The US Dollar was king last week! Although the ECB pre-committed to at 25bps rate hike at the July meeting, it failed to address what would be done if peripheral country’s interest rates rose more then the core EU interest rates. Fragmentation could lead to another debt crisis. In addition, the US CPI for May was hot, coming in at 8.6% YoY vs 8.3% YoY expected and 8.3% YoY in April. This was the highest reading since December 1981! This week brings more central bank meetings, as the Fed, BOE, SNB, and BOJ all have interest rate meetings! Traders will be watching to see if, and by how much, these central banks raise rates. In addition, traders will be watching the forward guidance for any clues as to what the Committees are thinking in terms of future interest rate hikes!
The RBA surprised the markets last week and hiked key interest rates by 50bps from 0.35% to 0.85%. Expectations were for a hike in the range of 25bps to 40bps. The RBA noted that inflation has increased significantly and is likely to be higher than was previously expected a month ago. The Board therefore expects to take further steps in normalizing monetary conditions over the months ahead. The RBA also noted the tightness in the labor market, as the Unemployment Rate sits at 50-year lows of 3.9% and is expected to drop further. This will also add to higher inflation and wage growth.
The ECB left interest rates unchanged, as expected, and announced that its Quantitative Easing Program under the APP will end on July 1st. This sets the table for a rate hike at its July meeting. The Committee pre-committed to a 25bps at that meeting and said that it will hike again at the September meeting. The door was left open for the amount to hike in September, depending on whether the 2024 staff inflation projections are greater than 2.1%. If so, Christine Lagarde said that the interest rate increase at that meeting will be greater than 25bps. However, the markets were looking for a more hawkish ECB last week, and therefore, the euro sold off after the meeting. Something the ECB neglected to provide enough information on was fragmentation of the Eurozone between peripheral countries and core counties. Markets were disappointed the ECB didn’t have a clear plan if interest rate spreads widened. The only comment was that the ECB would buy more of the peripheral country’s bonds if rates were too high (i.e. another bond buying program).
The FOMC meets on Wednesday and, by all indications, is expected to hike 50bps, bringing the Fed Funds rate from 1.0% to 1.5%. In addition, the committee will release forecasts for interest rates (dot plot), inflation and growth. However, with a CPI reading for May at 8.6%, its highest level since December 1981, could the Committee surprise the markets and hike by 75bps? It’s possible, but not the likely scenario. Fed officials have also indicated that they expect to raise interest rates by another 50bps at the July meeting. Again, watch for comments that may suggest the possibility of raising 75bps at that meeting. (Before the July meeting, markets will get a look at the June inflation data.) Looking out to the September meeting, the Fed said that it will be looking to raise rates again, with some Fed officials suggesting only 25bps. But the door was left open for the possibility of raising rates more than that. Watch the dot plots to see if they suggest a 50bps rate hike at the September meeting as well!
The BOE is expected to hike rates by “only” 25bps as it weighs the struggle between inflation and growth. This will increase the Bank Rate from 1% to 1.25%. The BOE is particularly concerned about the effect that high inflation and high interest rates will have on household incomes. The BOE currently forecasts that GDP will turn negative in Q4, while inflation is expected to peak at 10% in Q4. The May CPI reading was 9% YoY vs 7% YoY in April, while the core rate was 6.2% YoY, up from 5.7% YoY.
BOJ and SNB
The BOJ is expected to leave rates unchanged at -0.1%. The central bank should also continue to buy 10-year JGBs when necessary to keep rates at the 0.25% cap. As a result of the negative interest rate policy in Japan, interest rate differentials have been increasing dramatically over the last several months. Therefore, the Yen has fallen sharply against other currencies. Watch for BOJ officials to try and “talk down” many of the Yen pairs with possible threats of intervention. As for the Swiss National Bank, expectations are that the central bank will leave rates unchanged at -0.75% in order to fight off a strong Swiss Franc. However, the May CPI reading was 2.9% YoY, up from 2.5% YoY in May and 2.2% YoY at its last meeting. Could the SNB surprise the markets and hike 25bps to bring interest rates to the still ultra-conservative rate of -0.50?
Although earnings season is just about over, there are still a few lingering names that need to be watched for results. They include ORCL and ADBE.
In addition to the many central bank meetings this week, there is economic data that is worth watching. Given the surprise US CPI reading of 8.6% YoY on Friday, traders will be watching US May Retail Sales to see if higher prices affected consumer spending. In addition, Employment data will be released by both the UK and Australia this week. And China will have a data dump on Wednesday! Other major economic data releases are as follows:
- Japan: BSI Large Manufacturing (Q2)
- UK: GDP (APR)
- UK: Trade Balance (APR)
- UK: Industrial Production (APR)
- UK: Manufacturing Production (APR)
- New Zealand: Food Inflation (MAY)
- Australia: NAB Business Confidence (MAY)
- Australia: House Price Index (Q1)
- Japan: Industrial Production Final (APR)
- Germany: CPI Final (MAY)
- UK: Claimant Count Change (MAY)
- EU: Industrial Production (APR)
- Germany: ZEW Economic Sentiment Index (JUN)
- US: PPI (MAY)
- Japan: Reuters Tankan Index (JUN)
- Japan: Machinery Orders (APR)
- Australia: Westpac Consumer Confidence Change (JUN)
- China: Industrial Production (MAY)
- China: Retail Sales (MAY)
- China: Unemployment Rate (MAY)
- EU: Trade Balance (APR)
- Canada: Housing Starts (MAY)
- US: Retail Sales (MAY)
- US: NY Empire State Manufacturing Index (JUN)
- US: Business Inventories (APR)
- US: NAHB Housing Market Index (JUN)
- US: Fed Interest Rate Decision
- Crude Inventories
- New Zealand: GDP Growth Rate (Q1)
- Japan: Trade Balance (MAY)
- Australia: Employment Change (MAY)
- China: House Price Index (MAY)
- Switzerland: SNB Interest Rate Decision
- EU: Labour Cost Index (Q1)
- EU: Wage Growth (Q1)
- UK: BOE Interest Rate Decision
- US: Housing Starts (MAY)
- US: Building Permits (MAY)
- US: Philadelphia Fed Manufacturing Index (JUN)
- New Zealand: Business NZ PMI (MAY)
- Japan: BOJ Interest Rate Decision
- UK: Retail Sales (MAY)
- EU: CPI Final (MAY)
- Canada: PPI (MAY)
- US: Industrial Production (MAY)
- US: Manufacturing Production (MAY)
Chart of the Week: Weekly Ethereum (ETH)
Source: Tradingview, Stone X
Its been a while since we have shown any cryptocurrencies as the Chart of the Week, however this week brings a new low point for Ethereum. The cryptocurrency has closed lower for the last 10 weeks in a row, including this week. Ethereum made an all-time high during the week of November 8th, 2021 near 4867.81. Since then, ETH has been trading lower and formed an AB=CD pattern on the weekly timeframe, which targets near 975.00. This week, price definitively traded below the 61.8% Fibonacci retracement level from the lows of March 2020 to the all-time highs at 1935.70. As of the time of this writing, the low for the week has been 1655.00. If price is to get to the pattern target, it must first pass through support at previous lows from March 2021 near 1548.69 and then support at the lows from February 2021 at 1292.76. Below there is the 200 Week Moving Average at 1192.85. However, if price reverses, first resistance is at the spike lows from the week May 9th at 1701. Above there, price can move to the psychological round number resistance level at 2000, then horizontal resistance at 2445.
This week brings a plethora of central bank meetings, including the FOMC, SNB, BOE, and BOJ. Will these central banks raise rates 50bps, 25bps, or not at all? If this week of central bank meetings is anything like last weeks, markets will be volatile. In addition, watch for Retail Sales data from the US, Employment Data from the UK and Australia, and a data dump from China on Wednesday!
Have a great weekend!