The markets continued its risk-on sentiment from the previous week with bond yields globally edging higher, despite increased tensions regarding trade tariffs. The 10-year U.S. Treasury rate and domestic stock indices all ended the week higher. The 10-year treasury was trading at 2.966% at the Monday NY open. All eyes are now on central bank policy, the North Korea/U.S. meeting in Singapore and the market impact of escalating trade tensions this week.
European Central Bank Official’s Comment Sparks Bond Selloff
The bond selloff was in part fueled by comments from the ECB’s chief economist, Peter Praet, signaling an end to the ECB’s quantitative easing on the back of recent stronger inflation data within the Eurozone. The market was caught by surprise from Praet’s remarks as it was largely expected that the decision on the stimulus would likely be discussed at the ECB’s meeting in July.
The ECB is scheduled to meet this week on June 13th and 14th. Praet is also largely perceived as an inflation dove, so his more hawkish comments roiled the markets, particularly as he is responsible for framing the ECB’s policies. The Euro jumped to a 10-day high versus the dollar on the back of his speech, to roughly $1.17893, while German 10-year bunds jumped about four basis points to 0.471%.
Adding to the bond market volatility within the EU, Giovanni Tria, the Finance Minister of Italy, stated to the press that there was absolutely no discussion about Italy leaving the European Union.
Federal Reserve Meeting: BMA Outlook
Before the ECB takes center stage this week, the Federal Reserve will meet on Tuesday, June 12th and the 13th. There will be a post-meeting press conference and the officials’ economic projections will be shared as well. Here is what BMA expects:
1) Another rate hike – while the market has largely priced in a rate hike at the June meeting for some time now, recent unemployment and inflation data further support the hike.
2) More Fed officials will express the likelihood of four versus three hikes in 2018. Aside from the rate hike to be announced this week, BMA believes a fourth rate hike will be the result at the Fed’s December meeting.
3) At the March meeting, Fed officials predicted a year-end inflation level of 1.9%. Given recent economic data coupled with higher oil prices and threats of potential trade wars, we expect this level to be closer to be adjusted slightly higher to 2-2.1%.
4) The market will be keen on any comments from the Fed regarding escalating trade tension, particularly given the conclusion of the G7 Summit in Canada over the weekend.
G7 Summit: Trade Wars, Nuclear Arms, Climate Change
Trade tariffs, nuclear arms, and climate change were the key topics discussed at the G7 Summit in Canada over the weekend. Heading into the Summit, while the Trump administration was applauded on its efforts to denuclearize North Korea, both French Prime Minister Macron and Canadian Prime Minister Trudeau criticized Trump on the recent tariffs, warning they would be costly to U.S. jobs and the economy. Trade tensions remained elevated at the conclusion of the Summit, with Trump and Trudeau criticizing each other’s approach and Trump’s abrupt withdrawal from the G-7’s communique.
This week: Central bank meetings, globally, largely take center stage – outside of the aforementioned meetings, the Bank of Japan and the Swiss National Bank (“SNB”) are also on the docket this week. The market has a slew of data and other events to digest as well, including the Brexit bill which will go to a vote in parliament on Tuesday. On June 12th, Trump will meet with North Korean leader, Kim Jong-Un, regarding denuclearization. A positive outcome will likely fuel the risk-on sentiment further.
Potential Major market-moving events/data includes:
U.S./N. Korea Meeting (Tuesday)
GBP April Average earnings data (Tuesday)
USD May CPI (Tuesday)
CNY Q1 GDP (Wednesday)
GBP CPI (Wednesday)
FOMC rate decision/post press conference/forecasted economic data (Wednesday)
AUD May unemployment data (Thursday)
SNB press conference (Thursday)
ECB rate decision/press conference (Thursday)
U.S. May retail sales (Thursday)
BoJ rate decision/post press conference (Friday): It is expected that the BoJ may lower its outlook on inflation, given slower price growth in April. The BoJ is scheduled to release a quarterly economic outlook in July.
Key U.S. data includes: CPI (Tuesday), Redbook index, monthly budget statement, API weekly crude oil stock, PPI (Wednesday), FOMC decision and post Powell speech, EIA crude oil stock change, retail sales (Thursday), weekly jobless claims, industrial production (Friday), capacity utilization, Michigan consumer sentiment, Baker Hughes oil rig count.
Overseas data includes: GBP industrial/manufacturing production (Monday), Italian industrial output, JPY domestic corporate goods price index, AUD home loans (Tuesday), CNY FDI, GBP average earnings excluding bonus, GBP unemployment rate, EUR ZEW economic sentiment survey, German ZEW economic sentiment and current situation surveys, AUD Westpac consumer confidence (Wednesday), CNY GDP, Swiss industrial production, GBP retail price index, GBP PPI/CPI, Eurozone industrial production, AUD unemployment rate (Thursday), AUD consumer inflation expectation, CNY retail sales, CNY industrial production, German Harmonized index of consumer prices, French CPI, GBP retail sales, ECB rate decision, Swiss National Bank press conference, NZ business PMI, BoJ rate decision/press conference (Friday), EUR trade balance, EUR CPI.
