Macroeconomics: The Day Ahead for 20 June

A busy day for central bank policy meetings (BoE, SNB, Norges Bank & Bank Indonesia) follows China’s expected no change 1 & 5-yr LPR fixing and is accompanied by a generally light calendar of second division data, with German PPI to digest ahead of Eurozone Consumer Confidence, and the US Q1 Current Account, Philly Fed Manufacturing, Housing Starts and weekly jobless claims. There are a few Fed speakers and the ECB publishes its Economic Bulletin, while France (in a first test of demand since the snap election was called) and Spain hold multi-tranche auctions, and the US offers 5-yr TIPS. The EIA will also publish its weekly oil inventories report (delayed a day due to yesterday’s holiday), which will garner particular attention after the API report showed a much stronger than expected build in crude stocks, reigniting doubts about the demand outlook, above all given the OPEC production cut tapering plan. The SNB’s annual Financial Stability Report highlighted the increased focus by major central banks on illiquid collateral being deployed as Tier II capital, as well as the increased use of parametric risk transfer products, doubtless seeing an echo from the GFC era, when “wrapped” bonds (CDOs) ultimately proved to be the undoing of companies like AIG.

** U.K. – BoE MPC rate decision **

– The MPC meeting is severely constrained by the general election campaign, per se the vote is likely to remain 7-2 in favour of holding rates at 5.25%, and the statement likely little changed, with particular emphasis placed on incoming data in terms of the rates outlook. As previously noted, the MPC may well be quite relieved that it is constrained at this meeting, with the run of recent data proving rather mixed in terms of the inflation, wage and growth outlooks. There will be particular attention given to the minutes, given that the BoE has been on ‘radio silence’ since the election was called. While Restaurants & Hotels and Transport were the main drivers of the m/m CPI increase, it is worth examining y/y rates to get a better picture of why Services CPI remains so stubbornly high at 5.7% y/y (the BoE had expected it to fall to 5.3%). In contrast to the headline rate of 2.0% y/y, Communication at 4.1%, Education 4.5%, Restaurants & Hotels 5.8% and Health 6.2% remain high, and while Recreation is also high at 3.9% y/y, it has fallen from 5.3% as recently as March, offering hope that second round effects will ease in those other Services categories. That does need to happen, as the base effect driven falls in things like Food (1.7% vs. 5.0% just 3 months ago), Housing (-4.8% y/y) and Household (-1.9% y/y) fade going into H2 2024.

** Other Central banks: the SNB, Norges Bank and Bank Indonesia are all expected to hold rates at 1.5%, 4.5%, and 6.25% respectively. For the SNB, inflation has been in line with forecasts at 1.4% y/y, and per se should also see it keep its CPI forecasts unchanged, per se obviating any need to change rates at this meeting. Norges Bank will likely continue to signal no change in rates before year end, given that underlying (core) CPI remains rather sticky (last 4.1% y/y vs. expected 3.9%), and its own regional network survey upgraded estimates for Q2 GDP to 0.2% q/q vs. prior flat, markets nevertheless continue to anticipate two cuts by year end. Bank Indonesia will be disappointed that the IDR has now given up most of the gains that followed its unexpected 25 bps hike in April, but with inflation set to remain within its 1.5-3.5% target range, and the IDR doing no worse than other regional currencies in response to the Fed opting for ‘high for longer’, it will probably stick with FX intervention and other instruments to defend the IDR.

** U.S.A. – Housing Starts, Philly Fed Manufacturing & Jobless Claims **

Following on from another dip in the NAHB Housing Market Index (43 vs. expected/prior 45), today’s Housing Starts are seen accelerating to a 1.380 Mln SAAR pace, predicated on the continued strength in Building Permits (median 1.460 Mln SAAR). Starts are very much the lagging indicator for the sector, it is primarily underpinned by a well-documented shortage of housing in demand hotspots. Some will doubtless point to the MBS 30-yr Mortgage Rate dipping below 7.0% for the first time since March, but it remains high, and affordability issues remain. Tuesday’s much stronger than expected Industrial Production was broad based but saw particular strength in Consumer Goods output and Mining & Extraction, the latter boding well for today’s Philly Fed Manufacturing (seen edging up to 5.0), given that oil refineries make up a large part of local output. Initial Claims have trended higher in the past two weeks but are expected to dip back to 235K vs. prior 242K, much of the rise is down to typical seasonal volatility, with a strong boost seen in California due to a rise in minimum wages for fast-food workers. For claims to genuinely signal a more pronounced loosening in labour demand, the current uptrend would need to be sustained for a number of weeks and establish itself above 250K.