Weekly Market Outlook (May 20-24)

EVENTS TO COME:

• Monday: PBoC LPR, Waller of the Fed.
• Tuesday: Minutes of the RBA meeting, IPC Canada.
• Wednesday: RBNZ policy decision, UK CPI, FOMC minutes.
• THURSDAY: New Zealand Q1 retail sales, Australia/Japan/Eurozone/UK/US flash PMIs, Eurozone negotiated wage growth in Q1, US jobless claims.
• Friday: Japan CPI, UK retail sales, Canadian retail sales, US durable goods orders.

Monday

The PBoC is expected to leave the 1-year and 5-year LPR rates unchanged at 3.45% and 3.95%, respectively. Last week, the central bank kept the MLF rate unchanged at 2.50%, which is generally a reliable precursor for a change in LPR rates. We have received mixed economic data recently, but overall it appears that the PBoC does not have a pressing reason to ease policy further.

Tuesday

Canada’s year-over-year CPI is expected at 2.8% versus 2.9% previously, while the M/M figure is expected at 0.5% versus 0.6% previously. The focus, however, will be on underlying inflation measures, as this is what matters most to the Bank of Canada.. The truncated one-year average CPI is expected at 2.9% versus 3.1% previously, while the median one-year CPI is expected at 2.7% versus 2.8% previously. Such numbers, or even lower numbers, should give the BoC enough confidence to make the first rate cut in June, as it would be within its target range of 1-3%.

Wednesday

The RBNZ is expected to keep the official rate (OCR) unchanged at 5.50%. The central bank has limited tolerance for extending the time needed to achieve its 1-3% inflation target.. The latest CPI report for the first quarter showed a further slowdown in inflation, while the labor market report saw a further rise in the unemployment rate and job losses in the first quarter. The market expects the RBNZ to ease policy in August, while the central bank continues to repeat that it does not plan to normalize policy until 2025.

UK one-year CPI is expected at 2.1% from 3.2% previously, while core one-year CPI is expected at 3.7% from 4.2% previously. The BoE is mainly focused on services inflation, so this will have the most impact on market expectations.. As a reminder, we will have another CPI report before the next BoE meeting, but if this week’s inflation data turns out to be good, the market will likely already be pricing in greater chances of a rate cut in June .

FOMC minutes are generally not as effective a release for moving the market because the market already knows what to expect
and it becomes obsolete by the time it comes out, as more data is released in the meantime. I would have expected this to be a market changer this time around, as the Fed could have refrained from mentioning the QT cut at the last meeting but included it in the minutes. Since they already communicated about the reduction during the last decision, I don’t see that the minutes are that important.

THURSDAY

Negotiated wage growth in the eurozone in the first quarter is what the ECB has been waiting for for months to give it more confidence in the inflation outlook. The data is unlikely to change their plan to make the first rate cut in June. because they’ve telegraphed it so hard in the meantime that it would be a really bad idea to go back at this point. Nevertheless, this could shape market expectations for the number of rate cuts for the rest of the year.

Thursday will also be Flash PMIs Day for many advanced economies, with the focus, as usual, on the Eurozone, UK and especially US PMIs:

• The Eurozone manufacturing PMI index is expected at 46.6 compared to 45.7 previously.
• Eurozone Services PMI expected at 53.5 versus 53.3 previously.
• UK manufacturing PMI 49.2 is expected versus 49.1 previously.
• UK Services PMI 54.8 expected vs. 55.0 previously.
• The American manufacturing PMI index does not reach consensus against 50.0 previously.
• US Services PMI 51.5 expected versus 51.3 previously.

U.S. jobless claims continue to be one of the most important releases to follow each week because they are a more timely indicator of the state of the job market. Indeed, disinflation reaching the Fed’s target is more likely with a weakened labor market.
A resilient labor market, however, could make achieving this goal more difficult.

Initial claims continue to hover around cycle lows, while continuing claims remain firm around the 1,800,000 level. This week, initial claims are expected at 220,000 compared to 222,000 previously, while it was not There is no consensus at the time of writing for continuing claims, although the previous publication showed an increase to 1,794,000 compared to 1,785,000 expected and 1,781,000 previously.

Friday

Japan’s YoY Core CPI is expected at 2.2% versus 2.6% previously, while there is no consensus on the headline and Core-Core numbers at the time of writing. . This report generally does not influence the market because we have the opportunity to know the Tokyo CPI weeks in advance, which is a leading indicator of the national CPI figures.. Either way, surprises could impact the market, but it seems increasingly likely that the BoJ will not be able to raise rates further this cycle.