NOTE: Previews are listed in day-order
RBA POLICY DECISION (TUE): The Reserve Bank of Australia is expected to maintain the Cash Rate Target and 3-Year Yield Target (NYSE:TGT) at 0.10% at next week’s meeting. However, the focus will be on the central bank’s intentions regarding future bond purchases with the current program valued at AUD 100bln at a weekly pace of AUD 5bln which is set to be depleted in September, while policymakers will also decide whether to retain the April 2024 bond for the 3yr yield target or switch to the next maturity.
The central bank has continuously reiterated guidance that suggests rates will likely stay at the current level in the near-term as it noted at the last meeting that the Board will not increase the Cash Rate until actual inflation is sustainably within the 2%-3% target range and that it is committed to maintaining highly supportive monetary conditions to support a return to full employment and for inflation to be consistent with the target, but added that the labour market is unlikely to be tight enough to spur materially higher wage growth until 2024 at the earliest.
The RBA had also previously announced that it will decide at the upcoming meeting if it is to roll over to the November 2024 bond for its 3yr yield targeting and whether to extend bond purchases whereby the options include another round of AUD 100bln, scaling back purchases or spreading them out, and also discussed an approach of reviewing bond purchases more frequently depending on the data. The prior comments from Governor Lowe point to a likely extension as he stated it was premature to consider ending bond purchases and that the economy is still in a recovery stage with some way to go yet.
Lowe also noted that inflation pressures remain subdued which is likely to persist and suggested wage growth was constrained as firms focus on reducing costs.
Nonetheless, the latest data releases have been encouraging as Q1 GDP printed firmer than expected with Q/Q growth at 1.8% vs. Exp. 1.5% and Y/Y at 1.1% vs. Exp. 0.6%, while jobs data smashed expectations with the Employment Change at 115.2k vs. Exp. 30.0k led by a 97.5k increase in Full Time Employment and the Unemployment Rate declining to 5.1% from 5.5% which all supports the narrative of a quicker than anticipated rebound for the economy.
In terms of the various desk forecasts, ANZ Bank expects the RBA to tighten in 2 phases in H2 2023 to lift the cash rate to 0.50%, while CBA expects the RBA to raise the Cash Rate in November 2022 in which it sees the Cash Rate Target at 0.5% in late-2022 before peaking at 1.25% by Q3 2023, but recently noted that various lockdowns in Australia have lowered the chances that the RBA will reduce its QE purchases by 50% at next week's meeting. Westpac also anticipate the RBA to commence its tightening cycle in Q1 2023 and for the central bank to shift to a flexible QE regime, but does not expect the RBA to extend the yield target to November 2024 which is a view similarly held by ANZ Bank.
US ISM SERVICES PMI (TUE): The headline index is expected to fall modestly to 63 in June from a record 64 in May, when rising order backlogs and increased delivery times buoyed the print. In the prior release, the forward-looking New Orders component rose modestly to 63.9, Prices Paid rose to 80.6, Employment fell to 55.3, and Business Activity rose to 66.2. Meanwhile, the Flash Markit Services PMI for June, which can be used as a proxy, saw a larger fall than expected to 64.8 from 70.4 (exp. 70.0).
The Markit report noted similar themes that have been seen throughout the economy recently, "... struggles among companies to find suitable workers hampered employment growth in June. Although strong, the rate of job creation was the slowest for three months. Pressure on capacity was reflected in a solid rise in backlogs of work". The Markit report also noted some concerns around the impact of rising inflation over the coming months.
It's also worth noting that the ISM Manufacturing print for June, another proxy, saw a slight decline to 60.6 from 61.2, but with the headline still remaining well in expansionary territory, while the Prices Paid component rose to 92.1, the highest since 1979, although Employment fell into contraction.
FOMC MINUTES (WED): The June FOMC caught the market by surprise after the accompanying Dot Plot saw multiple 25bps hikes pencilled in for 2023 via the median dot, and an increasing number of dots forecasting a hike as soon as 2022 from the current Zero Lower Bound.
The Core PCE inflation forecast was unsurprisingly bumped up to 3.0% from 2.2% following a string of hot inflation prints, although the Fed still sees that fading into next year. The statement was little changed, although did acknowledge progress on vaccinations, whilst continuing to express the need for support until its "average 2% over the longer run" and maximum employment goals have been met.
Market participants are looking out for when the QE tapering process would begin and in what manner. Chair Powell said in his Q&A that this was the "talking about talking about" tapering meeting, noting that progress has been made, but there is still a ways to go; said it will be appropriate to consider a plan for tapering at the coming meetings if progress continues.
In wake of the meeting, most of the core Fed members (permanent voters) have stressed that the labour market is not close to "substantial further progress" and have been cautious not to express urgency in tapering ambitions. However, there has also been a fair amount of regional Fed Presidents which have shown more urgency to get purchase tapering underway, and given Powell's comments at the Q&A, the Minutes should reflect the common view that tapering discussions should begin in the coming meetings.
A talking point among some officials in recent weeks has been on the mechanics of tapering, and whether or not it should be completed before rate lift-off, although a large majority agree any hikes should not take place until there are no more asset purchases.
Nonetheless, the Minutes could give us some more details around the tapering debate: a timeline; the pace of tapering (i.e. USD 10/bln per month); whether to reduce MBS purchases first given the booming housing market.
Finally, the June meeting saw the IOER and RRP (administered rates) hiked by 5bps each in an effort to address money market issues as many STIRs had been flirting with negative rate territory, despite the target EFFR holding relatively firm. The Minutes should provide some colour around the decision, which was also somewhat unexpected, as the Fed appears to be showing some greater concern about where other money market rates trade aside from its benchmark EFFR.
ECB MINUTES (THU): As expected, the ECB stood pat on rates whilst pledging to conduct purchases under the PEPP at a “significantly higher pace” than during the first months of the year. At the accompanying press conference, Lagarde struck an optimistic tone on the economic environment with the ECB judging risks surrounding the economic outlook to be "broadly balanced" (prev. "tilted to the downside").
This sentiment was reflected in the accompanying macro projections which saw 2021 and 2022 GDP forecasts upgraded to +4.6% (prev. +4.0%) and +4.7% (prev. +4.1%) respectively; 2023 was held at 2.1%. Inflation is set to remain below target over the forecast horizon with a 2023 projection of just 1.4% (2021 and 2022 seen at 1.9% and 1.5% respectively).
Aside from the macro backdrop, financing conditions in the Eurozone remain a key focus at the Bank, on which Lagarde noted that conditions remain broadly stable but could tighten if market rates increase. In terms of the decision-making process, Lagarde noted that policy decisions had unanimous support, albeit there were some diverging views on the pace of purchases. As such, market participants will be eyeing the account from the meeting to see how these views are split across the GC.
Note, source reports in the aftermath of the meeting suggested that three policymakers wished to slow the pace of PEPP purchases with differing views over bond-buying needs amid thin summer markets. Additionally, sources highlighted policymakers noting upside risks to the inflation outlook; any further colour on this front from the account could be helpful in shaping market expectations in the coming months.
CHINESE INFLATION (FRI): The June release will be of interest as it will encapsulate China’s crackdown on the rise in base metal prices amid Beijing’s concerns over PPI spilling over to CPI. There is currently no consensus for the release, but the gauge for China’s factory gate prices has been running hot. PPI for May printed at 9.0% YY vs the 6.8% figure in April and was driven by strong external demand and a surge in commodity-related prices such as petroleum and natural gas extraction and smelting and processing of metals.
Furthermore, recent views on PPI have been mixed, as Capital Economics (prior to the last release) anticipated much of the recent surge to be transitory and for industrial metal prices to ease later this year, while Pantheon Macroeconomics expected PPI to continue increasing faster than implied due to base effects.
UK GDP ESTIMATE (FRI): M/M GDP for May is expected to print at +1.7% vs. April's +2.3% with the report taking place in the context of additional lockdown easing measures for the hospitality sector. Ahead of the release, Oxford Economics notes that some of the growth momentum might have been mitigated by expenditure switching from "shopping to socialising".
The consultancy supports this view by noting that retail sales in May fell 1.4% M/M; the first decline since January. That said, as pent-up demand continues to come into play, an expansionary reading is still on the cards. From a policy perspective, the release is unlikely to have too much sway on the MPC's decision-making ahead of the August meeting with timelier survey/payments data of greater interest to market participants.
CANADIAN LABOUR MARKET REPORT (FRI): Currently there is no expectation for the Canadian jobs headline, but hopefully it will be better than May’s report amid a reopening economy.
May saw overall employment fall 68k, consisting primarily of part-time jobs which declined 54.2k, although full-time jobs still fell by 13.8k, leaving the unemployment rate at 8.2%. Analysts at Canadian bank RBC are expecting a “bounceback” in employment with the reference week (13-19th June) likely to capture reopenings in several provinces, particularly Ontario opening non-mall retail on June 11th.
The desk is looking for 200k gains after the losses seen in both April/May amid lockdowns, but the forecast would not completely offset the two months of losses which saw a cumulative decline of 275k.
RBC notes that the job gains should be driven by low average hours in areas that have been hit hard amid the pandemic, such as the retail/leisure sectors. RBC looks for the unemployment rate to fall to 7.7% from 8.2% in May amid a 100k rise in the labour force.
IRANIAN NUCLEAR TALKS (TBC): The parties could resume JCPOA talks in the upcoming week, according to the Russian representative at the discussions, although no date has yet been fixed for the seventh round of negotiations. Optimism surrounding an imminent deal has somewhat faded for now as neither Washington nor Tehran are willing to concede enough ground to come to an accord.
The situation has been further complicated by the expiration (and no extension) of the IAEA-Iran monitoring deal. Iran said it has no obligation to respond to IAEA's request regarding the extension of the monitoring deal, whilst the US has indicated it would be an extremely complicating factor if Iran did not extend technical understanding with IAEA.
A US State Department official also noted that the US still has serious differences with Iran on the possible resumption of compliance with JCPOA, whilst noise surrounding the talks has also quietened for now. Since the last round, Iran has also named a new president, Raisi, although officials and analysts suggest that this should not shift the dials much as Supreme Leader Khamenei still calls the shots.