The Daily Update: The Week Ahead

Last week, Jerome Powell’s commentary before the House subcommittee on the Coronavirus Crisis was a key focus given the recent June FOMC meeting where the committee had “talked about talking about tapering” and a number of Fed members had brought forward their projections for a rise in the Fed Funds rate. Powell acknowledged that some of the inflation pressures seen of late are both stronger and more stubborn than first thought, however, he was confident they are nowhere what the US has seen historically. Among the factors pushing prices higher, hotel prices, lumber, airlines tickets added to pent up consumer spending he believed would resolve themselves in the “coming months”. He maintained that the Fed “Will not raise interest rates pre-emptively because we fear the possible onset of inflation” and that they will wait for “evidence of actual inflation or other imbalances”. He noted that “these effects have been larger than we expected, and they may turn out to be more persistent than we have expected”, adding “But the incoming data are very consistent with the view that these are factors that will wane over time, and inflation will then move down toward our goals, and we’ll be monitoring that carefully”. Data-wise, the US PCE data for May, released on Friday, was the main point of interest. The core reading came in at 0.5% mom and 3.4% yoy (against expectations of 0.6% mom and 3.4% yoy), nevertheless the year-on-year print was the largest increase since 1992. The headline reading came in at 0.4% mom and 3.9% yoy (against expectations of 0.5% mom and 3.9% yoy).

Over the week there was some reversal of the recent UST gains: Notably, longer dated USTs conceded ground into Friday’s close. The UST 10 year yield backed up 9bps to 1.53% week-on-week and the UST 30 year yield backed up 13bps to 2.15%. The 5s30s spread widened 9 bps to 122bps. In general, it was a positive week for equity markets: the S&P500 and Nasdaq gained 2.74% and 2.35% respectively. The news that President Biden had agreed to a USD1 trillion infrastructure deal with a bipartisan group of 10 senators was positively received in the equity space.

Elsewhere, the BoE meeting struck a dovish note with the MPC unanimously voting to keep rates at 0.1% and voting 8-1 to continue with the pace of its asset purchase programme. The meeting summary statement noted “the Committee’s central expectation is that the economy will experience a temporary period of strong GDP growth and above-target CPI inflation, after which growth and inflation will fall back” and it would not tighten monetary policy until “significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably”. The 10 year gilt yield tightened a little in response to the BoE decision on Thursday although over the week it backed up 3bps 0.78%. European Government Bonds also came under some pressure over the week. Economic data wise the preliminary PMI reading for services for June for the Eurozone was in line with expectations (Bloomberg survey) at 58, up from 55.2 the prior month. The manufacturing gauge came in ahead of expectations at 63.1, the same level as the prior month.

In the week ahead, Friday’s US non-farm payroll data for June due is expected to be the key focus. The past two reports have disappointed indicating it could still take some time to make ‘substantial further progress’ towards the Fed’s goals. The Bloomberg survey is looking for 700,000 jobs added and for the unemployment rate to edge lower to 5.7%. Other data releases due over the week include the Conference Board consumer confidence gauge for May on Tuesday, pending home sales for May on Wednesday and the US ISM manufacturing gauge for June on Thursday. In China, the PMI data for June are the main releases this week with the Bloomberg survey looking for expansionary readings close to the prior month’s levels. In Japan, the 2Q Tankan survey results are due to be released on Thursday with investors looking for signs of improvement as the pandemic situation starts to improve: the manufacturing sector is expected to show more signs of recovery than the service sector. In the Eurozone, the European Commission is due to release an updated set of economic forecasts on Monday. Key data releases include the preliminary reading for Eurozone June CPI with the Bloomberg survey looking for a headline reading of 1.9% against the prior reading of 2% yoy and a core reading of 0.9% yoy against the prior reading of 1% yoy. In terms of central bank meetings, the Riksbank decision is due on Thursday. Central Bank speakers over the week include John Williams and Thomas Barkin from the Fed. ECB speakers include ECB Vice President Luis de Guindos, ECB Governing Council member Francois Villeroy de Galhau and ECB President Christine Lagarde. BoE Chief Economist Andy Haldane is also due to speak on Monday and Wednesday, BoE Governor Andrew Bailey speaks on Wednesday and on Tuesday RBA Governor Philip Lowe also appears. Other events over the week include an OECD meeting to discuss the proposed minimum corporate tax rate ahead of presenting it at a G20 meeting in July. OPEC+ is also due to meet on 1 July and with Brent crude closing the week at USD76.18 per barrel last week the focus will be on any adjustments to supply.