Macroeconomics: The Day Ahead for 19 June

With the US closed for the Juneteenth holiday, the schedule of data and events is both quite sparse and heavily front loaded, with UK inflation and Japan & Indonesian Trade data to digest ahead of South African CPI and the US NAHB Housing Market Index. There is little in the way of central bank speakers, but Brazil’s BCB holds its policy meeting, and in the EU, all eyes will be on the excessive deficit procedures that are expected to be launched for France, Italy and Poland. For Italian PM Meloni, still enjoying a boost from last week’s G7 meeting, this will be a case of back to a familiar and unpleasant reality for successive Italian governments in recent decades, but Polish PM Tusk will doubtless be able to swat this away with the 4% of GDP per annum that the govt is spending on defence due to Russia’s invasion of Ukraine, and is in any case less encumbered as Poland is not in the Euro. Germany is the sole govt debt issuer of note today, with a modest EUR 2.0 Bln of 30-yr.

** U.K. – May CPI **

– Headline CPI is finally back at target at 2.0% y/y, and likely to remain at or below that level for a few months, before ticking up again, and while core CPI slipped to 3.5% y/y, Services CPI fell less than expected to 5.7% from 5.9%, and remains the biggest barrier to a rate cut. In the detail, food prices continued to act as a drag, but this was more than offset by Restaurants & Hotels and Transport (both adding 0.1 ppt on the month, though the MPC can take some comfort from the fact that most other categories were very subdued, as well as the lack of any evidence of pipeline pressures in PPI. Tomorrow’s MPC meeting is of course severely constrained by the general election campaign, but it will still have an assessment of recent data and how it has turned out relative to its May forecasts, and by extension offer some indirect signals on the likelihood of an August rate cut.

** U.S.A. – June NAHB Housing Market Index **

This week’s run of housing data kicks off with the NAHB Housing Market Index that is expected to stabilize at 45, after May’s tumble, with persistently high mortgage rates and ongoing affordability issues continuing to weigh. Yesterday’s Retail Sales and Industrial Production data continued the run of very inconsistent, often paradoxical evidence on the state of the US economy. On the one hand, weaker than expected Retail Sales suggest consumers are becoming more constrained on discretionary spending, while Industrial Production smashed forecasts with very broad-based gains, but above all strength in Consumer Goods manufacturing. Per se, along with the slower than expected fall in inflation, and still relatively robust labour demand, it is little surprise that the Fed continues to be very cautious about cutting rates.

** Brazil – BCB policy meeting **

– Brazil’s BCB is seen holding rates at 10.50% having cut rates by 325 bps since last August, and likely taking a rather hawkish turn in its rhetoric, despite real rates at around 6.1% being far higher than its assumption of a neutral rate of 4.5%. Increasing market concern about fiscal policy, which has been reflected in the recent decline in the BRL, as well as the Fed’s high for longer stance are likely to underpin the decision, as well as raising tensions with Lula’s government. The other question is whether BCB hints at the possibility of a rate hike, if the situation deteriorates.