US: Favour a hawkish hold, but Tuesday's core inflation will be key
Next week is a major one for US economic events and data. The Federal Reserve’s FOMC meeting on Wednesday is the highlight. After the May 3rd decision – where Fed Chair Jerome Powell hinted that after 500bp of hikes in 14 months, they could pause at the June meeting – markets started to price in aggressive cuts for later in the year. However, over the subsequent 6 weeks, activity has remained resilient, inflation continues to run hot, payrolls jumped 339,000 and the Australian and Canadian central banks surprisingly hiked rates. Hawkish comments from a few Fed officials have added to the sense that they may not be done. Markets are currently pricing a 33% chance of a 25bp hike at the June meeting, while only around 1 in ten economists are looking for an increase.
There is an intense debate within the Fed and there is likely to be dissent, but we favour a hawkish hold, with the central bank leaving the door open to additional hikes if inflation fails to show signs of softening and the jobs market remains hot. However, should core inflation (released on Tuesday) come in at 0.5% month-on-month – or 0.6% rather than the 0.4% consensus expectation – then the odds would likely swing in favour of a hike on Wednesday, as the measure would be heading in completely the wrong direction.
The other major reports will be published after the Fed’s decision, with retail sales and industrial production due for release on Thursday and the University of Michigan consumer sentiment on Friday. Auto sales are likely to drag retail sales into negative territory. Meanwhile, industrial production is likely to come in flat to lower after a surprise 0.5% jump last month, given that the ISM manufacturing survey has been in contraction territory for seven straight months and lower oil and gas prices will have disincentivised oil and gas drilling activity.
UK: Wage growth key to Bank of England rate hike prospects
The news on wage growth has been getting slowly better recently, at least from the perspective of the Bank of England. Survey indicators suggest pay pressure is easing, while labour shortages appear to be less acute than they were a year ago. We expect the headline measure of wage growth, which excludes bonuses and compares the most recent three months to the same period last year, to edge higher – perhaps as far as 7%. But that’s partly a function of base effects, and if we look at a more timely measure of momentum in pay growth – comparing the latest three months to the three months prior – wage growth does appear to have peaked. The question is how long it will take to fall back towards pre-Covid levels, and we think this will be a slow process.
We expect a 25bp rate hike later this month, though for now, the jobs market data doesn’t scream the need for the Bank of England to take rates much higher than that. It does however suggest rate cuts are likely to take time to come through – and probably longer than in the US.
Eurozone: European Central Bank to hike rates by another 25bp
Macro developments since the May meeting have clearly had more to offer the doves than the hawks at the European Central Bank. Headline inflation has continued to come down but remains far off 2%, survey-based inflation expectations have also started to slow, growth has disappointed, and confidence indicators seem to have peaked. In previous times, such a backdrop would have been enough for the ECB to consider pausing rate hikes and waiting for the effects of the rate hikes so far to unfold fully. However, the central bank is now determined to err on the side of higher rates.
Despite recent decreases, actual headline and core inflation and expectations for a return to target in two years from now are clear arguments for the ECB to not only continue hiking by 25bp next week but also to keep the door open for rate hikes beyond then.
In terms of eurozone data, it’ll be an interesting week as well. After the revisions to GDP resulted in the mildest of recessions over the past two quarters, the question is whether 2Q will show much of an uptick. Industrial data out this week should show an improving trade balance for April as the stronger euro and lower energy prices will have helped. At the same time, industrial production experienced a very weak March but the potential for an uptick remains limited. For April, German data saw just a modest uptick and Netherlands and Spain posted sharp declines. That means that the view of the eurozone economy in 2Q is not necessarily strong for the moment…
Poland: Current account balance in surpluses
- Current account balance (April): EUR1257mn
More favourable terms of trade (lower prices of imported commodities) and softer domestic demand (falling households consumption, destocking) underpinned improvement in Poland’s foreign trend balance in recent months. After the beginning of this year, Poland has been running current account surpluses. We forecast that in April, the external balance was in surplus of €1257mn. We expect that exports of goods jumped up by 8.3% YoY, while imports fell by 6.3% YoY. Improving the trade balance is one of the factors behind recent PLN firming.
Czech Republic: Last inflation number in double-digit territory
Inflation in the Czech Republic for May will be published on Monday. We expect a month-on-month stagnation after a 0.2% decline in April, which should translate into a big drop from 12.7% to 10.7% YoY, mainly due to the base effect that comes into play in these months. In month-on-month terms, the main downward drivers are food (-1.0% MoM) and fuel (-4.2% MoM) prices. On the other hand, seasonal factors in tourism are pushing inflation up. However, we see downside risks especially in food and housing prices, which have the potential to collapse faster. In addition, inflation in Poland and Hungary is already indicating a clear downward bias for the May numbers. Looking ahead, for June we see a strong chance of inflation getting below 10%, confirming that the disinflationary pace is faster than expected at the start of this year.
Key events in developed markets next week
Key events in EMEA next week
This analysis was first published on Think.ing.com.