Weekly Market Outlook (20-24 May)

UPCOMING EVENTS:

• Monday: PBoC
  LPR, Fed’s Waller.
• Tuesday: RBA
  Meeting Minutes, Canada CPI.
• Wednesday: RBNZ
  Policy Decision, UK CPI, FOMC Minutes.
• Thursday: New
  Zealand Q1 Retail Sales, Australia/Japan/Eurozone/UK/US Flash PMIs, Eurozone
  Negotiated Q1 Wage Growth, US Jobless Claims.
• Friday: Japan
  CPI, UK Retail Sales, Canada 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 maintained the MLF
rate unchanged at 2.50%, which is generally a reliable precursor for a
change in the LPR rates. We got some mixed economic data recently but overall
it looks like the PBoC doesn’t have an urgent reason to ease policy further.

Tuesday

The Canadian CPI Y/Y is expected at 2.8%
vs. 2.9% prior,
while the M/M figure is seen at 0.5% vs. 0.6% prior. The focus will be on
the underlying inflation measures though as that’s what the BoC cares most
about. The Trimmed-Mean CPI Y/Y is expected at 2.9% vs. 3.1% prior, while
the Median CPI Y/Y is seen at 2.7% vs. 2.8% prior. Such readings or even lower should
give the BoC enough confidence to deliver the first rate cut in June as they
would be within their 1-3% target band.

Wednesday

The RBNZ is expected to keep the Official
Cash Rate (OCR) unchanged at 5.50%. The central bank has limited tolerance for
an increase in the time to achieve its 1-3% inflation target. The latest Q1
CPI
report showed inflation easing further, while the labour
market report saw another uptick 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 doesn’t expect to normalise policy
before 2025.

The UK CPI Y/Y is expected at 2.1% vs. 3.2%
prior, while the Core CPI Y/Y is seen at 3.7% vs. 4.2% prior. The BoE is
mostly focused on services inflation, so that’s what will have the major impact
on market’s expectations. As a reminder, we will have another CPI report
before the next BoE meeting, but if this week’s inflation data comes out good,
the market will likely price in higher chances for a June rate cut already.

The FOMC Minutes isn’t generally such a great
market-moving release because the market already knows what to expect
and it becomes stale by the time it’s out as more data gets released in the
meantime. I would have expected it to be market-moving this time around because
the Fed could have refrained from mentioning the QT tapering at the last
meeting but include it in the Minutes. Since they already communicated the
tapering at the last decision, I can’t see the Minutes being a such a big deal.

Thursday

The Eurozone Negotiated Q1 Wage Growth is
what the ECB has been waiting for months to give it more confidence on the inflation
outlook. The data is unlikely to change their plan to deliver the first rate
cut in June since they telegraphed it so hard in the meantime that it would
be a real bad look to backtrack at this point. Nonetheless, it might shape
the market’s expectations for the number of rate cuts for the rest of the
year.

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

• Eurozone Manufacturing
  PMI 46.6 expected vs. 45.7 prior.
• Eurozone Services PMI
  53.5 expected vs. 53.3 prior.
• UK Manufacturing PMI 49.2
  expected vs. 49.1 prior.
• UK Services PMI 54.8
  expected vs. 55.0 prior.
• US Manufacturing PMI no
  consensus vs. 50.0 prior.
• US Services PMI 51.5 expected
  vs. 51.3 prior.

The US Jobless Claims
continue to be one of the most important releases to follow every week as it’s
a timelier indicator on the state of the labour market. This is because
disinflation to the Fed’s target is more likely with a weakening labour market.
A resilient labour
market though could make the achievement of the target more difficult.

Initial
Claims keep on hovering around cycle lows, while Continuing Claims remain firm
around the 1800K level. This week Initial Claims are expected at 220K vs. 222K prior,
while there is no consensus at the time of writing for Continuing Claims
although the prior release showed an increase to 1794K vs. 1785K expected and
1781K prior.

Friday

The Japanese Core CPI Y/Y is
expected at 2.2% vs. 2.6% prior, while there’s no consensus for the Headline
and the Core-Core figures at the time of writing. This report generally isn’t
market-moving because we get to see the Tokyo
CPI weeks in advance, which is a leading indicator for the National CPI
figures. Anyway, surprises could have an impact on the market, but it looks
increasingly likely that the BoJ won’t be able to hike rates further in this
cycle.