ON DECK FOR THURSDAY, JUNE 15
KEY POINTS:
- Mild risk-off sentiment braces for more central banks
- Will the ECB extend the string of hawkish central banks?
- PBoC shaves its policy rate
- Chinese macro reports mixed, retail better than the y/y rate
- US retail sales are expected to be soft...
- ...as auto sector supply chains remain impaired
- Was the increase in US initial jobless claims a one-off?
- US industrial data will probably be on the soft side
- Canadian home sales are likely to post a 4th straight gain
- A$, rates jump on strong Aussie jobs
- NZ$ slips as economy falls into technical recession
Global markets are treading cautiously this morning in the wake of the Fed (reminder recap here) and ahead of the ECB this morning and then the BoJ tomorrow with the latter posing higher risks than priced in my view. Sovereign debt curves are cheaper across US Ts, gilts, EGBs, and Down Under post-jobs. The A$, euro and krone are outperforming against the dollar. Stocks are broadly softening with N.A. futures a little lower along with declines across most European exchanges except for London that’s flat.
There were several overnight developments:
- the PBoC cut its 1-year Medium-Term Lending Facility Rate by 10bps as consensus expected. The yuan strengthened after the widely anticipated move but has been on a weakening trend since about mid-May. It may be vulnerable if the Fed delivers on the 50bps of additional tightening in the median projection and if the PBoC applies further monetary stimulus, but key may also be whether other forms of stimulus are delivered as rumoured.
- Chinese macro readings were a touch weaker than expected. Industrial production matched expectations at +3.5% y/y, but retail sales missed by a percentage point at 12.7% y/y despite the stabilization of the month-over-month reading versus the prior month’s seasonally unusual softness (chart 1). Fixed investment also missed by a bit at 4% y/y (4.4% consensus).
- Australian jobs sharply rebounded with a gain of about 76k in May after the prior month’s flat reading (-4k). That keeps the job market on a tear (chart 2). Almost all of the jobs gained were full-time, up 62k. That drove a bear flattener with 2s up 9bps as July 4th RBA pricing jumped by 7 bps to about half of a quarter point now priced while the terminal rate was repriced about 11bps higher to imply about 50bps of additional tightening coming.
- NZ did not follow the Aussie curve, however, as the economy slipped into technical recession. NZ GDP fell by -0.1% q/q which was on the screws, but the prior quarter was revised down a tick to -0.7.
- On deck today are several important considerations:
- The ECB (8:15amET) is widely expected to hike by 25bps across all rates but key will be any forward guidance that Lagarde offers during her press conference (8:45amET). Markets are pricing a terminal rate that is expecting 2+ 25bps rate hikes from here including today’s move which would extend the streak shown in chart 3. The risk is likely toward higher guidance. Eurozone core CPI softened toward something more seasonally normal in m/m NSA terms during May for the first time this year after a string of stronger than usual gains by that definition. It therefore seems premature to think the Eurozone will overreact to this one improvement. Further, labour cost pressures continue to soar as shown in charts 4 and 5.
- US retail sales are expected to be soft as reported in nominal terms (8:30amET). Weaker auto sales and lower gas prices should weigh on total sales, but key will be greater uncertainty around sales ex-autos and gas. I’ve gone a little weaker than consensus on the all-in gauge. A key issue for ages now is that the auto sector is still struggling with supply chain issues perhaps best reflected in the plunge in new vehicles in inventory across the US economy (chart 6).
- US weekly claims (8:30amET): was the prior month’s jump to 261k from the 230s before that just a one-off?
- US industrial data will further inform momentum in that sector with a pair of regional manufacturing gauges for June (8:30amET) and total industrial production in May (9:15amET). The Empire and Philly Fed manufacturing gauges could inform expectations for the next ISM-manufacturing print. Spin the wheel on the regional gauges, while IP is expected to be little changed following the prior gain.
- Canadian existing home sales during May (9amET) are expected to post another strong gain for the fourth consecutive increase and the sixth gain in the past 8 months. That’s despite all of the long faces across the real estate sector that have to remember that if monetary policy is to be successful in containing inflation, then the very essence of the exercise involves delivering pain to the interest sensitives with housing being toward the top of that list. So far, that just isn’t happening, and the forward drivers are mixed enough to merit leaning further toward additional tightening. I find there are too many economists who are too close to this one sector and who either lack this understanding and/or have put themselves into a position of compromising their views.
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