ON DECK FOR WEDNESDAY, JUNE 17th
KEY POINTS:
- Markets playing it safe ahead of key developments
- FOMC preview—Dots versus the press conference
- US retail sales to inform Q2 consumer spending
- Trump may offer more Iran details at this morning’s press conference
- UK CPI sets up a patient BoE tomorrow
- Riksbank warns of coming hike but guidance may be stale
- Brazil’s central bank expected to cut post-Fed
Global markets are playing it safe so far this morning ahead of several developments. They include this afternoon’s FOMC communications, this morning’s update on US consumer spending, and Trump’s press conference at 10:20amET on the sidelines of the G7 Summit. At that presser, Trump has pledged to discuss more about the apparently R-rated MOU with Iran that us adults have not been allowed to see thus far. Trump noted this morning that the MOU is not finalized, batted away some of the rumoured content, and said that if he doesn’t like what he sees, then the US will strike Iran again. This is a problem of his own making as there is no available text. Also note that Iran is claiming that the deal includes a requirement for Israel to withdraw from Lebanon which I’d give about 0.000001% odds of happening.
And so at present we’re staring at oil prices moving a few dimes higher this morning, slight strength in the USD against multiple crosses except the yen and Swiss franc, and small gains in most equity benchmarks. Rates curves are performing rather blandly except for outperformance in gilts (post CPI, see below) and Sweden’s curve (post Riksbank, see below).
FOMC — DOTS VERSUS THE PRESS CONFERENCE
The FOMC statement and Summary of Expectations including the dot plot arrive at 2pmET and will be followed by Chair Warsh’s first press conference at the helm thirty minutes later. A comprehensive preview was provided in my weekly here which I won’t repeat here but encourage readers to review given there are a lot of potentially moving parts into this one.
I would expect the balance of the dots projection to remove the median participants call for a rate cut this year but for Warsh’s press conference to sound more neutral-dovish than the dots which he’ll likely boycott. The March dot plot had seven participants in the no cut camp, seven in the -25bps camp, and five expecting more than one cut. The bottom part of the distribution expecting more than one cut is likely to be trimmed or removed and the balance is likely to shift to a hold with some hike projections. That could be a set up for a different tone in the press conference which could drive meaningful market volatility this afternoon.
And who cares. The dots perform terribly relative to what the FOMC actually winds up doing (chart 1 for example) which is part of the reason why Warsh loathes forward guidance.
My weekly lays out further expectations.
US RETAIL SALES EXPECTED TO POST A SMALL GAIN
Before the Fed we’ll get US retail sales for May (8:30amET). A small rise in vehicle sales and higher gasoline prices should contribute to a modest gain with consensus at 0.6% m/m and I’m at 0.4%. Key will be sales ex-autos and gas but that too will only be in nominal terms including price effects so turn quickly to volume estimates in the aftermath. For purposes of estimating consumption in the GDP accounts key will be the control group that omits categories like gas, autos, building materials and food services and which is tracking a solid gain but this is in nominal dollar terms not adjusted for price effects (chart 2).
Post-data we will also be able to refresh tracking of retail sales volume growth. Q1 was up by just 1.2% q/q SAAR after applying linear interpolation to fill in an estimate for October given missing data due to the government shutdown. So far, Q2 is tracking 2.3% q/q SAAR based only on the Q1 average and April.
SOFT UK CPI SETS UP A PATIENT BOE TOMORROW
UK inflation came in beneath expectations on the eve of the Bank of England’s decision. Headline CPI at 0.2% m/m seasonally unadjusted (NSA) was half of consensus with the year-over-year rate at 2.8% (consensus 3%). Core CPI at 0.3% m/m NSA was relatively soft compared to a normal month of May (chart 3) which contribute to the year-over-year rate of 2.6% slightly undershooting consensus by a tenth. Services inflation, however, warmed up to 3.7% y/y (3.2% prior, 3.6% consensus). Other price gauges like the retail price index (0.2%, 0.5% consensus) and producer prices (0.5% on consensus) reinforced the general bias.
As a result, the gilts curve rallied by 5–6bps across maturities, sterling slipped a touch, and markets lowered pricing for Bank of England hikes. Nothing remains priced for tomorrow with only a slim chance at a hike next month, half a hike in September, and a full hike isn’t priced until December but is down a few basis points post-data.
RIKSBANK GUIDANCE WARNS OF A COMING HIKE BUT MAY BE STALE
Sweden’s Riksbank left its policy rate unchanged at 1.75% as widely expected. Key, however, was that the explicit forward rate path provided by the bank was nearly identical to the path it prescribed back in March and which continues to rest below market pricing (chart 4). The central bank warned of a rate hike later this year, but also noted that its projections were set last week before news of a potential deal between the US and Iran to end hostilities. That last point could be why Sweden’s rates curve bull steepened with the 2-year yield down about 4bps on the day while the krona depreciated to the dollar and slightly underperformed other crosses.
BRAZIL’S CENTRAL BANK EXPECTED TO CUT
Brazil’s central bank is widely expected to deliver another 25bps rate cut down to a new Selic rate of 14.25% (5:30pmET). This would be the third cut since March after a prolonged period of restrictiveness. Expect guidance to be measured and data dependent as the effects of the inflation shock work through. Headline CPI climbed to 4.7% y/y in May with trimmed inflation performing identically. This is why markets foresee only a modest additional chance at easing thereafter.
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