Central banks around the world will deliver their monetary policies this week including the Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England, along with central banks in Norway, Brazil, Taiwan, and Indonesia.
First up, all eyes will be on the Federal Reserve who will not only opine on its key policy rate but is also expected to share its interest rate projections via the dot plot. Changes in forecasts will be keenly scrutinized as the market expects the dot plots to portray a level of accommodation, particularly given recent Fed speeches amidst downbeat sentiment from other central banks, including the European Central Bank, and sluggish global growth expectations. The conundrum for the Fed will be whether or not to cut interest rates to shelter the U.S. economy from its escalating trade disputes. Despite a weaker-than-expected U.S. May jobs report and mounting trade uncertainty, the market largely expects the Fed to stand pat and leave the policy rate in the range of 2.25% to 2.50%. The 10-year U.S. Treasury is currently up +2bps to 2.108%.
Following the Fed, the Bank of Japan will take the spotlight. Some practitioners expect the BoJ to cut rates to -0.3% from -0.1%, especially as inflation remains weak. Trade tensions have impacted the world’s fourth-largest export economy, and it is expected that the bank will continue to find ways to stimulate the economy.
Finally, the Bank of England will wrap up the central bank circuit on Thursday. Three bank officials have recently clamored for rate hikes given higher inflation, despite continued questions surrounding Brexit. Conversely, other officials have argued that Brexit uncertainty is enough of a reason to delay raising the policy rate, which currently stands at 0.75%.
Moving beyond the central banks, the market will focus on key global data releases this week, which kicks off with housing data out of China and the ZEW economic sentiment surveys conducted in Germany. Other key releases include Japanese trade data, U.K. inflation, and retail sales. Closer to home, the market will pay attention to the Philadelphia Fed index and U.S. PMI manufacturing data.
Last week, geopolitical concerns drew the attention of market participants. Oil prices rose when two vessels carrying crude oil came under attack in the Middle East. White House officials alleged that Iran is responsible for the attacks, furthering strains between the two countries. Separately, tensions remained elevated between mainland China and Hong Kong after protests over a proposed extradition bill erupted in violence mid-week.
Global data, in particular, weak industrial production also weighed on the market last week. U.S. retail sales, however, provided a silver lining, with a strong showing in May and April’s data was revised higher. Given consumption accounts for more than two-thirds of the U.S. economy, the data served as some reprieve regarding ultimate Q2 GDP levels.
Elevated geopolitical risks coupled with generally weaker global economic data fueled a RISK-OFF sentiment last week. All three major U.S. stock indices closed the five-days in the red, with the S&P 500 closing the week at 2,886.98. Similarly, demand for Treasuries edged higher, pushing yields lower as the 10-year traded around 2.082% at the close.
Despite heightened geopolitical concerns in the Middle East, oil prices dropped over the week on the back of weaker demand. Further, the International Energy Agency lowered its estimate for global oil demand for the second straight month on the back of trade tensions and slowing economic growth. The agency revised global demand for oil lower by 100,000 barrels per day this year. WTI crude closed the week in the red, trading around $52.49/barrel. Finally, gold prices soared as it is sought as a safe haven asset and edged above $1,350/ounce, levels not reached since April 2018. The price of the precious metal, however, hovered around $1,344.90/ounce at the close.
I. U.S. Economic Data/Markets
- Michigan Consumer Sentiment fell to 97.9 in May from 100 in April on the back of tariff concerns. The market expected a level of 99.
- Industrial Output increased 0.4% last month, after falling 0.4% in April.
- Retail Sales rose 0.5% in May and April’s data was revised higher to a 0.3% gain from a previous reading of a 0.2% drop.
- The import price index fell for the first time this year in May, dropping by 0.3% m-o-m. Prices related to energy, food, and industrial supplies dropped last month.
- Export prices fell 0.2% in May, meeting expectations. On an annual basis, export prices fell 0.7%, after a 0.2% increase the month prior.
- CPI edged higher by 0.1% m-o-m in May, in line with expectations. Rents, food, and healthcare costs increased while gasoline prices fell. Core CPI (excluding food and gas) also moved 0.1% over the month – the fourth straight monthly increase.
- Core Producer Price Inflation increased 2.3% in May y-o-y, a tad increase from the 2.2% reading in April. Services-sector largely contributed to the data.
II. Non-U.S. Economics
- Eurozone Economy
- Industrial production dropped in April by 0.5%, in part due to a decline in car production, which fell 4.1% from a month earlier.
- European Central Bank President Draghi noted central and eastern European regions are more vulnerable to trade strife and deteriorating financial conditions. He emphasized the need for greater domestic innovation and investment spending.
- Chinese Economy
- Industrial Production output increased by 5.0% in May, compared to expectations of a 5.5% increase. Output growth slowed to a more than 17-year low.
- Retail Sales rose 8.6% y-o-y in May after a 7.2% rise in April, a 16-year low.
- Trade Surplus came in at $41.65 billion in May, surprising the market to the upside given forecasts of $20 billion.
- China’s trade surplus with the U.S. rose to $26.89 billion in May from $21.01 billion in April.
- Exports in May edged higher 1.1% y-o-y, while imports fell 8.5% during the same period.
- CPI rose to a 15-month high coming in at 2.7% y-o-y, largely driven by higher food prices.
- U.K. Economy
- GDP contracted by 0.4% in April, after shrinking 0.1% in March. A 3.9% decline in manufacturing contributed to the data.
- Manufacturing production dropped 3.9% m-o-m in April, the biggest monthly decline since June 2002 largely led by a contraction within the automotive industry.
- Industrial production surprised to the downside falling 2.7% in April versus expectations of a 0.1% increase.
- Trade Balance deficit narrowed to GBP 12.1 billion from GBP 15.4 billion in March.
- Imports and exports fell 14.4% and 10.9% respectively in April. Exports saw the biggest fall since July 2006.
- Unemployment held steady at 3.8% in April, a 45-year low. Ongoing political uncertainty and sluggish global growth will likely place downward pressure on the economy going forward.
- Japan’s machinery orders surprised to the upside, increasing 5.2% m-o-m in April. It was the third straight monthly rise.
Key data/events this week:
- U.K. Inflation Report Hearings (Monday)
- EU CPI (Tuesday)
- German ZEW Surveys
- U.S. Housing Starts/Building Permits
- JPY Trade Data
- U.K. Retail Price Index/CPI/PPI (Wednesday)
- CAD CPI
- U.S. FOMC Statement/Projections/Press Conference
- NZD GDP
- Bank of Japan Statement/Press Conference (Thursday)
- U.K. Retail Sales
- Bank of England Rate Decision
- U.S. Philadelphia Fed Manufacturing Survey
- JPY CPI
- German/EU Markit Manufacturing/Composite PMI (Friday)
- CAD Retail Sales
- U.S. Existing Home Sales
- U.S. Markit Manufacturing/Composite PMI
