After a packed week for US data, the US calendar is looking relatively light for the next seven days. However, the spotlight will stay on the US as Fed Chair Janet Yellen delivers a speech on June 6, which may offer the final clue on whether the Fed will raise rates in the middle of the month. Also to watch are revised GDP estimates for Japan and the Eurozone. Plus, the Reserve Bank of Australia and the Reserve Bank of New Zealand both meet for their scheduled policy meetings.
RBA and RBNZ likely to hold rates
Australia’s and New Zealand’s central banks have both cut rates once already this year and while both have signalled their bias for further easing, neither central bank is expected to lower rates at this month’s meetings.
The RBA will meet on Tuesday and is likely to hold rates at a record low of 1.75%. Australia’s economy remains fairly robust and its GDP expanded by an enviable rate of 1.1% q/q in the first quarter of the year. However, the RBA is worried about inflation staying below its target band of 2-3% for too long and is also not keen on seeing the Australian dollar appreciating.
The RBNZ is in a similar position with growth above 3% but an inflation rate hovering just above 0%. Markets are pricing around a 30% probability that the RBNZ will cut rates on Wednesday to 2.0% from 2.25%. If not, there will be a significant probability that the central bank will move in August. The New Zealand dollar could therefore face more downwards pressure until the next cut.
No respite expected for Chinese exporters
The yuan has been on a gradual but steady downtrend against the dollar since last summer but Chinese exporters have yet to see a substantial benefit from a weaker currency as exports are expected to continue declining in May. Exports from China are forecast to drop by 3.6% y/y in May, down from -1.8% in April. Imports are expected to improve though, as they are forecast to decline by 6.0% in May versus a 10.9% drop the prior month. The trade data is released on Wednesday.
Also to watch for China are the latest CPI figures out on Thursday. Annual inflation is expected to hold steady at 2.3% in May.
Japan GDP expected to get revised up
Japan’s GDP will get a second estimate on Tuesday and will likely be revised up. Quarter-on-quarter growth is forecast to be revised from 0.4% to 0.5% for the first quarter. Whether this would be significant enough to dissuade the Bank of Japan from further action is unclear, though many economists expect the BoJ to ease again by July. In other data for Japan, April machinery orders are out on Wednesday and forecast to have dropped by 3.8% m/m. This compares with a 5.5% gain the prior month.
UK industrial output to stay flat in April
As Brexit uncertainty continues to impact business investment plans, the UK’s beleaguered manufacturing sector appears to be bearing the brunt of this. Manufacturing production (out on Wednesday) is forecast to remain unchanged in April on a monthly basis, though the year-on-year decline is expected to ease from 1.9% to 1.5%. Overall industrial output is also forecast to see no growth in April. Meanwhile, the UK’s large trade deficit is estimated to see only a marginal improvement in April when released on Thursday. The data is unlikely to have much effect on sterling which lately appears solely driven by Brexit opinion polls.
Eurozone GDP to stay unrevised
GDP growth for the Eurozone is expected to be confirmed at 0.5% q/q on Tuesday as the region continues to recover at a moderate pace. The ECB this week issued a rare upgrade to its growth forecast for the euro area, putting the euro under some pressure as the ECB’s forecasts failed to meet market expectations.
The key data for the Eurozone next week will likely come from Germany though as industrial output and trade data for the country are released. German industrial production out on Tuesday is forecast to rise by 0.6% m/m in April after contracting by 1.3% in March. But exports could see a dip in April as they are forecast to fall by 0.7% m/m when released on Thursday.
All eyes on Yellen as June rate hike expectations fade
Market expectations of a June rate hike as implied by the fed funds futures market jumped to 34% after the Fed’s hawkish FOMC minutes for April. They have since fallen to 17% as traders become more sceptical of a rate hike just a week before the UK’s EU referendum. On the other hand, the likelihood of a July hike has increased to 57% as the Fed would have had more data to analyse by then.
Fed Chair Janet Yellen could provide a valuable insight on the Fed’s mindset when she gives a speech at the World Affairs Council of Philadelphia on Monday. Yellen will be the last Fed policymaker to make a public appearance before the June 14-15 FOMC meeting and may use this opportunity to guide the markets on what to expect.
In terms of data, it will be a quiet week for the US with the only major release being the University of Michigan preliminary confidence survey out on Friday. The UoM confidence index is forecast to fall slightly from 94.7 in May to 94.0 in June.
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