Key Events This Week: ECB And Inflation, A “Nightmare Scenario”
While newsflow is set to take a backseat with the mid-summer sun rising, the fun and games in markets this week are heavily back ended according to DB’s Jim Reid, as the highly anticipated ECB meeting on Thursday is followed by the even more important US CPI on Friday. The rest of the week is scattered with production and trade balance data, while Chinese aggregate financing data is expected at some point. The Fed are now on their pre-FOMC blackout so the attention will be firmly on the ECB this week.
So let’s preview the two main events. For the ECB, DB’s European economists believe the ECB will confirm that APP net purchases will cease at the end of the month, paving the way for policy rate lift-off at the July meeting. They also expect the ECB to hike rates by 50 basis points at either the July or September meeting, with the risks skewed toward the latter, to accelerate the policy hiking cycle in light of growing inflationary pressures. Eventually, DB economists believe that hiking cycle will ultimately reach a 2% terminal rate next summer, some 50 basis points into restrictive territory. As prelude, next week watch for the staff’s forecast to upgrade inflation to 2% in 2024, satisfying the criteria for lift-off. With all three lift-off conditions met, expect the statement language to upgrade rate guidance for the path of the hiking cycle. Meanwhile, the June meeting should also bring about the expiration of the TLTRO discount.
According to Reid, there are two interesting things for the ECB to consider at the extreme end of the spectrum at the moment. Firstly German wages seem to be going higher. In a note on Friday, DB’s Stefan Schneider updated earlier work on domestic wage pressures by highlighting that on Thursday night, the 700k professional cleaners in the country achieved a 10.9% pay rise. In addition, with the nationwide minimum wage legalization voted through on Friday, the lowest paid in this group will get a +12.6% rise from October.
At the other end of the spectrum 10yr Italian BTPs hit 3.40% on Friday, up from 1.12% at the start of the year and as low as 2.85% intra-day the preceding Friday. To be sure, expectations are that the ECB will create tools to deal with Italy’s funding issues (with the FT reporting as much today), but it is more likely to be reactive than proactive to ensure legal barriers to intervene are not crossed. However, as Reid puts it: the nightmare scenario we’ve all been hypothetically thinking about for years, if not decades, is here. Runaway German inflation at the same time as soaring Italian yields. The good news is that this should bring a lot more targeted intervention and a better-balanced policy response than in the last decade where negative rates and blanket QE was a one size fits all policy. High inflation will force the ECB to hike rates while managing the fall out on a more bespoke basis. It won’t be easy, but it will likely be better balanced.
Following on from the ECB, the next day brings the US CPI data (which we previewed here). Month-over-month CPI is expected to accelerate to 0.7% from last month’s 0.3% reading. The core measure stripping out food and energy is expected to print at 0.5%. Those figures would translate to 8.3% and 5.9% for the year-over-year measures, respectively (from 8.3% and 6.2% last month).
Elsewhere, data will highlight production figures and the impact of the nascent tightening of financial conditions, with PMI, PPI, and industrial production figures due from a number of jurisdictions.
Shock CPI print notwithstanding, the Fed policy path for the next two meetings appears to be locked in to 50 basis point hikes, but Fed officials have highlighted the importance of inflation readings to determine the path of policy thereafter. There is a growing consensus that month-over-month inflation readings will have to decelerate in order to slow hikes to 25 basis points come September. Some Fed officials are still considering ramping the pace up to 75 basis points if inflation doesn’t improve. None appear to be considering zero policy action in September. We expect that to change in the coming weeks.
Courtesy of DB, here is a day-by-day calendar of events
Monday June 6
- Data: Japan April household spending, China foreign reserves
Tuesday June 7
- Data: Japan April leading index, GDP, trade balance Germany April factory orders, UK S&P services and composite PMI, US trade balance
Wednesday June 8
- Data: China aggregate financing (between June 8 and June 15), trade balance, Germany industrial production, France trade balance, Italy retail sales, UK S&P construction PMI, Eurozone final 1Q GDP, US MBA mortgage applications, wholesale inventories
Thursday June 9
- Data: Japan May machine tool orders, PPI, China PPI, US initial jobless claims, continuing claims
- Central Banks: ECB monetary policy decision
Friday June 10
- Data: Spain CPI, Italy industrial production, Germany current account, US CPI, University of Michigan sentiment surveys
- Central Banks: ECB’s Holzmann speaks, BoE inflation attitudes survey
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Finally, focusing on just the US, Goldman writes that the key economic data release this week is the CPI report on Friday. There are no speaking engagements from Fed officials this week, reflecting the FOMC blackout period for the upcoming meeting June 14-15.
Monday, June 6
- There are no major economic data releases scheduled.
Tuesday, June 7
- 08:30 AM Trade Balance, April (GS -$92.0bn, consensus -$89.5bn, last -$109.8bn): We estimate that the trade deficit decreased by $17.8bn to $92.0bn in April, reflecting a decrease in imports and an increase in exports in the advanced goods report.
Wednesday, June 8
- 10:00 AM Wholesale inventories, April final (consensus +2.1%, last +2.1%)
Thursday, June 9
- 08:30 AM Initial jobless claims, week ended June 4 (GS 195k, consensus 206k, last 200k); Continuing jobless claims, week ended May 28 (consensus 1,305k, last 1,309k): We estimate initial jobless claims edged down to 195k in the week ended June 4.
Friday, June 10
- 08:30 AM CPI (mom), May (GS +0.73%, consensus +0.7%, last +0.3%); Core CPI (mom), May (GS +0.48%, consensus +0.5%, last +0.6%); CPI (yoy), May (GS +8.29%, consensus +8.3%, last +8.3%); Core CPI (yoy), May (GS +5.88%, consensus +5.9%, last +6.2%): We estimate a 0.48% increase in May core CPI (mom sa), which would lower the year-on-year rate by three-tenths to 5.9%. Our forecast reflects a decline in apparel prices due to weaker-than-expected demand but strength elsewhere in the report. We expect higher prices for new and used cars and for auto parts related to the Ukraine-Russia war and China covid lockdowns. Within services, we believe the continued reopening of the economy further boosted prices of hotels and car insurance. We estimate rent increased by 0.50% and OER increased by 0.44%, reflecting slowing gains in our shelter tracker and an OER drag from imputed utilities. We estimate a 0.73% monthly increase in headline CPI, reflecting higher energy, grocery, and restaurant prices.
- 10:00 AM University of Michigan consumer sentiment, June preliminary (GS 56.0, consensus 58.3, last 58.4): We expect the University of Michigan consumer sentiment index decreased to 56.0 in the preliminary June reading.
Source: DB, Goldman, BofA
Mon, 06/06/2022 – 09:57