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Saxo Spotlight: Heavy central bank week - Powell’s testimony and decisions from Bank of England, Norges Bank, SNB and Turkey – June 19-23

Macro 9 minutes to read
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Summary:  The extent of hawkishness from global central banks gets several tests this week. Bank of England likely faces a tough communication setup with about 6% terminal rate priced in, while others like SNB and Norges Bank still expected to stick to the script and hike 25bps. Fed Chair Powell may have little to add in his semi-annual testimony but China’s PBoC is expected to cut rates. Meanwhile, Japan’s CPI could leave little reasons for BOJ to withdraw stimulus. Commodities have been extending gains this month, and food inflation fears may be in focus. Earnings calendar continues to thin out, but AI focus will be sustained by Accenture results.


Weekly MI 19 Jun 2023

Fed Chair Powell heads to Capitol Hill after a pause in the rate hike cycle last week

Fed Chairman Jerome Powell will be appearing before the House (June 21) and the Senate (June 22) this week to provide his semi-annual monetary policy report. After the hawkish hold last week, there appears to be minimal new information for Powell to add any significant new direction on monetary policy. He may continue to signal more rate hikes, but Republicans would get the stage to express their concerns around the sticky core inflation while Democrats advocate for a more dovish policy given the rising risks to economy. Markets looking to understand what the next key catalyst for a move may be will perhaps be disappointed and continue to find a reason to rise further.

Chinese banks poised to slash Loan Prime Rates, prompted by PBoC's MLF rate cut

In response to the reduction in the 1-year Medium-term Lend Facility Rate (MLF rate) by the People's Bank of China (PBoC) last week, Chinese banks are expected to recalibrate their 1-year Loan Prime Rates (LPR) and 5-year LPR downward by 10bps to 3.55% and 4.20% respectively. The existing interest rate framework in China entails the central bank adjusting the MLF rate as a guiding benchmark, while commercial banks establish their LPR quotations by incorporating a spread over the MLF rate. In an effort to stimulate housing demand, it is plausible that the 5-year LPR, which mortgage loans are tied to, could witness a more pronounced downward adjustment than the aforementioned market consensus, potentially reaching a reduction of 15 bps.

In addition to LPR cuts, market participants are expecting China’s Central Government to issue as much as RMB 1 trillion in special bonds to boost infrastructure projects as well as increase the RMB 3.8 trillion local government special bond quota for 2023 by RMB 500 billion.

Hot UK CPI will add further pressure on bank of England

After a hot labor market report from the UK last week, focus turns to May inflation (due on June 21) and another upside surprise can spell havoc again for UK gilts. Bloomberg consensus expects headline CPI to soften to 8.4% YoY from 8.7% previously, while the core CPI is likely to stay firm at 6.8% YoY. Higher food prices may be offset by the decline in fuel prices, while services inflation may is likely to remain sticky due to the tightness in the labor markets. The Bank of England announcement is due the day after, on June 22, and a 25bps rate hike to 4.75% is expected while a 50bps can also not be ruled out. Rate expectations for BOE have moved considerably higher to ~6% terminal rate, and a hawkish surprise from the central bank will be very tough at this juncture. GBPUSD has also had a remarkable run from 1.25 to 1.28+, and technical analysis suggests further upside room, but policy expectations are looking stretched.

More central banks on the agenda – SNB, Norges Bank and Central Bank of Turkey, RBA and BOC minutes due as well

Hawkish rhetoric this week will also be supported by 25bps rate hikes expected for the Swiss National Bank and Norges Bank – with announcements from both due on Thursday. SNB Chairman Jordan, speaking after May’s CPI, said that inflation is more persistent than thought and both second- and third-round effects are being seen, cementing the case for another rate hike. Likewise, the resurgence in Norway’s May CPI has raised scope for a 50bps surprise as well from the Norges Bank.

Carry trades also get a key focus this week with both Turkey and Mexico central bank announcements due as well. The Turkish central bank is expected to normalize its policy rate to something close to actual prevailing rates in the country, so the official policy rate will be bumped from 8.50% to 20% or higher in a pivot away from its loose stance. That will be an interesting test for TRY after a step-wise like revaluation post-election. No change in interest rates is expected from Mexico’s central bank.

Also on the central bank agenda this week will be the meeting minutes of the returning hawks – Reserve Bank of Australia and Bank of Canada. Focus will be on discussions around the rate path from here, and the outlook for inflation and labor markets.

Japan’s May CPI may leave little scope to expect BOJ tightening

Bank of Japan doesn’t fail to give a dovish surprise meeting-after-meeting, and focus has now turned to the July meeting which will include the updated outlook. But ahead of that, inflation and wage data will be key to assess as Governor Ueda has set those to be the key targets for the central bank to consider retreating its easy policies. May CPI is due on June 23, and the headline is expected to soften to 3.2% YoY from 3.5% previously amid retreating cost-push factors, while core is still likely to stay firm and come in at 4.2% YoY from 4.1% previously. The Tokyo inflation data for May, which provides a leading indicator for national price trends, showed that headline and core inflation eased to 3.2% from 3.5%, and softer than the respective 3.9% and 3.3% estimates to suggest inflation was stabilizing, although ex-fresh food & energy CPI continued to accelerate, to 3.9% from 3.8%, as expected.

Commodities: Food inflation and battery metals to be a key focus this week

As hinted last week, El Nino concerns have been hitting agricultural crops and wheat, corn and soybeans saw strong gains last week. That has fueled speculation of food inflation becoming a threat again, and weather patterns and crop output reports will remain a key focus again this week. The possibility that Russia may withdraw from the grain deal that allows Ukraine to safely ship grains from Black Sea will add further volatility.

Battery metals will also be in focus this week as the world’s biggest producers of lithium for electric vehicle batteries hold their largest annual gathering at the Fastmarkets Lithium Supply & Battery Raw Materials conference in Las Vegas.

FedEx to report results: revenue and EPS decline expected

FedEx (FDX:xnys) is slated to announce its fiscal Q4 2023 earnings, which concluded on May 31, this Tuesday. According to the Bloomberg consensus, the courier giant is expected to report a 7% Y/Y decline in revenues, reaching USD22.657 billion, along with a significant 29% drop in adjusted EPS to USD4.872.

FedEx is a global logistics company and thus will provide a fresh outlook on our global transportation dynamics are evolving given the recent slowdown we have seen in the global economy. Investors will closely monitor the progress of FedEx's cost reduction program. Additionally, attention will be focused on any insights provided by the company regarding its business outlook, given the evolving market dynamics and economic conditions.

AI focus: Accenture earnings to bring a test of corporate AI integration

Accenture’s (ACN:xnys) fiscal third quarter earnings is due before market opens on Thursday. The stock has gained about 20% YTD amid the AI impact expectations as well as cost-cutting efforts that include a plan to lay off 19,000 employees. Last week, the company announced a massive $3bn in artificial intelligence over the next three years. These plans may be elaborated further in the earnings call and could boost sentiment, further adding fuel to the recent AI wave in the market. The company is expected to deliver adjusted EPS of $2.99 on revenue of $16.49bn from fiscal Q2 EPS of $2.69 on a revenue of $15.81bn.

 

Earnings this week:

  • MON: Vantage Towers
  • TUE: FedEx
  • WED: KB Home
  • THU: Accenture, Darden Restaurants, FactSet
  • FRI: Oracle Japan, CarMax

 

Key economic events this week:

  • MON: US Juneteenth Market Holiday, US NAHB index
  • TUE: PBoC LPR Announcement, RBA Minutes, German PPI (May), US Housing Starts/Building Permits (May), Fed's Bullard and Williams
  • WED: BoC Minutes, BCB Announcement, UK Inflation (May), New Zealand Trade Balance (May), Fed Chair Powell (in House) and Goolsbee
  • THU: BoE Announcement, SNB Announcement, Norges Bank Announcement, CBRT Announcement, Banxico Announcement, Chicago Fed NAI, Existing Home Sales, KC Fed index, Fed's Waller, Bowman, Powell (in Senate), Mester, and Barkin
  • FRI: Japanese CPI (May), UK Retail Sales (May), EZ/UK/US Flash PMIs (Jun), Fed's Bullard and Mester

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