The Daily Update: The Week Ahead

Last week the FOMC meeting was the key event for markets. As expected, the FOMC made no changes to the Fed Funds rate or asset purchases but the Fed was seen as taking a more hawkish tilt. The economic projections painted a more upbeat picture on the economy: the median growth projection for 2021 increased to 7% from 6.5% in March. Core PCE inflation was also revised up to 3% from 2.2% in March. A number of Fed members upwardly revised their projections for the Fed Funds rate and the median projection now shows the Fed Funds rate at 0.6% in 2023 when the March median was for no rate increase in 2023. Plus, 7 officials (out of 18) expected to raise rates in 2022, compared to 4 members in March. However, Jerome Powell said market participants should take the dot plot with a ‘big grain of salt’. On tapering, Powell confirmed that the Fed ‘talked about talking about tapering’ but he gave no obvious signal on the timing of any announcement or reduction on bond buying. He said that assuming progress continued ‘it will be appropriate to consider announcing a plan for reducing our asset purchases at a future meeting’ . Powell was at pains to stress that the Fed would give ‘advance notice’ on any decision but that a decision would depend on data, not on the calendar. He stressed that the Fed intends for a future adjustment to asset purchases to be ‘orderly, methodical, and transparent’ and that the Fed wants to give as much transparency as possible, adding that they see ‘real value’ in communicating well in advance.

USTs came under pressure following the FOMC announcement and press conference: the yield on the UST 10 year backed up 9bps on the day to 1.58% at Wednesday’s close but then the long end of the UST curve recovered strongly into Friday’s close. However, over the week, the UST 10 year yield tightened 1bps to 1.44% and the UST 30 year yield tightened 12bps to 2.02%. The UST yield curve flattened with the 5s30s spread tightening 27bps to 113bps. While shorter dated yields have backed up the more hawkish tone from the Fed has brought forward expectations for tightening and for inflationary pressures to remain in check once the transitory pressures pass. Equities saw some unwind of the inflation trade on the prospect for earlier than expected rate rises: the S&P 500 fell 1.91%.

Aside from May PPI which increased 6.6% yoy ahead of expectations, US data releases over the week generally disappointed; May retail sales fell 1.3% mom against expectations of a decline of 0.8% mom. Stripping out auto sales retail sales fell 0.7% mom when expectations were for +0.4% mom. The Empire Manufacturing gauge also came in below expectations at 17.4 and the Philadelphia Fed gauge came in a bit below expectations. Weekly jobless claims also increased to 412,000, the first increase since late April. The key will be when the base effects/supply bottlenecks start to drop out of the numbers and the underlying strength of the recovery becomes clearer. Elsewhere, the BOJ left its rate and yield targets unchanged but extended its pandemic lending programme by 6 months.

In the week ahead, the Bank of England meeting on Tuesday is the key central bank meeting is likely to be closely watched given the reopening and recovery of the economy but also given the pick-up in the inflation data. Last week the UK headline CPI inflation for May increased 2.1% yoy which exceeded market expectations of a 1.8% increase and the BoE 2% target. The core rate increased 2% yoy ahead of market expectations of a 1.5% yoy increase. The 10 year gilt yield increased 4bps on the week to 0.75%. It will be interesting to see if the panel becomes more split on interest rates and changes to its asset purchases. As expected, today the PBoC kept the 1 year and 5 year Loan Prime Rates unchanged at 3.85% and 4.65% respectively. Other central meetings include Hungary, the Czech Republic and Mexico. Fed speakers due to appear include James Bullard, Robert Kaplan, John Williams, Loretta Mester, Mary Daly, Raphael Bostic, Eric Rosengren and Patrick Harker. Jerome Powell is also due to appear before a House subcommittee on the Fed pandemic response on Tuesday. ECB speakers include ECB President Christine Lagarde who addresses the European parliament on Monday, ECB Vice President Luis de Guindos, ECB Executive Board members Isabel Schnabel and Fabio Panetta.

Data-wise, on Wednesday there will be a slew of preliminary June Markit PMI readings with the US, Eurozone, France, Germany and UK all due for release on Wednesday. In Japan, the June Jibun PMI readings are also due for release. In the US, the week starts with the Chicago Fed National Activity Index reading for May and on Thursday the US durable goods data for May are also due for release. Existing home sales and new homes sales data for May are also due on Tuesday and Wednesday respectively. On Friday, the May personal spending and income and PCE deflator data will be a focus: the Bloomberg survey is looking for the core PCE reading to increase 0.6% mom and 3.4% yoy. In Europe, the German IFO data for June is also due Thursday with the Bloomberg survey looking for an improvement in the readings for expectations, business climate and current assessment compared to May. Other events include an EU leaders’ meeting on Thursday where issues such as covid, migration, the recovery and foreign relations are expected to be discussed.