basis point reduction is not fully priced in until November. Although markets could probably be underestimating the Bank of England’s eagerness to begin the easing cycle and, if CPI is below 2% for May, hopes of a rate cut by the summer will receive support.
For sterling, however, the data is far from encouraging and dovish statements after the July 4 election may only have a limited impact if expectations of a September Fed rate cut also rise. On the other hand, if investors believe that an early Bank of England taper is just a preview of the momentum to come and not a move towards a more noticeable easing path, the overall outlook for sterling may not change much.
U.S. retail sales in focus after a busy week
Last week, it was a confusing week for Fed watchers as a weak CPI report followed a hawkish Fed meeting. As for the dollar, its rally started a few days ago, since the jobs report. However, the most telling part of all of this is where Treasury yields ended up: at two-month lows, reflecting fear.
Simply put, market estimates have been moving between one and two rate cuts for a few weeks now, so the new dot plot indicating a single cut by 2024 didn’t signal much of a change in the outlook. Fed Chairman Jerome Powell left the door open to a September cut if further progress is made in reducing inflation before then. Additionally, officials estimated more cuts by 2025 than in the March dot plot.
But the trend could still tip in either direction, so retail sales figures on Tuesday, June 18, would be in a position to spoil current optimism if they indicate that consumer spending accelerated in May. Predictions point to 0.3% month-on-month, up from 0.0% in April.
Other second-tier data will be released in the United States this week. These are manufacturing indicators from the New York Fed and Philadelphia Fed, due on Monday, June 17, and Thursday, June 20, respectively; industrial production on Tuesday, June 18; building permits and housing starts on Thursday, June 20; and S&P global PMIs and existing home sales on Friday, June 21.
Euro expected to have a calmer week
Another currency that has seen some volatility in recent days has been the euro. Following far-right gains in connection with the previous weekend’s European Parliament votes and French President Emmanuel Macron’s surprise announcement to call early elections, a wave of dollar selling came briefly to the euro’s aid. This week, the euro’s hope for some support will be the preliminary PMI numbers due on Friday, June 21.
An upbeat set of surveys for June could underpin the single currency, as strengthening economic recovery would dispel hopes of a further rate cut by the ECB in the near term. Investors will also pay attention to quarterly wage data on Monday, June 17, final May CPI estimates on Tuesday, June 18, and Germany’s ZEW economic confidence index, due later in the day.
Japanese CPI and New Zealand GDP in the spotlight
In Japan, May inflation figures due on Friday, June 21, will draw investors’ attention to the yen. Trade figures on Tuesday, June 18, as well as preliminary PMI indices could also attract some attention.
The Bank of Japan decided last week to postpone a decision on cutting its bond purchases until the July meeting. This cautious attitude has sent the yen lower, but the CPI report could bring good news for the troubled currency. The underlying figure is expected to rise again to 2.6% year-on-year in May from 2.2% previously, which would help the Bank of Japan to continue tapering its stimulus policies.
On Thursday, June 20, first-quarter GDP will be most relevant for the New Zealand dollar, while on Monday, June 17, monthly data from China, including industrial production and retail sales, will determine the market mood.
