The Daily Update: The Week Ahead

Last week the focus for markets was the US CPI data and the ECB meeting on Thursday. It was a broadly positive week across asset markets. Over the week the UST 10 year yield tightened 11bps to 1.45%. The 5s30s spread tightened 5bps to 140bps and the UST market absorbed issuance of USD58bn of 3 year notes, USD38bn of 10 year notes and USD24bn of 30 year bond re-openings. The S&P 500 gained 0.41% to reach another record high.

US headline CPI gained 5% yoy, the largest increase since August 2008, exceeding expectations of a 4.7% yoy increase and well up on April’s 4.2% yoy increase. Core CPI, ex food and energy, increased 3.8% yoy, again ahead of expectations of 3.5% yoy and up from last month’s 3% yoy increase. Nevertheless, USTs rallied in the run up to the inflation release and yields continued to tighten into Thursday’s close. Base effects and supply bottlenecks are impacting readings at the moment and the Fed has been emphasising the transitory effects on inflation in its recent commentary and that it would take ‘some time’ to make ’substantial further progress’ towards its goals; the market has become more sanguine on this following the weaker non-farm payroll reports. On Friday, the preliminary reading for the June University of Michigan Sentiment gauge was stronger than expected at 86.4 from the prior reading of 82.9 and USTs gave back some of their gains over the day into Friday’s close.

As expected, the ECB left interest rates unchanged and maintained its bond buying programme at the faster current pace than earlier in 2021. The updated set of economic forecasts saw Eurozone growth estimates revised up to 4.6% and 4.7% in 2021 and 2022 from 4% and 4.1% respectively. Inflation estimates were also revised up although are expected to remain “subdued overall” due to slack in the economy and a stronger euro: 2021 and 2022 forecasts are now for 1.9% and 1.5% respectively. This backdrop was supportive of European Government Bonds. In contrast, the Central Bank of Russia raised rates by 50bps to 5.5% citing inflationary pressures and Governor Elvira Nabuillina said another rise in July was ‘very likely’.

Elsewhere, China’s May PPI reading grew 9% yoy up from 6.8% yoy in April although CPI remained subdued and came in at 1.3% yoy, below estimates. Japan’s GDP shrank less than expected, coming in at a revised -3.9% quarterly annualised from the prior estimate of -5.1% quarterly annualised. UK GDP for April grew 2.3% mom, slightly below expectations of 2.4% mom, but an increase on March growth of 2.1% mom, reflecting a pick-up in retail spending and schools being open for a full month as the economy reopened. Today is also the day that Boris Johnson will confirm whether the UK will delay the proposed ending of lockdown restrictions on June 21 given the uptick in cases from the Delta variant. The G7 gathering projected a coordinated approach on a range of global issues from covid, climate change, human rights although received some criticism from those hoping for more aggressive targets for vaccination supply to countries in need and climate goals.

In the week ahead, the FOMC meeting on June15-16 and the post meeting press conference with Fed Chair Jerome Powell will be the key market focus. This meeting will see an updated set of economic projections published with questions likely to continue to focus on progress towards the Fed’s employment and inflation goals and signs that the Fed is getting closer to starting discussing the tapering of bond purchases. The BoJ policy decision is due on Friday but no change to the settings is expected and there will be a post meeting press conference with the Governor Haruhiko Kuroda. Other central bank meetings include the Swiss Central Bank and Norges Bank on Thursday and the minutes of the last RBA meeting are also due for release on Tuesday. Central Bank speakers this week include ECB Executive Board member Isabel Schnabel, ECB Board Member Luis de Guidos, and Philip Lane ECB Chief Economist. The BoE’s Governor Andrew Bailey is due to appear at events on Monday and Tuesday.

US data releases this week include May PPI and retail sales data and the June reading for the Empire Manufacturing gauge on Tuesday. The market (Bloomberg survey) is looking for retail sales to fall 0.6% mom and expectations are for the headline May PPI reading to increase 6.2% yoy. Data for May housing starts and building permits are also due on Wednesday and the Philadelphia Fed Business Outlook gauge for June on Thursday. In the Eurozone, final reading for May CPI is due on Wednesday is likely to be the main focus although Euro area industrial production data for April also comes out on Monday. UK May CPI data is due on Wednesday with the Bloomberg survey looking for the reading to increase to 1.8% yoy up from 1.5% yoy the prior month. Key data releases from China include May industrial production and retail sales data on Wednesday. Other key events include President Biden attending an EU-US summit in Brussels and then meeting with Vladimir Putin in Geneva.