Central bank meetings to dominate the week

Central bank policy meetings will the focus for markets this week. The FOMC meeting will conclude on 14 June and we (and most economists according to the Bloomberg survey) expect the Fed to keep rates unchanged, to allow more time to assess incoming data. However, the May US inflation release is due tomorrow as the Fed starts its deliberations. Should inflation come in hotter than the 4.1% y/y forecast for headline CPI, or 5.2% y/y for core, the risk of another 25bp hike either this week or in July would rise. The Fed will also publish a new “dot plot” and updated economic projections at this week’s meeting. Later this week, US retail sales data for May is expected to show further softening in consumer spending, which has proved relatively resilient so far in the face of higher borrowing costs and inflation.  

The ECB is expected to raise its policy rates by 25bp on Thursday, taking the main refinancing rate to 4.0%. While inflation came in a little lower than forecast in the preliminary readings for the major European economies in May, it remains well above target at 6.1% y/y on headline and 5.3% y/y on core. Final inflation data for the Eurozone will be released the day after the ECB’s rate decision.

The Bank of Japan is expected to keep rates and the 10y yield target unchanged at Friday’s policy meeting. Producer inflation data for May released this morning came in lower than expected, declining -0.7% m/m and bringing the annual rate down to 5.1% y/y from 5.9% in April.

Egypt’s CPI inflation rate rose to 32.7% y/y in May, up from 30.6% the previous month. Prices were 2.7% higher compared to in April, up from the 1.7% m/m inflation recorded on the last print. Food inflation was a major driver of price growth as it rose 60%. Core inflation was at 40.3% in May, up from 38.6% in April

Today’s Economic Data and Events

• Turkey current account balance (Apr) forecast -USD 4.4bn

Fixed Income

• US Treasuries ended the week on a slightly softer footing with yields higher on both the 2yr UST and 10yr UST. The market is focused on this week’s FOMC meeting where a 25bps is about 30% priced in while the release of the May CPI report and the Fed’s new dots plot will give markets a stronger signal about what to expect at upcoming FOMC meetings. The 2yr UST yield closed up 8bps on Friday at 4.5956% while the 10yr yield rose 2bps to 3.7394%.
• Fitch cut its sovereign rating on Tunisia to ‘CCC-‘ as the country endures an external financing challenge. The IMF has requested Tunisia’s government to carry out reforms to release some emergency support funding.

FX

• The US dollar managed a bit of reprieve on Friday but not enough to unwind losses from earlier in the week. EURUSD settled lower by 0.3% on Friday at 1.0749 but was still up by 0.4% for the week as a whole while GBPUSD gained 0.1% on Friday but at 1.2572 was still up 1% for the five days. USDJPY moved lower last week by 0.4%, closing on Friday at 139.40.
• Commodity currencies had a decent week with gains across the board. USDCAD edged lower on Friday to 1.334, taking its losses for the week to 0.6% while AUDUSD rallied 2% last week and closed on Friday at 0.6742. NZDUSD added 1% last week at 0.6129.

Equities

• Equity markets were mixed last week, with a robust performance in East Asia but less conviction seen in much of the rest of the world. The Hang Seng gained 2.3% over the week, and while the story on the mainland was more sedate as the Shanghai Composite closed almost flat w/w on Friday, in Japan the Nikkei closed the week up 2.4%.
• It was a different story in Europe, where most of the major indices ended lower than they had the Friday previous. The composite STOXX 600 ended down 0.5%, as the CAC and the FTSE 100 lost 0.6% w/w and the DAX 0.8%.
• There were some gains in the US, but here too they were lacklustre. The NASDAQ added 0.1% w/w, the Dow Jones 0.3%, and the S&P 500 0.4%.
• Locally, the DFM had a strong week as it closed up 2.7% w/w on Friday. The ADX ended the week 0.4% lower.

Commodities

• Oil prices dropped a second week running, even as the market was shocked with surprise cuts from Saudi Arabia at the front of the week. Brent futures fell 1.8% last week to close at USD 74.79/b while WTI dropped 2.2% to settle at USD 70.17/b.
• Both US and Iranian officials denied that there had been any progress on negotiations to restore the JCPOA. Oil markets had briefly plunged on Thursday as several news agencies reported that progress had been made on a new deal.