Week Ahead: ECB To Set Up A July Hike And U.S. Inflation Nears Peak

Last week's nonfarm payroll report means that the Fed won’t be pausing their interest rate hiking campaign anytime soon.

The May employment report was impressive, but it will likely be the last strong one we will see in a while. The focus shifts to the May inflation report which should show inflation on monthly basis is rising, which should force some Fed members to agree pricing pressures will remain sticky for the next couple of quarters.

The upcoming week is filled with important central bank rate decisions, with the ECB being the main event. The ECB will boost their inflation forecast and prepare currency traders for a July rate hike. ECB President Lagarde’s press conference will probably be determining factor for whether traders price in a 25 or 50 bps rate increase in July.

It seems the cryptoverse has been stuck following the action on Wall Street, but that could change if the 2022 Consensus festival unveils any major breakthroughs with blockchain technology, Web 3, the metaverse, and crypto investment commitments.

US

The labor market is showing signs of deceleration and now Wall Street wants to see if inflation has peaked. The May inflation report will still be hot and even if prices come down a little bit more than economists expectations, the Fed will most likely stay locked into delivering half-point rate increases over the next couple of Fed policy decisions. Consumer prices are expected to ease slightly to an 8.2% annual gain in May, while a surge is forecasted for the month-over-month basis with a gain of 0.7%. If inflation shows signs that demand destruction is happening, calls for a 50bps hike in September may decline.

The other key economic release in the US will be June’s preliminary University of Michigan sentiment report. The headline index is expected to improve from the decade low of 58.4 to 58.9. Traders will care if the deterioration of buying conditions is worsening. Inflation expectations might not improve significantly as the recent surge with oil prices and persistent supply chain issues will continue to weigh on prices.

The blackout period for the Fed begins so we won’t hear comments until after the June 15 policy decision. The Summit of the Americas will last all week and President Biden and Brazilian President Bolsonaro will have their first bilateral meeting.

UK

Brexit isn’t over. Tensions are rising over the Northern Ireland protocol, which governs post Brexit trade rules between the EU and the UK. The protocol requires inspections of some goods entering Northern Ireland from the rest of the UK, in order to avoid a hard border between Northern Ireland and Ireland, which is part of the EU.

British Prime Minister Boris Johnson is threatening to make changes to the protocol, saying that the present inspection mechanism is too cumbersome and is hurting the UK economy. The UK government may table legislation to amend the protocol, a move which is sure to draw EU retaliation.

The UK releases Services PMI on Tuesday.

EU

The ECB holds a policy meeting on Thursday, in the shadow of the war in Ukraine. The EU announced it will ban all Russian oil imports by sea, while allowing pipeline imports to continue. The move, which could result in as much as 90% of Russian oil imports being banned from Europe, is meant to deal a crippling blow to Russia, but will also have a negative impact on the EU economy.

The ECB has signalled that it will increase the deposit rate starting in July and end its asset purchase programme (QE). It remains unclear whether liftoff will take the form of a 25-bps or 50-bps hike. The markets will be closely monitoring President Lagarde’s press conference for any hints on the size of the rate increase.

Germany releases Factory Orders on Tuesday expected to improve by 0.3% from a month ago and Industrial Production on Wednesday.

Russia

The war in Ukraine rages on, and Ukrainian President Zelensky stated this week that Russia controls about 20% of Ukrainian territory. The EU’s ban on most oil imports from Russia will squeeze Russia’s economy even further, although record-high oil prices are relieving some of the pressure from sanctions.

The Bank of Russia holds a policy meeting on Wednesday and is expected to cut the benchmark rate. The Bank slashed the rate on May 26 at an extraordinary meeting, lowering the rate from 14% to 11%. The move was made to support the Russian economy, which has contracted as a result of sanctions. The markets had expected a 200-point cut and the Russian rouble fell sharply after the decision.

Russia will release CPI for May on Wednesday Inflation remains very high and is expected to tick lower to 17.4%, down from 17.8% in April.

South Africa

South Africa releases GDP for Q1 on Tuesday. Economic growth is expected to tick higher to 1.8% in the first quarter.

South Africa’s economy has benefited from the recent boom in commodity prices, but inflation has been rising, with food inflation being a particular concern.

Turkey

The Turkish lira continues to lose ground and has fallen to its lowest level since December 2021. The lira has become the worst performer in the emerging markets, and the slide is expected to continue. Inflation remains high and growth is slowing, yet the central bank is defiantly pursuing its unorthodox, ultra-loose monetary policy, which continues to put downward pressure on the fragile Turkish lira.

China

The most important data release this week is the Caixin Services PMI on Monday. Having been pummelled by Covid zero lockdowns, it is probably too soon to expect a sharp recovery with Shanghai and Beijing still in the reopening process. Nevertheless a sharp jump back to near 50 would likely spark an immediate rally in China stocks and put downward pressure on USD/CNY.

Inflation data due on Thursday should be a non-event, with slumping domestic demand keeping inflation around 2.0%, even though PPI is expected to print near 8.0% YoY.

The PBOC continues to draw a line on further Yuan weakness, having started announcing stronger fixes as USD/CNY moved near to 6.8000.

India

Recent inflation data has shown it to be well above the RBI’s 2-6% band, and it seems certain that the RBI will hike rates once again at its meeting on Wednesday. How much impact that will have will depend on the statement afterwards, but I expect the RBI to maintain its hawkish rhetoric as PMIs indicate an economic recovery is under way. A hawkish RBI is likely to be a headwind for local equities.

Elsewhere, the Indian Ruppee continues to trade on the weaker side, with USD/INR stuck at 77.600. Part of the reason may be India’s soaring energy bill pressuring the current account and if Brent crude rises through $120.00 this week or next, I expect to see INR come under more selling pressure.

Australia

Australia has a packed data week with ANZ Job Advertisements Monday, and NAB Business Confidence on Wednesday. Undoubtably the highlight though is the latest RBA Interest Rate Decision on Tuesday, with markets pricing in a 25bps hike to 0.60%. The accompanying statement, be it hawkish, or less hawkish, will be felt mostly by equity markets. A bigger than 0.25bps hike would be a huge surprise and see a sharp AUD rally, while local equities will fall aggressively.

The Australian dollar has ridden the US dollar correction higher but despite data, elections, and monetary policy changes, the short-term direction of the currency continues to be dominated by the swings in risk sentiment day-to-day.

New Zealand

No significant data next week. Like the Australian dollar, the New Zealand dollar remains hostage to the daily swings we are seeing in investor risk sentiment from North American markets.

Japan

Japan releases Household Spending, Final Q1 GDP and PPI next week, but realistically, the Nikkei will continue to tightly track the US NASDAQ, at least until the BOJ policy meeting which usually follow the US FOMC.

USD/JPY has rallied back to 130.00 in the past week as US yields moved higher and Japanese official reiterated the BOJ’s super-easy monetary stance. That proves that the primary driver of Yen direction continues to be the US/Japan rate differential and nothing should change regarding that in the week ahead.

Energy

Crude prices remain supported as energy traders digest a modest output boost by OPEC+ and have renewed optimism for the US economy following a better-than-expected nonfarm payroll report. Oil’s rally now stands at six weeks, so that might be why bullish exhaustion is settling in and not reacting more positively to this week’s decision by OPEC+ that will still keep the oil market tight throughout this summer.

If any details emerge about what President Biden is looking to accomplish with his trip to Saudi Arabia, that could weigh on prices.

Gold

Gold’s little bullish streak has run into some resistance as the dollar stabilizes over expectations that the Fed won’t be changing up their rate hiking campaign anytime soon. Doom and gloom calls are growing, but what right now that is mainly benefiting global bond yields. The yellow metal has consolidated between $1,830 and $1,880 this week and that might continue until the latest inflation report confirms pricing pressures are easing.

Cryptos

Bitcoin remains in consolidation mode as it has for the last few weeks. It remains anchored around the $30,000 level but that could change if the bond market selloff intensifies or if consensus 2022 triggers some trading off of crypto fundamentals. The Austin, Texas event by CoinDesk could provide some major announcements for blockchain projects, Web3, or NFTs.

Sunday, June 5

Economic Data/Events:

• UK continues celebration of Platinum Jubilee Holiday
• Australia’s new prime minister Albanese visits Indonesia

Monday, June 6

Economic Data/Events:

• Australia inflation gauge, job advertisements
• China Caixin services PMI
• Czech Republic industrial output, trade
• Thailand CPI
• Summit of the Americas: President Joe Biden and Brazilian President Jair Bolsonaro will hold their first bilateral meeting

Tuesday, June 7

Economic Data/Events:

• US trade, consumer credit
• Australia rate decision: Expected to raise rates by 25bps to 0.60%
• China Foreign reserves
• Australia Foreign reserves
• Singapore Foreign reserves
• Germany factory orders
• Greece GDP
• Japan household spending, labor cash earnings, leading index
• Mexico international reserves
• New Zealand commodity prices
• South Africa GDP
• Spain industrial production
• UK services PMI
• World Bank’s “Global Economic Prospects” report
• ECB’s Wunsch presents Belgium’s financial stability review.
• Riksbank Governor Ingves speaks on monetary policy.
• Russian Foreign Minister Sergei Lavrov speaks in Serbia

Wednesday, June 8

Economic Data/Events:

• US wholesale inventories
• India central bank (RBI) Rate decision: Expected to raise rates by 50bps to 4.90%
• Poland central bank rate decision: Expected to raise rates by 75bps to 6.00%
• Thailand central bank (BOT) rate decision: Expected to keep rates steady at 0.50%
• Russia Foreign Min Lavrov visits Turkey
• Irish PM Martin speaks to European Parliament
• Eurozone GDP, employment
• France trade
• Japan GDP
• Hungary CPI, industrial output, trade
• Germany Industrial production
• Japan trade, BoP, bank lending, bankruptcies
• Russia CPI
• Switzerland unemployment
• Taiwan trade
• OECD Economic outlook released
• EIA crude oil inventory report

Thursday, June 9

Economic Data/Events:

• US initial jobless claims
• ECB Rate Decision: To end ECB net asset purchases and signal a rate hike in July
• Bank of Canada Financial System Review
• China trade, new yuan loans, money supply, aggregate financing
• Greece CPI
• Japan money stock, machine tool orders
• Mexico CPI
• South Africa manufacturing production, current account
• Thailand consumer confidence
• UN Food & Agriculture Organization’s “Food Outlook,” focusing on developments affecting global food and feed markets.
• Consensus by CoinDesk festival in Austin, TX
• The Bank of Canada delivers an assessment of risks and vulnerabilities in Canada’s financial system.

Friday, June 10

Economic Data/Events:

• US CPI, University of Michigan consumer sentiment
• Canada unemployment
• BOE/Ipsos Inflation Survey
• China CPI, PPI
• Czech CPI
• Denmark CPI
• Norway CPI
• India Industrial production
• Mexico Industrial production
• Japan PPI
• New Zealand manufacturing activity, card spending, home sales
• Russia rate decision: Expected to cut rates by 100bps to 10.00%
• Thailand forward contracts, foreign reserves
• IISS Shangri-La Dialogue, Asia’s biggest defense summit, in Singapore
• European Leaders prepare for NATO summit.

Sovereign Rating Updates:

• Spain (Fitch)
• United Kingdom (Fitch)
• EFSF (Moody’s)
• ESM(Moody’s)
• Netherlands (Moody’s)

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