UPCOMING EVENTS:

• Monday: PBoC LPR, Fed’s Waller.
• Tuesday: RBA Meeting Minutes, Canada CPI.
• Wednesday: RBNZ Policy Decision, UK CPI, FOMC Minutes.
• Thursday: New Zealand Q1 Retail Sales, Australia/Japan/Eurozone/UK/US Flash PMIs, Eurozone Negotiated Q1 Wage Growth, US Jobless Claims.
• Friday: Japan CPI, UK Retail Sales, Canada Retail Sales, US Durable Goods Orders.

 

• ECB GOVERNING COUNCIL RETREAT (TUE-WED):

The upcoming ECB strategy review in Ireland is anticipated to stir discussions around "green monetary policy," highlighting the central bank's focus on how environmental factors intersect with monetary frameworks. While this gathering is slated as a brainstorming session without immediate policy announcements, it's a critical moment to assess how climate-related risks could potentially influence inflation dynamics, commonly referred to as "climateflation."

This strategic meeting is crucial, especially as it occurs just two weeks ahead of the June policy decision, where a rate cut is highly anticipated by the markets. The conversations could set the tone for future monetary policy adjustments, particularly in how the ECB might integrate climate considerations into its broader economic assessments and policy formulations.

Market participants and analysts will be particularly keen on any subtle cues regarding future policy directions beyond the expected rate cut. While the immediate focus for more substantive policy discussions is likely to be the Frankfurt meeting, any preliminary discussions in Ireland could provide valuable insights into the ECB's evolving policy landscape, especially regarding the integration of sustainability into its core objectives.

 

• RBA MINUTES (TUE):

The minutes from the upcoming RBA meeting will be scrutinized for deeper insights into the central bank's decision-making process and its assessment of economic conditions. Key points of interest will include the rationale behind maintaining the Cash Rate at 4.35%, especially in light of the nuanced shifts in inflation and economic growth projections.

Market participants and analysts will be keen to understand the RBA’s revised stance on inflation expectations for 2024 and the downward adjustments in GDP and unemployment forecasts. These details will be crucial in assessing the likelihood of future rate adjustments and the anticipated timeline for monetary policy normalization.

Governor Bullock’s remarks at the post-meeting press conference emphasized a cautious approach to policy adjustments, highlighting the need to remain vigilant about inflation risks while suggesting that the current rate level is appropriate for steering inflation back to the target range. The minutes may provide further elaboration on this point, potentially offering clues about the conditions under which the RBA might consider further rate hikes or adjustments.

Additionally, the discussion around the technical assumptions regarding rate forecasts, as highlighted by Governor Bullock, will be another focal point. Analysts and investors will be looking for any indications that might suggest a deviation from these assumptions based on evolving economic data or external shocks, thereby influencing market expectations and strategic planning.

Overall, the RBA minutes will be pivotal in clarifying the central bank's policy trajectory and its readiness to adapt to changing economic conditions, which will be instrumental for financial markets and policy analysts in shaping their outlooks and strategies.

 

• CANADA CPI (TUE):

The April CPI data will be instrumental for the Bank of Canada as it prepares for its upcoming policy meetings, particularly the one on June 5th. With the three core inflation measures having dipped to below 3% in March, within the BoC's target range, the April report will be closely watched to confirm if this downtrend in inflation is holding steady, which is crucial for the BoC's assessment of the economic landscape.

Governor Macklem's recent remarks suggest a nuanced approach to rate cuts, emphasizing the sustainability of inflation declines over reaching the exact 2% target quickly. This approach indicates that the BoC might consider rate reductions even if inflation hovers above the target, provided the trend shows consistent downward movement.

Market expectations reflect a growing anticipation of rate cuts, with a 45% probability priced in for a June reduction and certainty by July. This suggests that investors are aligning their strategies with a potential easing cycle, though the actual decisions will hinge critically on incoming data like the April CPI.

• Looking ahead, the market anticipates a total of 56 basis points in cuts for the year, which would typically suggest two rate cuts of 25 basis points each. However, there's also a notable minority view that a third cut might be on the table, highlighting the ongoing uncertainty and the critical role upcoming inflation data will play in shaping monetary policy.

Overall, the April CPI report is set to be a pivotal data point for the BoC, influencing not just the immediate policy decisions but also the broader monetary strategy in response to evolving economic conditions.

 

• FOMC MINUTES (WED):

The May FOMC meeting concluded with the Fed keeping interest rates steady at 5.25-5.50%, in line with expectations, but with a significant adjustment to its quantitative tightening (QT) program. The Fed reduced the monthly cap on Treasury runoffs more than anticipated, from $60 billion to $25 billion, maintaining the monthly redemption cap on agency debt and agency MBS at $35 billion. This higher-than-expected reduction in Treasury runoffs indicates a cautious approach towards tightening financial conditions further, amid mixed economic signals.

Chair Powell acknowledged that while inflation has decreased over the past year, recent months have not seen further progress towards the Fed's 2% inflation target. He emphasized the readiness to maintain current rate levels for an extended period to ensure inflation returns to target, effectively dismissing the immediate likelihood of rate hikes. This stance is aimed at balancing the risks between ensuring economic stability and preventing an employment downturn, which is now a growing concern.

The subtle change in language from “moving into better balance” to “risks...have moved toward better balance” in the FOMC statement reflects a nuanced shift in the Fed's assessment, possibly hinting at increased worries about labor market cooling. Despite these concerns, Powell downplayed the impact of the recent hot Employment Cost Index, focusing instead on softer indicators like the decline in job openings reported in the JOLTS data, which support the view that current policy settings are restrictively calibrated.

Looking forward, while the door is open for future rate cuts, Powell indicated a higher threshold for action, necessitating a consistent pattern of favorable inflation data before considering easing. This cautious approach underscores the central bank's focus on data dependency, especially in light of recent inflationary pressures that suggest core PCE might ease in April. However, the Fed seeks more sustained evidence of inflationary trends aligning closer to their target before making any policy adjustments.

Overall, the Fed’s current strategy highlights a delicate balance between fostering economic growth and controlling inflation, with a strong emphasis on adapting to incoming economic data to guide future monetary policy decisions.

 

• RBNZ ANNOUNCEMENT (WED):

The Reserve Bank of New Zealand (RBNZ) is widely anticipated to maintain the Official Cash Rate (OCR) at 5.50% in its upcoming decision, with market odds strongly favoring the status quo at 97% versus a minimal 3% chance for a 25 basis point cut. This forecast aligns with the central bank's recent communications, which have emphasized a continued need for restrictive monetary policy to mitigate inflationary pressures and align the Consumer Price Index (CPI) with the target range of 1-3% within this year.

During the last meeting, the RBNZ underscored the efficacy of current monetary settings in tempering capacity pressures, crucial for steering inflation back to target levels. The minutes highlighted a consensus among members on the necessity of maintaining a restrictive stance for a prolonged period, reflecting a minimal tolerance for deviations in achieving the inflation target on time.

Recent economic indicators lend further support to the decision to hold rates steady. Inflation showed signs of moderating both quarterly and according to the RBNZ’s Sectoral Factor Model Inflation Index, which eased slightly. Additionally, the drop in 2-year inflation expectations suggests diminishing future inflationary pressures. On the labor front, the unexpected contraction in employment and a rise in the unemployment rate further validate the central bank’s cautious approach, indicating an economy that is cooling off and potentially reducing demand-pull inflationary pressures.

Overall, the RBNZ's current policy stance appears well-calibrated against the backdrop of evolving economic conditions, with a clear inclination to adjust the OCR only if substantial deviations from expected inflationary trends emerge.

 

• UK CPI (WED):

Inflation in the UK is projected to significantly decrease to 2.1% Y/Y for April, with predictions ranging widely from 2.0% to 3.2%. The recent trend showed a decrease from 3.4% to 3.2% Y/Y in the previous month, with core inflation also retreating from 4.5% to 4.2% Y/Y. Notably, the all services component, a crucial indicator for the Monetary Policy Committee (MPC), declined marginally from 6.1% to 6.0% Y/Y, slightly above the MPC’s expected 5.8%.

The Office for National Statistics attributed the major downward influences in the last CPI data primarily to food prices. For the upcoming data, Pantheon Macroeconomics anticipates that the 3.2% headline inflation rate will be driven by disinflationary pressures across several sectors:

• The OFGEM energy price cap adjustment.
• Lower food inflation.
• Decreased goods inflation.
• Reduced services inflation, expected to fall to 5.4% Y/Y from 6.0%, subtracting about 23 basis points from the headline figure due to favorable base effects, including mobile-phone bills and rents.

Looking forward, the consultancy forecasts that services inflation will progressively decrease throughout 2024 as wage growth decelerates. This anticipated slowdown is crucial as the MPC has consistently emphasized the importance of services inflation in their assessments.

From a monetary policy standpoint, market expectations are finely balanced regarding a potential Bank of England (BoE) rate cut in June. The impending inflation report will be particularly significant for adjusting market expectations, especially with one more inflation update scheduled before the BoE's next decision. The precise figures and their components will thus be critical for shaping policy expectations and market reactions.

 

• JAPANESE CPI (FRI)

The recent Tokyo CPI figures came in significantly cooler than expected, with headline CPI at 1.8% Y/Y compared to an expected 2.6%, core CPI at 1.6% Y/Y against an anticipated 2.2%, and super-core CPI (excluding food and energy) at 1.4% Y/Y, well below the expected 2.7%. These figures suggest a cooling of inflationary pressures in the capital, which might influence expectations for the nationwide Japanese CPI data due in April.

The Bank of Japan (BoJ), having recently exited its negative interest rate policy (NIRP), will scrutinize these inflation metrics closely. The central bank's primary focus remains on the underlying trend in prices to appropriately calibrate its monetary policy. During the April meeting, the BoJ's Summary of Opinions highlighted a member's view that adjustments to the degree of monetary easing might be necessary if trend inflation accelerates, although an accommodative financial environment is expected to persist for some time.

Furthermore, the BoJ's latest Outlook Report revised upward its median inflation forecasts for the coming years, signaling expectations of sustained inflationary pressures. However, recent remarks from a former BoJ executive suggest potential reductions in bond purchase sizes next month due to a largely dysfunctional bond market. This indicates a cautious approach to tightening, with rate increases potentially delayed until September.

Adding to the complexity, the BoJ's chief economist recently hinted that the central bank might consider up to three rate hikes this year, with the next increase possibly as early as June. This aggressive stance reflects a willingness to adjust the current "excessively" easy monetary settings in response to evolving economic conditions.

These developments suggest a delicate balancing act for the BoJ, as it navigates between fostering economic growth and containing inflation within its target range. The upcoming national CPI data will be crucial for informing the central bank's next moves, particularly in the context of global economic uncertainties and domestic fiscal policies.

 

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