U.S. Treasuries, Equities, and Oil prices all are pointing to a higher open this morning. Jerome Powell, Fed Chairman, will speak at the Council on Foreign Relations in New York City on Tuesday with the main event kicking off on Friday in Osaka, Japan at the G20 Summit. A particular focus will be on the Trump-Xi sit down to rekindle trade discussions, as global growth concerns weigh on both the global markets and central banks across key economies. Beyond any Sino-U.S. trade developments, any trade rhetoric between President Trump and other G20 officials will be closely watched.
Outside of the summit, the markets will focus on inflation data to be released in the U.S., Eurozone, and Japan this week. Stubbornly low inflation has recently grabbed the attention of many central banks, prompting officials to signal potential monetary easing if prices remain subdued.
Last week, while the Federal Reserve kept its key rate unchanged, as officials seemed to be laying the groundwork for a possible rate cut in the near future. Chairman Powell noted concerns surrounding continued trade disputes, the impact to economic outlook and that the Fed is “prepared to move and use…tools as needed.” He expressed that the case for more accommodative policy had strengthened and suggested that the Fed may stop shrinking its balance sheet, if warranted.
Market participants not only scrutinized what the Fed explicitly expressed, but also what was not said as well. The Fed dropped “patient” in its statement, regarding its policy move, suggesting it may be willing to act sooner than later. Powell also no longer referred to low inflation as “transient”, and officials’ lowered their expectations for inflation compared to forecasts in March (see more below).
The Fed’s dovish sentiment put the Bank of Japan on guard. The USD declined versus the yen to near six-month lows after the FOMC meeting, and a stronger yen could weigh on Japan’s export-driven economy. The BoJ also left its policy rates unchanged but signaled its willingness to provide stimulus measures as needed.
Finally, the Bank of England followed suit by leaving its policy rate steady. Similar to its peers, the BoE noted increased downside risks to global growth, adding the additional pressure of Brexit uncertainty weighing on its local economy. The bank, however, noted the need to gradually hike rates if a smooth Brexit comes to fruition.
Dovish central bank sentiment propped up equity markets last week, with all three major U.S. stock indices closing the five-days in the green. The S&P 500 touched a new high of 2,964.15 on Friday and capped the week at 2,950.46. Conversely, Treasury yields edged lower across the curve, with the 10-year Treasury hovering around 2.059% at the close. Finally, escalating tensions between the U.S. and Iran fueled energy prices with WTI crude trading near $57.60/barrel at the close.
I. U.S. Economic Data/Markets
- Fed Official Mester expressed how increased risks to the U.S. economy, including low inflation and political uncertainty in recent weeks could prompt officials to focus on “risk management” to sustain growth. Her sentiments reinforced the expectation that the Fed may cut rates in the near future.
- Fed Official Clarida noted that the case for a more accommodative policy increased since the last FOMC meeting in May. Risks expressed included trade uncertainty and global growth slowing. However, he remained positive regarding the U.S.’s economic outlook, noting sustained growth, a strong labor market, and inflation near the Fed’s objective.
- Existing Home Sales rose 2.5% in May m-o-m versus expectations of an increase of 1.2%. Lower mortgage rates partly contributed to the rise in sales.
- For example, the average 30-year fixed mortgage rate dropped to 3.99% the last week of May compared to 4.2% the prior month.
- Manufacturing PMI dropped to 50.1 in June from 50.5 in May, the worst reading since September 2009
- Services PMI also fell to 50.7 from 50.9, the lowest level since March 2016.
- Philadelphia Fed Manufacturing survey tumbled to a four-month low in June to a reading of 0.3 from 16.6 in May. New orders, shipments and the price index all fell. Manufacturers’ prices, dropped by 17 points to 0.6, its lowest level since October 2016.
- Federal Reserve left its key policy rate range unchanged at 2.25%-2.50%, with a 9-1 vote. Official Bullard dissented in favor of lowering rates. Dovish sentiments emanated from officials:
- Chairman Powell noted the case for a more accommodative policy has strengthened.
- Notable changes to the FOMC statement included:
- The Fed dropped “patient” in describing its approach to policy.
- Changed language from the May statement to reflect economic activity is “rising at a moderate rate,” previously described as “solid.”
- Increased uncertainty regarding the economic outlook.
- Eight members favor one cut this year, while the same number votes in favor of keeping rates unchanged and with one official vying for a rate hike. Median projections reflected lower rates in 2020, 2021 and the Longer-Run (see table below).
- Core inflation projections for the end of the year were lowered to 1.8% from 2% in March. Similarly, headline inflation was slashed to 1.5% from a previous forecast of 1.8%. Unemployment estimates were also lowered across the board.
- Building permits increased 0.3% in May, to 1.294m, the best level since January – indicating that construction may continue in the short-term.
- Housing Starts fell in May with a 0.9% m-o-m drop, compared to forecasts of a 0.4% decline.
- NY Empire Manufacturing Index had its biggest one-month decline in 18-years. The index fell to -8.6 in June, the lowest level in almost three years, from 17.8 in May.
- New orders and shipments fell about five points.
- Employment printed a negative level for the first time in over two years.
- Capex fell 16 points to 10.5.
II. Trade
- China/U.S. – the two sides apparently rekindled trade discussions earlier in the week, with President Trump indicating that he will meet with China’s President Xi at the G20 Summit this week in Japan.
- Brexit – Theresa May’s successor has been narrowed down to two candidates: Boris Johnson and Jeremy Hunt. Johnson is favored to win as the U.K.’s next prime minister, he is well known for his ardent support for Brexit. He has previously stated that the U.K. will leave the EU with or without a deal. In contrast, Hunt has promised to leave the EU with a deal.
III. Economics Outside the U.S.
- Eurozone Economy
- Composite PMI increased in June to 52.1 from 51.8, largely driven by the services sector which had a reading of 53.4 versus last month’s 52.9 level. Manufacturing came in at 47.8 – a level below 50 signals a contraction.
- Core CPI came in at 0.8% y-o-y in May as expected.
- German ZEW survey showed economic sentiment fell more-than-expected, with a drop to -21.1 ( a seven-month low) from -2.1 in May compared to forecasts of a drop to -5.9. It was the lowest reading since last November. The ZEW President attributed the morose sentiment to:
- Intensified trade issues between the U.S. and China.
- Continued uncertainty surrounding Brexit.
- Increased conflict in the Middle East.
- Eurozone ZEW sentiment fell 18.6 points to -20.2 in June compared to the previous month.
- European Central Bank President Draghi expressed a more dovish sentiment at the ECB Forum noting that if economic conditions further deteriorate that the bank would provide further stimulus. He noted that the ECB could cut rates or enact further asset purchases if inflation does not reach the bank’s target of 2%.
- U.K. Economy
- Bank of England unanimously left its policy rate at 0.75% given continued uncertainty surrounding Brexit.
- Bank noted that “downside risks to growth have increased” and that “globally, trade tensions have intensified.” The bank downgraded its growth outlook for the second quarter to zero from 0.2%.
- The bank reiterated the need to gradually raise rates, particularly if a no-deal Brexit can be avoided. It did note, however, that the perceived likelihood of a no-deal Brexit has risen.”
- Retail Sales declined by 0.5% in May m-o-m, partly due to colder weather. Department stores saw the biggest dip in sales while online purchases the largest gain over the past three months.
- CPI Index fell to 1.9% in May from 2.0% in April.
- Producer Price index dropped to 0.0% in May, disappointing expectations of 0.2%.
- Retail Price Index beat expectations rising to 3.0% versus forecasts of 2.9%.
- Bank of England unanimously left its policy rate at 0.75% given continued uncertainty surrounding Brexit.
- Canadian Economy
- Inflation increased in May 2.4% y-o-y. Eight categories within the index saw a jump in prices, particularly food prices. Energy prices dipped by 0.1% over the year. Excluding energy, inflation would have been closer to 2.7%.
- Japanese Economy
- Manufacturing PMI fell to 49.5 in June from 49.8 in May. New orders fell at the fastest pace in three years.
- Bank of Japan left key policy rates unchanged leaving its short-term rate target at -0.1% and pledged to guide 10-year government yields around 0.0%.
- Gov. Kuroda suggested the bank will provide stimulus measures as needed, if global risks continue to weigh on the economic outlook. He noted this could be done by lowering rates and through bigger asset purchases, if needed.
- The bank’s policy statement noted that the downside risks regarding international economies are carefully being monitored, given their potential impact on Japan’s corporate and household sentiment.
- Exports fell 7.8% in May y-o-y reflecting a decline for the sixth straight month. Exports to China, Japan’s biggest trading partner fell 9.7% y-o-y, the third straight month of declines.
- Imports fell by 1.5% in May y-o-y.
Key data/events this week:
- German IFO data (Monday)
- NZD Trade Balance
- Bank of Japan Meeting Minutes
- U.S. OPEC Meeting (Tuesday)
- U.S. Housing Price Index/Consumer Confidence/New Home Sales
- FOMC Chairman Powell Speaks
- The Reserve Bank of New Zealand Rate Decision
- German Gfk Confidence Survey (Wednesday)
- U.S. Durable Goods Orders/Non Capital Goods Orders
- JPY Retail Trade
- EUR Business Climate (Thursday)
- German CPI/Harmonized Index of Prices
- U.S. GDP/Personal Consumption Expenditures Index q-o-q
- U.K. Gfk Confidence Survey
- JPY CPI/Unemployment data/Industrial Production
- U.K. GDP Q1 (Friday)
- E.U. CPI
- U.S. Personal Income/Personal Consumption Expenditures Index y-o-y
- CAD GDP
- U.S. Chicago PMI/Michigan Consumer Sentiment
