- ECB tops schedule as markets digest hawkish Fed; run of disappointing
China data and UK RICS House Price Balance; awaiting Sweden CPI, UK and
US Retail Sales, US Jobless Claims and Import Prices; Trump decision on
China Trade tariffs also due
- China: Retail Sales very disappointing, raise questions about rebalancing
despite strength of online; FAI drop eye-catching, but strength of Private
Sector FAI an encouraging offset
- Sweden CPI: surprise may prompt SEK volatility, but unlike to sway
Riksbank majority
- UK Retail Sales: further solid gain expected, suggesting marked personal
consumption in Q2
- US Retail Sales: further solid gain seen across all measures, despite drag
from Auto Sales
- ECB: QE decision in focus, along with forecast revisions and any hints
on September LTRO expiry
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** EVENTS PREVIEW **
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It's a busy day for economic data, but as with yesterday the primary point of focus will be on the ECB meeting. Be that as it may, there are the UK RICS House Price survey and the run of monthly Chinese activity data to digest ahead of Swedish CPI, UK and US Retail Sales, with the US also having jobless claims and Import Prices. In respect of Swedish CPI, it is expected to edge up somewhat further (CPI 1.9% y/y from 1.7%, core CPIF to 2.1% from 1.9%), but a) it was higher than this in Q3 2017, and the Riksbank was sceptical that it would prove durable ... and they were right; b) yesterday's Riksbank Business survey made specific note of the that companies in the trade sector are struggling to put through price increases due to competition, and are thus focussed on reducing costs and headcount above all via automation, particularly as the weak Krona is raising imported goods costs - all of which implies that an upside miss would not be a game changer for the Riksbank's rate trajectory, though the ECB meeting outcome today could be! As for the run of generally disappointing Chinese activity data, the FAI data offer some important clues as to the source of the weakness in the manufacturing sector, in so far as the sharp slowdown at the headline level to 6.1% vs. expectations of 7.0%, actually masks another solid reading on Private Sector FAI, which remains solid at 8.1% y/y. Therefore the driver is the already well documented reining in of local govt spending, in order to consolidate local finances, and given plenty of anecdotal evidence of too many white elephant "infrastructure" projects. That said the weak Retail Sales at 8.5% vs. expectations of 9.6% and April's 9.4% was clearly disappointing, and raises questions about how much the economy is really rebalancing, even if online sales at 30.1% y/y were very strong. This may all prove to be rather moot, given that there is a hard deadline for the US imposition of previously announced Trade tariffs on China tomorrow, with Trump meeting with his various trade 'advisers' today to discuss what if any progress has been made in the various talks, and what will actually be implemented.
Oh and by the way, the World Cup kicks off in Russia today, and in now time honoured tradition a reminder that the unofficial anthem for Die Mannschaft was penned some 32 years ago by my brother in law's band Boehse Onkelz, here's the karaoke video version
!
** U.K. - May Retail Sales **
- After an Easter related jump (1.4% m/m), Retail Sales are forecast to a more modest, though still healthy 0.5% m/m rise, which thanks to base effects would push the y/y rate up to a respectable 2.4% from 1.4%. The pointers from the various surveys (e.g. BRC 2.8% vs April -4.2%, Visa Consumer Spending 5.4%) certainly offer plenty of support for the consensus, though due to different data collection periods for these surveys and the official data, the read across is not always reliable. Perhaps more pertinent is the point that consumer spending and services output will need to put in a much better performance than in Q1, if Q2 GDP is going to bounce to 0.4% q/q as the BoE anticipates, and probably even more so after Monday's poor run of Manufacturing and Construction data.
** Eurozone - ECB meeting **
- The ECB meeting was probably the more heavily anticipated of the Fed & ECB meetings, and sources and some council members have signalled that there will be a discussion on whether to announce how and when it will end its QE programme, which if it does, will almost certainly be accompanied by endless references to how it continue to reinvest its existing QE portfolio. In best guess terms, the compromise between the waverers and the hawks may be to announce that QE will end in December, with a taper to 10-15 Bln per month pace for Q4 from the current EUR 30 Bln.
Inevitably the new Italian govt and its budget proposals will engender a long list of questions, many of which will probably be dodged outside of a reiteration of the ECB and Eurozone 'rules of engagement'. There will be a fresh set of forecasts, which sources have indicated will see CPI forecasts revised higher, but GDP forecasts revised lower, and in respect of the latter, much attention will be given to whether the council remains relatively confident that the Q1 setback in France and Germany prove to be largely transitory. Inevitably markets will above all looking for further clues on what precisely the ECB means when it says that rates will remain at current for a 'considerable period' after the end of QE, having previously suggested that it probably means a couple of quarters, but not a year or more. The other key element will be what signals are offered on how it plans to deal with the EUR 432 bln LTRO that expires in September (and will likely see some bank repayments starting in July), above all from the aspect that a simple rollover of that operation is not an option, given that would tie the ECB's hands on policy for a protracted period.
** U.S.A. - May Retail Sales **
- Retail Sales are also seen underlining that the sluggish profile of Personal Consumption in Q1 was transitory, even if Auto Sales remain sluggish, with headline seen up 0.4% m/m, ex-Autos 0.5% m/m and the core "control group" 0.4%. AS noted in the FOMC review from yesterday, the fact that the FOMC highlighted personal consumption as picking up, would appear to suggest that the risks may be skewed to the upside of forecasts, though even on the basis of the consensus, the core 'control group' measure is on a 3-mth annualized pace of 5.2%, a very sharp acceleration from the weak Dec-Feb period.
** Japan - BoJ meeting **
- Tomorrow's BoJ meeting is probably viewed by most market participants as a quasi non-event, with no changes expected to any of its policy measures, and Kuroda likely to underline that with inflation still very subdued, it is much too early to even vaguely consider an exit from its QE programme. That said, it will be interesting to see if the BoJ shows any sign of concern that some recent economic data has suggested the economy is losing considerable momentum, though the sharp rebound in Monday's Orders should assuage any such concerns to a degree, even if personal consumption continues to be rather sluggish, in no small due to a lack of a meaningful pick-up in wages.
RECAP - Post FOMC Thoughts
While the longer-term forecasts for the economy and rate remained the same, the near term trajectory for Fed rates and the economy has been clearly shifted higher, and any chance that this could be classified as a 'dovish hike' should have been clearly "chased out of the room", except for those are in the camp for 'wishful seeing' and/or 'wilful blindness'. It is ironically teh more hawkish from the aspect that it clearly designates current policy rates as 'accommodative', but needing to be 'neutral'. Thus the dot plot now sees four rate hikes in total for 2018, with the end year rate seen at 2.375% vs. 2.125% in March, ans 3.125% end 2019 vs, March 2.875% - i.e. four rate hikes this year end and next. Near-term forecasts for the economy have been revised up, very modestly for GDP, with a tweak lower for Unemployment in 2019 and 2020, and a tweak higher for 2018 core PCE to 2.0% from 1.9%. The statement was stripped back to remove any element of doubt about the near term outlook, perhaps most notably 'growth of household spending has picked up' (somewhat out of tune with the latest Beige Book, but in line with solid forecasts for tomorrow's Retail Sales. No references were made to trade tensions.... yet again.
The simple point for some time has been this: the opportunity cost for holding 'cash' or cash like instruments falls with every Fed rate hike, and by contrast the opportunity cost of chasing riskier assets (duration, credit and equities) rises concomitantly - everything else is primarily a noisy FOMO/TINA narrative that gets one 'hospital pass' after another. Incoming data may be emboldening the Fed, but easy financial conditions relative to the end of 2015 even more so (see chart from this morning's preview). The ECB will struggle to even vaguely match the Fed's rhetoric when it meets today, and as for the BoJ tomorrow, well Mr Kuroda must be rubbing his hands with glee, though he will be more than well aware that an escalation of the various global trade tensions, above all between the US and Asia.
from Marc Ostwald
