Saxo Spotlight: Central Bank Decisions: Fed, ECB, BoJ, and the PBoC – June 12-16

US FOMC: Could CPI play a spoilsport to the expected June pause?

Market expectations are calling for the Fed to leave policy unchanged at the June meeting (decision due at 2 am SGT on June 15), taking perhaps a necessary break to continue to assess the cumulative impact of the aggressive hiking cycle. While that makes sense, hawkish tremors were felt last week after surprise rate hikes from the Reserve Bank of Australia and Bank of Canada. That has raised the possibility that we get another hike, dependent on the CPI data that is scheduled to be released on the first day of the Fed meeting. Bloomberg consensus expects May CPI to come in at 4.1% YoY, the weakest since March 2021, from 4.9% previously. Core CPI is expected to slow to 5.2% YoY in May from 5.5% previously. If the core inflation number surprises on the high side for either the month-on-month or year-on-year readings, the Fed may be forced to consider another rate hike than stand pat. Even if the CPI is in-line with expectations and the June pause prevails, there will potentially be some dissenters as some Fed voters such as Lorie Logan and Michelle Bowman have been increasingly commenting against a June pause. The dot plot will also be key to watch at this week’s meeting, to gauge PCE forecasts and the potential for more rate hikes given continued strength in the labor market. The bias remains toward USD strength going into this week – both if the Fed is hawkish but also on the hit-to-risk sentiment if the Fed turns out to be dovish.

ECB: A 25-bps rate hike seems to be a “done deal”

The European Central Bank is widely expected to hike rates by 25bps on Thursday to take the deposit rate to 3.50%. Since the last meeting when the ECB slowed down the pace of rate hikes from 50bps increments to 25bps headline Eurozone CPI has cooled to 6.1% from 7.0%, whilst the “super-core” measure fell to 5.3% from 5.6%. Furthermore, the ECB’s Consumer Expectations survey for April saw the 1yr ahead inflation expectation decline to 4.1% from 5.0% and 3yr view fall to 2.5% from 2.9%. That said, despite the disinflationary impulses, President Lagarde has reiterated that inflation “is too high and is set to remain so for too long”, adding that the ECB will “keep moving forward” as the bank is still behind the curve. However, growth trajectory is also worrisome with Germany and Eurozone in a technical recession, and if the ECB decides to (like Bank of Canada) remove all forward guidance, it could mean a firmer downside for EURUSD below 1.07. 

Bank of Japan: Recent inflation and wage data provides little scope for policy tweaks

The Bank of Japan is expected to keep its policy unchanged at this week’s meeting after Governor Ueda declared that the central bank would take up to eighteen months to conduct a policy review. Meanwhile, Tokyo inflation and wage growth data has surprised on the downside recently. Headline May Tokyo CPI slowed to 3.2% YoY from 3.5% in April, while April’s real cash earnings were down 3% YoY from -2.3% previously. This suggests that the post-pandemic consumption boost is fading and provides the BOJ enough reasons to keep its stimulus measures intact as it continues to review the long-term effects of its yield curve control policy. Key focus remains on the Japanese yen and how much further it can fall if FOMC surprises with a rate hike this week, and whether that can prompt any reaction tweak from the BOJ this week. The odds are low, but scope of a surprise is potentially large given expectations remain modest.

UK: Labor data may question the BOE hawkishness priced in

Tuesday’s UK jobs report could be a key test for forward expectations for the Bank of England and the sterling strength after April’s high inflation numbers prompted markets to price in a terminal rate of 5.5%. But last month’s labor market report showed a sharp decline in payrolled employees and a surge in jobless claims. If that trend continues in May, expectations may turn around to signal slowing wage growth that could also bring inflation lower and reduce the need for further tightening beyond the summer. GBPUSD remains in close sight of its cycle high above 1.2600 at the start of the week and may be prone to a downside test of 50DMA at 1.2472 in UK jobs data bringing a dovish outcome.

Treasuries market braces for wave of supply with multiple issuances in one week

This week, the Treasury market is expected to experience a significant influx of supply, with several bond, notes, and bill issuances scheduled. On Monday, the Treasury plans to issue USD40 billion of 3-year T-notes and USD32 billion of 10-year T-notes (with a remaining maturity of 9 years and 11 months as it involves reopening current 10-year notes). Additionally, USD65 billion of 13-week T-bills and USD58 billion of 26-week T-bills will be auctioned.

On Tuesday, there will be an auction for USD18 billion of 30-year T-bonds (with a remaining maturity of 29 years and 11 months as it involves reopening current 30-year bonds), along with USD38 billion of 52-week T-bills and USD45 billion of 42-day cash-management bills.

Furthermore, announcements regarding the auction sizes of 4-week, 8-week, and 17-week bills to be auctioned on Wednesday and Thursday will be made. The substantial volume of securities being issued poses a challenge for the market in terms of absorption.

Treasury's TGA replenishment raises liquidity concerns in the banking system

Last week, the Treasury announced its intention to increase its cash balance at the Federal Reserve (referred to as the Treasury General Account or TGA) to USD 425 billion by the end of June and approximately USD 600 billion by the end of September. As of June 8, the TGA held USD 88 billion. This means that the Treasury aims to accumulate an additional USD 337 billion in cash balance at the Fed, on top of what is needed for financing the Federal Government's deficit during the rest of the month.

Market participants are expressing concerns about the impact of replenishing the Treasury's TGA on draining liquidity from the banking system. As we previously mentioned in the Global Market Quick Take: Asia and on other occasions, the extent of this impact largely depends on whether the increase in the TGA arises from a reduction in bank excess reserves, thereby reducing liquidity in the banking system, or from a decrease in the Reverse Repo balances of money market funds at the Fed. The latter would transfer liabilities on the Fed's balance sheet without affecting banking liquidity.

If money market funds choose to obtain the newly issued Treasury bills from the Treasury and finance the transaction by reducing their investments in the Fed's Reverse Repos, while the Treasury deposits the acquired funds into the TGA at the Fed, the liquidity of the banking system would remain unaffected. However, if other investors withdraw funds from their bank accounts to purchase the newly issued Treasury bills, and the Treasury subsequently deposits the resulting proceeds into the TGA, it would deplete banking liquidity.

Treasury bills that have been auctioned since the enactment of the debt-ceiling agreement have been issued with yields ranging from 5.195% to 5.483% (Note: investment rates or yields are higher than the discount rates quoted). These yields are higher than the 5.05% interest rate that money market funds receive from the Fed on reverse repos. As a result, they provide reasonable incentives for money market funds to shift their funds from reverse repos to T-bills, effectively mitigating a portion of the potential liquidity drain on the banking system.

Repayment of ECB's TLTRO raises funding costs for banks

On June 16, European banks faced the repayment deadline for approximately EUR 480 billion borrowed under the ECB's Targeted Long-term Refinancing Operations III (TLTRO III), triggering worries about a liquidity drain in the European banking system.

Previously, under the TLTRO III program, banks could borrow from the ECB at favorable rates, going as low as 50 basis points below the average interest rate on the ECB's Depository Facility Rate. However, since the ECB increased the applicable interest rate in November 2022, European banks have voluntarily repaid around half of the outstanding TLTRO III balance of EUR 2.1 trillion.

Given the ample excess reserves in the European banking system and various other ECB liquidity-providing operations like the Main Refinancing Operations (MROs), the 3-month Liquidity-providing Operations (3-month LTROs), and the Margin Lending Facility (MLF), the repayment of the TLTRO is unlikely to cause a liquidity crunch. Nonetheless, the reduction in excess reserves could potentially raise funding costs for European banks.

China: New RMB loans expected to see a seasonal surge

According to the latest Bloomberg survey, economists anticipate a seasonal upswing in new RMB loans during the month of May. Projections indicate a rise to RMB1,550 billion, surpassing April's figure of RMB719 billion. However, it is worth noting that this May's estimate falls short of the RMB1,890 billion recorded in the same period last year, reflecting a comparative decrease. Furthermore, the survey highlights expectations for a seasonal increase in new aggregate financing during May, reaching RMB1,900 billion compared to April's RMB1,217 billion. Nonetheless, this projected figure remains significantly below the RMB2,842 billion recorded in May 2022. The primary factor dampening aggregate financing growth stems from the subdued issuance of corporate bonds.

China: Retail sales, industrial production, and fixed asset investment expected to slow in May

According to the Bloomberg survey, China's retail sales growth is expected to slow to 13.7% Y/Y in May, compared to 18.4% Y/Y in April. This deceleration can be attributed to several factors. Firstly, there has been robust demand for automobiles, leading to a 5.9% M/M increase in auto sales according to the China Passenger Car Association. Additionally, there has been a recovery in the consumption of catering services. However, these positive factors were partly offset by a higher base in May last year, resulting in a slightly lower growth rate for retail sales.

In terms of industrial production, it is projected to soften with a Y/Y growth rate of 3.5% in May, down from 5.6% in April. This softer estimate takes into account the recent weakening in export data and steel production. Similar to retail sales, the growth rate of industrial production in May is also affected by a higher base from the previous year when the Shanghai lockdown eased.

The Bloomberg survey also indicates an anticipated drop in year-to-date fixed asset investment growth to 4.4% Y/Y from 4.7% Y/Y, partly based on deceleration in the construction sub-component in the non-manufacturing PMI data. The data implies a 3.7% Y/Y monthly growth rate in May, decelerating from 3.9% in April.

Overall, the data suggest a moderation in retail sales, industrial production, and fixed asset investment growth in China and are likely to add to the investors’ anticipation of stimulus policies from the Chinese authorities to address the slowing growth rates.

China: Stalled recovery raises calls for rate cut as deflationary pressure mounts

Recent data from China indicates an increased risk of a stalled economic recovery. The CPI and PPI data released last Friday showed deflationary pressure, further adding to concerns. Additionally, upcoming activity data scheduled for release this week could reinforce the case for the People's Bank of China (PBOC) to implement a rate cut.

While the Bloomberg consensus forecast suggests that the 1-year Medium-term Lending Facility Rate (MLF rate) will remain unchanged, there is a growing probability of a reduction in the MLF rate this Thursday. This likelihood has been strengthened by recent comments from PBOC Governor Yi Gang, who stated that the central bank would lower funding costs and support the real economy. The PBOC already reduced the Reserve Requirement Ratio in March and has recently urged large state-owned banks to cut deposit rates.

Commodities: Agri crops in focus as El Niño threatens supply

The commodity sector started June on a positive note with gains seen across all sectors and across all the individual commodities. Our head of Commodity Strategy Ole Hansen notes that several commodities from copper, gold, and silver to wheat, corn, soybeans, and coffee are all showing signs of bottoming out from a technical perspective with multiple factors adding support. In addition to expected China stimulus announcements, as we discussed above, it will be key to monitor the weather developments this week with eyes on how El Niño develops. An El Niño is a natural, temporary, and occasional warming of part of the Pacific that shifts weather patterns across the globe, often by moving the airborne paths for storms. Significant impact is usually seen in Australia and Southeast Asia. The US crop conditions report is due on Monday and the weekly drought report is out on Thursday and these may also be key for the outlook of agricultural crop supplies.

Adobe's Q2 earnings to highlight revenue growth and profitability focus

Adobe is set to announce its fiscal year 2023 Q2 earnings on Thursday, after the close of the US market. Analysts anticipate year-on-year revenue growth of 9% and an EBITDA of $2.36 billion, compared to $1.74 billion in the previous year. The company has intensified its focus on profitability following the slowdown in 2022 and the impact on equity valuations due to rising interest rates.

According to Peter Garnry, Saxo’s Head of Equity Strategy, investors will closely watch the potential Figma acquisition, which could face regulatory hurdles due to competition concerns. While the failure of the deal would likely be celebrated by investors and the equity market in the short term, it could have a negative impact on future revenue growth. Adobe has been leveraging the AI trend, and recent product updates have incorporated various AI-related functionalities, generating excitement in the content creation industry. It will be intriguing to see if this excitement translates into the company's outlook for the future.

Earnings this week:

Monday: Oracle, Vantage Towers

Tuesday: Ashtead Group

Wednesday: Lennar

Thursday: Adobe, Kroger, Jabil, Halma

Key economic events this week: