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• ECB members disagree about the rates outlook
• Key data releases including the June CPI figures
• A soft inflation report is unlikely to result in a dovish July ECB meeting
• Political risks keep the euro under pressure

The ECB hawks are clearly upset

It has been three weeks since the first ECB rate cut, and the situation feels very different to a traditional monetary policy easing cycle. Under normal conditions, every meeting would be considered a “live” one with most ECB members happily singing the same tune. However, this is not the case at this juncture.

The main message from the June 6 ECB gathering was that President Lagarde et al made the first crucial step, but they need to see a plethora of data confirming the disinflation process in order to cut rates again. This statement captures the sentiment in the ECB hawks’ ranks. They feel that they were pinned in the corner and hence forced to agree on a rate cut in June without really being convinced of the need for such an action.

However, they voted in favour of the rate move as backing down from a barrage of dovish comments, mostly from ECB doves, would have dealt another very serious blow to ECB’s credibility. Thursday’s release of the ECB meeting minutes could shed more light on the difficult behind-the-door discussions.

The barrier for another rate cut is higher now

The end product of this growing dichotomy is that the barrier for the next rate cut is much higher now. A month of weak data will not lead to a cut as the hawks want strong evidence that inflation is slowing down, especially in the services sector. Therefore, they appear determined to block any rate cut discussions until September when the new ECB staff projections will be ready. As such, the July meeting is not expected to produce a surprise.

The doves, though, remain committed to further ease monetary policy. Comments from ECB members Rehn and Knot about three rate cuts being reasonable in 2024 means that the debate during the next ECB meetings, starting with the July 18 one, could be described as hostile with President Lagarde facing her toughest challenge yet.

Maybe the ECB forum on Central Banking held in Sintra, Portugal on July 1-3 could help mend some of the ECB members’ differences. In addition, with the far-right parties faring well in the recent European elections, the ECB will probably draw even more criticisms than praise going forward. Hence, it is imperative for the next ECB actions to be extremely well thought-out and have the unanimous backing of the entire ECB council.

All eyes on the CPI report

At the end of the day, ECB members agree that the data will determine the ECB’s next steps. With the market most likely digesting the result of the first round of the French parliamentary election held this weekend, which could potentially unsettle even more the fragile European political scene, next week’s calendar starts on a high note.

The preliminary inflation report from Germany will be published on Monday with the Eurozone aggregate figures following on Tuesday. The final PMI surveys will also be released during the week with a decent chance of an upward revision in the German figures, but not in the French numbers as the local economy remains numb ahead of the parliamentary elections.

The market is currently expecting both the eurozone headline and core inflation rates to ease to 2.5% and 2.8% year-on-year respectively. The initial inflation prints from France, Italy and Spain point to a small possibility of an upside surprise to Tuesday’s prints. However, even in this case, the ECB doves will quickly try to dismiss the report. Chief Economist and Executive Board members Philip Lane has already been on the wires downgrading the importance of the monthly inflation reports, particularly when they are deemed to contain more noise than signaling power.

Euro remains under pressure as political risks linger

The euro remains on the backfoot against the US dollar as eurozone political risks linger and because the US continues to enjoy strong economic data that gradually push out the date of the first Fed rate cut. The outcome of the French elections could set the tone for next week, but the inflation report could quickly dictate the market moves.

A strong CPI report could help the euro reclaim the 1.0735 level and then tentatively open the door to a move towards the busier 1.0774-1.0796 area. On the flip side, a weak set of CPI prints might not increase the chances of a July ECB rate cut but it could add to the already negative market sentiment for the euro. A retest of the early April low at 1.0600 could reignite discussions about euro/dollar parity.

• France and UK go to the polls; will elections bring chaos or order?
• US payrolls report for June awaited as Fed hawks don’t budge
• Eurozone CPI, Fed minutes and ECB forum also on investors’ radar

Macron’s gamble set to backfire

Political risks came back to haunt the euro in June as the resurgence in popularity for far-right parties sparked jitters in financial markets. France has been at the centre of this resurgence where Marine Le Pen’s National Rally party is on course to repeat its success in the European elections in the country’s legislative vote. The first round of the election takes place on Sunday, June 30, with the second round due a week later.

Most polls show that President Macron’s decision to call snap elections in the likely hope of forming a new coalition against the far right will not pay off. But markets are no longer as worried about a far-right government as they were in the immediate aftermath of the European election results. The National Rally party appears to have shifted towards the mainstream in its bid to appeal to more voters and secure an absolute majority, rowing back on some of its more radical pledges. It's even said it will abide by the EU’s fiscal rules, which has been music to investors’ ears.

A bigger problem now for the markets is the possibility of the left-wing coalition leading the next government, which is more likely to spend recklessly and trigger a Liz Truss-style debt crisis. The left-wing alliance has overtaken Macron’s Ensemble coalition in the polls so should it come a close second after the National Rally, it could be in a position to form the next government.

Markets seem just as worried about the prospect of political paralysis in the event of a hung parliament. Even if the major parties were to put their differences aside and agree to a unity government to end a stalemate or keep the far right out of power, there is a danger that it may not survive long, hence the nervousness in the markets.

Will flash CPI boost ECB cut bets?

A strong showing for the National Rally could send the euro as well as French stocks and bonds lower on Monday in a knee jerk reaction before potentially rebounding, whereas a better-than-expected outcome for the other parties might initially be seen as positive before caution sets in.

Uncertainty about the French elections as well as concerns about political stability in other Eurozone countries has already started to weigh on business confidence and should that begin to hurt the growth outlook, the European Central Bank would be less likely to hesitate to cut interest rates again.

On that front, policymakers will be closely monitoring Tuesday's flash CPI readings for the euro area following the surprise uptick in May in the headline figure to 2.6% y/y. The forecasts point to a small drop to 2.5% in June, which if confirmed, the euro could come under slight pressure as traders would raise their bets of a September cut.

But investors will be just as interested to hear what Lagarde & Co. will have to say on the price outlook during the three-day forum on central banking organized by the ECB in Sintra, Portugal. Fed officials, including Chair Powell will also be in attendance and take part in a panel discussion with President Lagarde on Tuesday.

UK’s Labour expected to win landslide

Across the Channel, there is less uncertainty surrounding the outcome of the UK general election on Thursday. Prime Minister Rishi Sunak has failed to turn the ruling Conservatives’ fortunes around despite a hard-fought campaign. The opposition Labour party are riding high in the opinion polls and could even win a supermajority.

As appealing as a stable government is for sterling right now given how tumultuous the past few years have been under the Tories, a weak opposition might worry some investors. There is a risk that the Conservatives might even be beaten to third place, losing out to Britain’s own far-right party, Reform UK, led by Brexiteer Nigel Farage.

However, it’s also possible that the Tories might do somewhat better than the polls suggest, giving Labour a narrower victory, and this could be positive for UK assets. But the real test for the pound will probably come after Keir Starmer has settled into Number 10 and the new finance minister, expected to be Rachel Reeves, has started to outline more details about Labour’s economic agenda.

Will NFP and ISM PMIs spoil the dollar’s bullish run?

With both the euro and pound gripped by domestic politics, investors are only slowly turning their attention to the upcoming US presidential election and monetary policy continues to be the dominant theme for the US dollar. The recent encouraging data on inflation as well as the signs of a slowdown in consumer spending and the housing market have bolstered hopes of a September rate cut by the Fed even though policymakers don’t yet seem convinced.

The ongoing tightness of the labour market is probably the main reason why the Fed is reluctant to drop its hawkish bias and Friday’s jobs report might not do much in changing that. Nonfarm payrolls are projected to have increased by 180k in June, which would be down from 272k in the prior month but still considered as a solid print.

The unemployment rate is forecast to have remained steady at 4.0% in June, while average hourly earnings are expected to have risen by 0.3% m/m versus 0.4% in May.

Ahead of the NFP release, there will be other gauges on the labour market, including the JOLTS job openings and Challenger layoffs on Tuesday, as well as the ADP employment report on Wednesday. In addition, the minutes of the June FOMC meeting will be published on Wednesday and may reveal more on policymakers’ thinking after most pencilled in just one cut for 2024 in the latest dot plot.

Should investors fail to get much clarity from the job indicators, they will focus more on the ISM PMIs. The manufacturing PMI is out on Monday and the services PMI follows on Wednesday.

The former is forecast to edge up to from 48.7 to 49.0, while the latter is expected to dip from 53.8 to 52.0. A weaker services PMI would be positive for Wall Street, as long as it doesn’t decline more than anticipated. But more importantly, markets will be hoping to see a deceleration in factory gate inflation.

The dollar is vulnerable to a selloff should the incoming data be broadly on the soft side following the steady gains over the past month.

Loonie and kiwi on data watch ahead of July rate decisions

Canada will also see the release of jobs numbers on Friday, which could prove crucial for the Bank of Canada’s July policy decision. Expectations for a rate cut next month fell sharply after the hotter-than-expected May CPI figures. Wage growth is also a bit of a concern as it accelerated to 5.2% y/y in May. Any moderation in June could lift the odds of a back-to-back rate cut, pulling the Canadian dollar lower.

In the bigger picture, Canada’s labour market has been slowly cooling, with the jobless rate edging up from 2022’s post-pandemic lows, despite a healthy rise in employment.

In New Zealand, the kiwi will be keeping an eye on Tuesday’s NZIER business confidence gauge as the RBNZ’s next policy decision approaches on July 10, while its aussie cousin will be watching PMI numbers out of China.

The official manufacturing PMI due on Monday is expected to hold unchanged below 50 at 49.5 in June, but the Caixin equivalent is forecast to have eased slightly to 51.2.

Adding to Monday’s unusually busy start to the week is the Bank of Japan’s quarterly Tankan business survey. The outlook by businesses was likely little changed compared to the previous survey but which nevertheless doesn’t reflect the sluggish growth seen in the hard data. So, signs of ongoing optimism may offer the battered yen a supportive hand.

This week has been quiet in terms of global macro data and events. In this final Weekly Focus before the summer break, we will thus mainly highlight key data and events to watch until the Weekly Focus returns on Friday, 16 August.

This week's data releases included June inflation figures from France, Spain, and Italy, which were in line with expectations. Consequently, we continue to anticipate a decline in both euro area headline and core inflation to 2.5% and 2.8% y/y, respectively, on Tuesday. Core inflation remains subdued due to negligible inflation in core goods, while the momentum in core services is higher than the ECB would prefer.

The Ifo index of the German economy declined unexpectedly in June like the PMI report. The decline in June follows three months of increases in the Ifo and PMI indices. While we should not put too much emphasis on one month, the June data clearly questions the strength of the growth rebound in Germany and the euro area.

We can look forward to several significant events and data releases throughout the summer. The upcoming French elections on the next two Sundays could likely result in a "hung parliament," easing market concerns about significant spending increases. Should the National Rally (RN) win an absolute majority, we anticipate a rise in spending. However, RN's recent scaling back of expensive initiatives and softer EU rhetoric suggest that the yield spread to Germany will decrease in either scenario.

In July, the ECB, Fed, and BoJ will hold monetary policy meetings. We anticipate no changes in policy rates from the ECB and Fed, as neither has signalled a pressing need to adjust rates this summer. With inflation remaining persistent and economies coping well with current policies, both are likely to delay any rate cuts until more data is available; we expect the Fed to deliver the first rate cut in September and the ECB in December. At the BoJ meeting, a detailed tapering plan is expected as warranted at the June meeting. We expect no rate hike despite the weak yen as price pressures have muted and we are still waiting for any significant reflationary spillover from the solid spring wage increases.

On the data front, the key data to follow during the summer will be the euro area and US inflation and PMI data. We anticipate that the euro area PMIs will remain largely stable, with the manufacturing sector showing improvement and the service sector maintaining a high level. We expect July HICP at 2.4% y/y. In the US, we expect a gradual cooling of data over the summer, with July's core CPI increasing by 0.2% month-on-month, seasonally adjusted, and non-farm payrolls adding +180k jobs on Friday.

In China focus over the summer will be on the so-called Third Plenum, which is a gathering of the Central Committee of the Chinese communist party, taking place every five years and laying out reform blueprints for the next five years. In terms of key figures, the most important ones will be PMIs, home sales and retail sales.

In Japan, we get the Q2 Tankan survey on Monday, which will be interesting following the steep decline in service PMI for June. The economic recovery in Japan has been sputtering this year and Tankan data will be important input ahead of the 31 July BoJ meeting.

Full report in PDF.

Markets

Today’s avalanche of inflation numbers had little surprises in store. Euro area member states France (0.1% m/m, 2.6% y/y) and Spain (0.3% m/m, 3.5% y/y) reported theirs ahead of the June European figure next Tuesday. Both printed bang in line with expectations, suggesting an outcome close to the European consensus of 2.5%. US May PCE deflators were up next, coming in … bang in line with expectations. The headline index was flat on the month and eased from 2.7% to 2.6% y/y. The core gauge rose 0.1% m/m and 2.6% y/y with an upward revision of the April reading to 0.3% m/m. The CPIs published earlier this month, if anything, entailed risks for a downside surprise. So to see US yields still snap lower (daily losses between 0.5 and 4.5 bps) on a PCE exactly as expected tells a lot about the current market sentiment. The end of the quarter is likely to have supported a more technical bid as well, in particular since it coincides with an important weekend. The first round of the snap French parliamentary elections takes place this Sunday. Market nervousness translates into French asset underperformance. The CAC40 loses 0.7% vs other European indices trading flat to only marginally lower. The OAT/Bund spread rises 4 bps, more than semi-core peers including Belgium (flat) and comparable to daily changes in the European periphery (Italy +3 bps, Spain +6 bps, Portugal +1 bps, Greece +2 bps). On a yield level, the French 10-yr tenor briefly surpassed the previous YtD high seen in the aftermath of Macron’s announcement. This compares to the German reference that’s still trading 20+ bps below the YtD. A wary euro is unable to profit from UST outperformance. EUR/USD trades around the 1.07 barrier. Election fever is spreading from the European mainland to the UK on Thursday. General elections are all but certain to bring Labour back into power after 14 years in the opposition. Europe continues to take center stage next week with the ECB’s Sintra conference (“Monetary policy in an era of transformation”) kicking off. One of the attention grabbing themes is about the drivers of the equilibrium interest rates. ISM business confidence and the June payrolls report is due in the US.

News & Views

Polish consumer prices in the country in June rose 0.1% M/M and 2.6% Y/Y (was 0.2% M/M and 2.5% Y/Y in May), Statistics Poland revealed today. The figure was marginally softer than expected. Prices of food and non-alcoholic drinks increased 0.7% M/M, but electricity and gas prices declined 0.1% M/M while fuel prices were 2.8% lower compared to May. Headline inflation is within the 2.5% +/- 1.0% target range of the National Bank of Poland (NBP) since February. Even so, the NBP at the June meeting reiterated that inflation developments are associated with substantial uncertainty related to the impact of fiscal and regulatory policies as well as to the pace of economic recovery. Higher energy prices (removal of price cap) and demand pressures due to strong wage growth might cause inflation to rise in the second half of the year. Most MPC members, including Governor Glapinski, recently held to the communication that rate cuts this year (policy rate 5.75%) are unlikely. The next NBP policy decision is scheduled for Wednesday next week. After a risk-off driven setback early this month, the zloty again trades to the stronger side of the EUR/PLN 4.25/4.41 trading range that guided trading this year (currently 4.31).

The Swiss National Bank (SNB) reported it bought a limited amount of CHF 281 mln in foreign currency in Q1. This is a sharp turnaround compared last year when it sold substantial amounts of foreign currency/bought CHF to support the franc to help bring inflation back to target (amount CHF 22.7 bln in Q4 2023). The SNB didn’t give any comment. However, as inflation returned to the 0 %-2.0% target and SNB even cut its policy rate in March and this month, CHF purchases didn’t fit in the SNB’s policy anymore. At the press conference after the June 20 SNB decision, Governor Jordan indicated that the SNB could intervene in the CHF in both directions. Also today, the KOF Swiss economic Institute reported that its economic barometer increased from 102.2 tot 102.7. The index stays in a slightly above average range since the beginning of the year. The rise is primarily due to a more favourable outlook for foreign demand. The hospitality industry also benefits more strongly. The indicator bundles for manufacturing, construction and private consumption are virtually unchanged in June. In contrast, the outlook for financial and insurance services and other services is slightly gloomier. The Swiss franc since the June 20 SNB decision declined from EUR/CHF 0.948 to currently 0.9625.

Graphs

French 10-yr yield briefly this new YtD high ahead of first round in Sunday’s parliamentary elections

EUR/PLN: zloty back towards stronger side of a sideways trading range after a risk-off driven correction lower early June

EUR/CHF: CHF ready to catch some post-election safe haven bids?

DXY struggles near 106 barrier after in-line PCE triggers UST bid

Personal income grew 0.5% month-on-month (m/m) in May, up from April's 0.3% gain, and ahead of market expectations (0.4%).

Accounting for inflation and taxes, real personal disposable was also up 0.5% m/m in May, relative to a flat reading in April (revised up from a -0.1% decline previously).

Personal consumption expenditures rose by 0.2% m/m. This is higher than the revised 0.1% recorded in April (0.2% previously), but below market expectations (0.3%). Spending in real terms rose 0.3% m/m – more than reversing the -0.1% decline recorded in April. The uptick in real spending reflected increases in both goods (0.6%) and services (0.1%) outlays.

On inflation, the Fed's preferred inflation metric, the core PCE price deflator, decelerated on both a monthly and annual basis. The measure fell from 0.3% to 0.1% month-over-month and from 2.8% to 2.6% annually. Both measures were in line with market expectations.

The personal savings rate rose by 0.2 percentage points to 3.9% in May.

Key Implications

Yesterday's GDP update showed that Q1 consumer spending continued to be revised lower. At 1.5%, the Q1 reading is now a full percentage point lower than the advanced estimate, largely due to a combination of weaker durable goods spending and a slower pace of services spending. That said, with data in for the first two months of Q2, growth in real consumer expenditures is expected to land around a similar place for the second quarter.

With May's CPI report following through on the good news from April's release, markets were primed for even more positive developments on the inflation front this morning. The core PCE deflator did not disappoint, with both the monthly and annual figures decelerating. These movements are sure to be welcomed by Fed members, but given the inflation upswing observed at the start of the year, "caution" will remain the watchword. As such, rate cuts aren’t likely to materialize until closer to the end of the year.

Daily Pivots: (S1) 1.0678; (P) 1.0703; (R1) 1.0728; More....

Intraday bias in EUR/USD stays neutral as sideway trading continues. Outlook stays bearish with 1.0760 resistance intact. Decline from 1.0915 is seen as another leg in the larger corrective pattern. Firm break of 1.0667 will target 1.0601 and below. However, decisive break of 1.0760 will turn intraday bias back to the upside for stronger rebound.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern that's still in progress. Break of 1.0601 will target 1.0447 support and possibly further to 100% projection of 1.1274 to 1.0447 from 1.1138 at 1.0311. For now, this will remain the favored case as long as 1.0915 resistance holds, in case of rebound.

Daily Pivots: (S1) 1.2612; (P) 1.2641; (R1) 1.2670; More...

Further decline is still expected in GBP/USD with 1.2702 resistance intact. Sustained trading below 1.2633 resistance turned support will argue that whole rise from 1.2298 has completed, and target 1.2445 and below. On the upside, however, firm break of 1.2702 resistance will argue that pull back from 1.2859 has completed, and bring retest of this high instead.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern that is still in progress. Break of 1.2445 support will confirm that another falling leg has started and target 1.2036 cluster support again (38.2% retracement of 1.0351 (2022 low) to 1.3141 at 1.2075. Nevertheless, break of 1.2892 resistance will argue that larger up trend from 1.0351is ready to resume through 1.3141.

Daily Pivots: (S1) 0.8968; (P) 0.8979; (R1) 0.9000; More…

Intraday bias in USD/CHF remains mildly on the upside at this point. Fall from 0.9223 could have completed a three-wave corrective move to 0.8825. Intraday bias is back on the upside for channel resistance (now at 0.9039). Firm break there will target 0.9157 resistance next. On the downside, below 0.8956 minor support will turn intraday bias neutral gain first.

In the bigger picture, price actions from 0.8332 medium term bottom are seen as developing into a corrective pattern to the down trend from 1.0146 (2022 high). Rejection by 0.9243 resistance affirms this case, and maintains medium term bearishness. While more range trading could be seen between 0.8332/0.9243 first, downside break out is mildly in favor at a later stage.

The Canadian economy bounced back in April, up 0.3% month-on-month (m/m). This print landed in line with Statistics Canada's advanced guidance and market expectations. The flash estimate for May points to a slight advance of 0.1% m/m.

April's reading was broad-based, with output expanding in 15 of 20 industries. The gain was evenly split between goods and services sectors, both expanding by 0.3% m/m.

Wholesale trade contributed most on the services side, growing by 2.0% m/m, the fastest pace since May 2023. Growth in accommodation and food services (1.9% m/m) and finance and insurance (0.4% m/m) also provided an assist.

On the goods side, support activities for mining and oil and gas extraction helped the overall sector grow by 1.8% m/m in April. The manufacturing sector also expanded by 0.4% m/m after contracting for two consecutive months. A small pullback in the construction sector (-0.4% m/m) offset some of the growth on the goods side.

The advanced reading for 0.1% growth in May is being driven by gains in the manufacturing, real estate and finance sectors, with retail and wholesale trade acting as a headwind.

Key Implications

GDP data for April came in bang on with expectations, which has kept growth tracking for the second quarter steady. The Canadian economy indeed started  Q2 on solid footing, with early tracking suggesting trend-like growth for the quarter. This would roughly match growth in the first-quarter, which came in at 1.7% quarter-on-quarter annualized.

The Bank of Canada is likely satisfied with today's report. On one hand, there doesn't appear to be signs of a reacceleration in growth. On the other, the Bank should take comfort that its Q2 growth forecast is materializing so far. The stability in the GDP reading will allow the Bank of Canada to keep its focus more squarely on the evolution of inflation, especially with the start of its interest rate easing cycle underway. We believe that the Bank of Canada will hold off on another interest rate cut next meeting, opting instead to move rates lower in September, which will allow them to assess both inflation (and growth) dynamics until then.

Daily Pivots: (S1) 160.43; (P) 160.63; (R1) 160.98; More...

Intraday bias in USD/JPY is turned neutral again with current retreat. Some consolidations could be seen first and deeper pullback cannot be ruled out. But near term outlook will remain bullish as long as 157.70 resistance turned support holds. break of 161.27 will resume larger up trend to 161.8% projection of 151.86 to 157.70 from 154.53 at 163.97.

In the bigger picture, there is no sign of long term trend reversal yet. Further rally is expected as long as 151.86 support holds. Decisive break of 160.02 will target 100% projection of 127.20 to 151.89 from 140.25 at 164.94.