Bumper Week of Event Risk Ahead

Featuring two central bank updates – the Bank of Canada and the European Central Bank – a slew of job numbers out of the US and Aussie GDP growth data, the first full week of June is poised to be eventful.

The Week That Was

Stateside, consumers were more optimistic in May. According to the US Conference Board’s Consumer Confidence Index, it rose for the first time in four months to 102.0 from 97.5 the previous month. However, in terms of output of goods and services, the preliminary (second) estimate for US real GDP growth revealed economic activity increased by +1.3% (annualised) in Q1 2024. This was in line with market expectations, though 0.3 percentage points lower than the annual rate of +1.6%, per the advance estimate released last month; this also follows an annualised rate of +3.4% for Q4 2023.

The Fed’s preferred measure of inflation also made the airwaves on Friday; the personal consumption expenditures price index (PCE) was largely in line with market estimates. The core PCE measure, which excludes food and energy components, rose +0.2% between March and April from +0.3% and increased +2.8% on a year-on-year basis (unchanged from the prior month and consistent with expectations).

Personal income increased +0.3% in April, slowing from March’s +0.5%, while personal consumption expenditures increased +0.2% from +0.7% over the same period. US Treasury yields and the US dollar (USD) immediately plunged south following the release, with US equity index futures catching a bid. Regarding market pricing, OIS traders are still pricing in at least one rate cut this year. Currently, it’s a coin toss between November and December’s policy meeting (a total of 33bps of easing is presently priced in).

Across the pond, euro area inflation revealed a pick-up in inflation, increasing to a four-month high ahead of this week’s policy-setting meeting on Thursday. According to the Flash estimate provided by Eurostat, year-on-year CPI inflation rose +2.6%, up from +2.4% in April and bettering the +2.5% median estimate. The increase was largely due to a rise in services inflation, jumping +4.1% in the twelve months to May from +3.7% in April.

Despite the data, many desks believe that this is unlikely the start of an acceleration in inflation, and 24bps of easing is still priced in for this week’s event, according to the OIS market (suggesting a rate cut is on the table). For the year, approximately 57bps of easing is priced in compared to 60bps before the release of inflation data.

Aussie CPI inflation also claimed a portion of the spotlight last week, showing an acceleration for a second successive month to +3.6% in April on a year-on-year basis. This move considerably dented the chances of policy easing this year, consequently increasing the prospect of a potential rate increase.

US Jobs Data on the Radar

How did the US labour market perform in May, and is it slowing sufficiently to help strengthen the case for a rate cut this year?

Following the latest round of FOMC minutes exhibiting a higher-for-longer vibe amidst increasing inflationary pressures – with some Fed officials even voicing the prospect of policy tightening – investors will closely monitor this week’s jobs data for signs of cooling.

While this week’s data will likely move the market’s dial, the Fed will need to see a handful of softening metrics before the pendulum returns to a rate-cutting bearing. Any broad miss in upcoming data will likely fuel USD downside and increase the prospect of rate cuts this year. A downside surprise could also underpin bonds and equities.

US non-farm payrolls data headlines Friday’s calendar at 12:30 pm GMT. Bloomberg’s median estimate indicates a rise in employment growth, adding 180,000 new payrolls in May; however, we have a relatively broad estimate range to work with between 230,000 and 120,000.

Unemployment is expected to remain at 3.9%, though the estimate high is 4.0% and the low is currently 3.8%. Wage growth is anticipated to increase moderately between April and May to +0.3% from +0.2% and remain at +3.9% year over year.

Additional data to pencil in is the US ISM manufacturing PMI, which is out on Monday. Tuesday also welcomes US JOLTs data, while Wednesday, in addition to the Bank of Canada (BoC) rate decision, features Aussie GDP growth figures, the US ADP non-farm employment number and the US ISM services PMI.

Two Central Banks; Two Rate Cuts?

The BoC hits the wires on Wednesday at 1:45 pm GMT and is widely anticipated to cut rates by 25bps amid cooling inflation (we’re now within the central bank’s inflation band between 1% and 3%) and a softening labour market.

However, some desks remain on the fence and favour a cut at July’s meeting. Unlike Governing Council Members out of the European Central Bank (ECB), BoC officials have not voiced much in the way of support for easing policy this week.

Ahead of the event, Friday welcomed the latest update for economic activity out of Canada – the last key data print ahead of the policy meeting. The release surprised to the downside, showing real GDP for Q1 2024 expanded slower than expected at an annualised rate of 1.7%, comfortably below the market consensus of 2.2% and the BoC’s forecast of 2.8%.

Couple this with unemployment remaining at a two-year high of 6.1%, rising from the low seen in June and July of 2022 (4.9%), and year-on-year wage growth consolidating since early 2022 between 1.8% and 4.5%, the BoC could very well step up and cut rates this week. Still, the path following this is uncertain, therefore language in the accompanying rate statement and communication through the press conference will be meticulously scrutinised and could ultimately influence CAD pairs.

The ECB is also poised to claim the spotlight on Thursday at 12:15 pm GMT this week and markets and economists have largely priced in a 25bp cut. ECB Governing Council Members have been outspoken about a cut at this meeting; in fact, no Members have openly pushed back against the idea of easing policy; ECB Vice-President de Guindos even referred to this as a ‘fait accompli’. Anything other than a cut would be a surprise, and a market-moving surprise at that.

Where things do become more opaque is the direction following a June rate cut. ECB Board Member Schnabel noted that ‘based on current data, a rate cut in July does not seem warranted’, while Speaking to the Financial Times at the end of May, ECB Chief Economist Philip Lane commented: ‘Barring major surprises, at this point in time, there is enough in what we see to remove the top level of restriction’. Lane added: ‘The data flow over the coming months will help us decide the speed at which we remove more restrictiveness’.

With a rate cut all but a done deal, attention falls on ECB President Christine Lagarde’s press conference and the ECB’s new Staff Projections for any insight into future rate cuts, which could prove market-moving. This will be particularly interesting after Eurostat revealed that annual inflation rose for the first time in five months in May to +2.6%, matching February’s rate.

G10 FX (5-Day Change)

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