THE WEEK THAT WAS AND THE WEEK AHEAD – 5 June, 2022

Nicholas Glinsman | June 5th, 2022

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A FREE look at some brief thoughts about the week ahead, along with highlights from the past week’s subscription issues of Ahead of the Herd, and our Macro Dailies for Asia-Pac and Europe.

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THE WEEK AHEAD

The ECB is finally about to join the global bandwagon of monetary policy tightening, spurred into action by repeated record highs in inflation. Almost three months since the Fed delivered a first interest-rate hike, its euro-zone counterpart will this week announce an end to bond purchases and formally begin the countdown to an increase in borrowing costs in July. The ECB has hesitated to remove stimulus while gauging the fallout from the war raging just over the frontier of its currency area in Ukraine. 

By contrast, most major central banks are now further down the road with tightening, and some are even ratcheting up the pace. The Fed doubled the speed of rate hikes last month with a half-point increase, and policy makers in Australia on Tuesday and India on Wednesday could follow suit with faster moves too. 

Against that backdrop and with euro-zone inflation now at 8.1%, there’s a clear consensus at the ECB on the need to get started. The argument now within the Governing Council centres on whether quarter-point increases are enough, and on how high to ultimately bring rates next year. Austrian central bank Governor Robert Holzmann says anything less than a half-point move “risks being seen as soft,” and colleagues from the Netherlands, Slovakia and Latvia have openly called for such an increment to at least be considered. 

Forecasters at Deutsche Bank and Bank of America now reckon that will materialize, but most economists currently assume the hawks’ views won’t prevail. Indeed, ECB President Christine Lagarde is likely to face questioning on that debate at her press conference on Thursday after the meeting. She will also unveil crucial new forecasts that informed the decision, with projections that may invite comparison with the OECD’s latest global outlook due the previous day.

Elsewhere, central banks from Chile to Poland will probably continue hiking too, Russian policy makers may deliver a rate cut, and US consumer-price data is likely to show a monthly acceleration.

US ECONOMY

In the US, the May consumer price index takes top billing in an otherwise quiet week for economic data. Fed officials will observe a blackout period ahead of their June 14-15 policy meeting. The government’s CPI report on Friday is expected to show inflation accelerated on a month-to-month basis, due in part to record gasoline prices. Excluding fuel and food, the core measure probably posted another sizable advance that indicates sustained price pressures.

The projected monthly gains are seen keeping annual inflation elevated. Economists are calling for an 8.3% year-over-year increase in the overall CPI and a 5.9% gain in the core measure.

ASIA-PACIFIC

The Reserve Bank of Australia meets Tuesday with another rate hike anticipated as inflation continues to outstrip forecasts and the economy holds up better than forecast. The question is by how much, with the official cash rate out of sync with its usual quarter-point settings.

Australian consumer prices have accelerated from the 5.1% recorded in the first three months, Treasurer Jim Chalmers said Sunday. “It’s now really clear that the inflation challenge that Australians are facing is worse,” Chalmers told News Corp., saying he’ll likely raise the forecast in next month’s economic statement to parliament. “People should anticipate that it will be higher than it is now. Significantly higher.”

India’s central bank is also expected to raise rates again on Wednesday, while the Bank of Thailand is likely to buck the hiking trend.

Japan and South Korea will revise their GDP figures for the first quarter on Wednesday. Japanese household spending and wage figures for April will show how the rebound from a first-quarter contraction is faring, with soaring energy prices and a weak yen anticipated to limit the release of pent-up demand. 

Remarks by Bank of Japan Governor Haruhiko Kuroda during the week will be closely parsed for any signs of change as prices keep rising and the yen shows renewed weakness. 

Chinese trade data on Thursday and inflation data on Friday will be closely scrutinized after purchasing managers reports for May pointed to some improvement as lockdowns eased.

EUROPE, MIDDLE EAST & AFRICA

While the ECB decision on Thursday will take centre stage, manufacturing data from around the euro zone may also attract investor attention. Both German factory orders on Tuesday and industrial production the next day are likely to show improvement at the start of the second quarter, picking up after disruptions caused by supply bottlenecks. Spanish output on Tuesday is also expected to rise, though Italian factory data on Friday may have fallen.

Consumer-price data will draw focus elsewhere in Europe. In the Czech Republic, economists anticipate inflation to surge above 15%, posing a challenge to the incoming central bank governor who plans to halt aggressive rate hikes. 

Meanwhile Norwegian officials will watch for an acceleration in annual price increases too, with a reading of 5.6% expected.

Among central bank decisions due, Polish policy makers will probably raise rates for the ninth straight month on Wednesday, and their Serbian counterparts may consider additional tightening too the next day. 

Russia is going the other way. Governor Elvira Nabiullina is expected to cut rates further on Friday, dismantling more of the economic defenses she established after sanctions were imposed on Russia following its invasion of Ukraine. The bank already delivered its third rate reduction in just over a month on May 26 at an extraordinary meeting, reaching 11%. Nabiullina, who more than doubled the key rate to 20% after the invasion began in late February, said after the last cut that she saw further room for easing at meetings ahead.

LATIN AMERICA

Look for a bit of history out of Chile on Tuesday where the central bank is expected to raise its key rate to a record high 9% to extend its sharpest and longest-ever tightening cycle. On Wednesday, expect the country’s May inflation reading to accelerate for a 15th straight month, up from April’s near three-decade high, to well over 11%. Core inflation has nearly tripled in the last year.

Watch for the May consumer price numbers in Brazil posted Thursday to ease — some economists see April as the peak — but not by enough to hold off the 11th straight rate hike next week.

Analysts see Peru’s veteran monetary chief, Julio Velarde, going with a 10th straight half-point hike to put the key rate at 5.5%.

The numbers may be lower but the consumer price data Mexico reports Wednesday are only slightly less dire than those expected in Chile, as both headline and core readings hover near two-decade highs. The figures will do nothing to quell speculation that Banxico’s patience is wearing thin and a record 75 basis-point hike on June 23 is a very real possibility.

THE WEEK THAT WAS

The true meaning of volatility – June 3

Do the markets appreciate the true extent of the Fed’s fight against inflation?

Markets are simply not ready for a global tightening – June 2

Good news is now bad news for the markets – June 1

It was a bear market rally, may still be, but it doesn’t change the outlook much – -May 31

ASIA PACIFIC MACRO COMMENTARY HIGHLIGHTS

The key theme we covered last Week is how the Chinese economy has been damaged by the application of Zero Covid. Overall, there is little optimism, as we covered on June 2.

Asia Pacific Macro – June 2

Speaking of supply-side stimulus, the day after the CCP unveiled a 800 bn yuan stimulus package, revolving around infrastructure.

Asia Pacific Macro – June 3

With real estate de facto stalled, manufacturing severely impacted, consumption lagging even more than it used to and limited need for additional infrastructure, it is plausible to see the Chinese equivalent to the downfall of Japan in the early 1990s. While it is difficult to say whether it will happen, it is impossible to exclude this eventuality anymore.

For the upcoming week, all eyes will be on the central banks, as the RBI and RBA will have its policy-setting meetings early in the week. Both should be fairly aggressive when it comes to dealing with inflation, given prior hints, but it is difficult to see how the economies will be able to roll with the punches.

EUROPE MACRO COMMENTARY HIGHLIGHTS

The most important developments in Europe continue to be the fact that inflation divergences between member states are rising as well as the fact that the ECB is behind the curve. It’s now looking to raise rates going into an economic slowing trend with ongoing supply side issues it cannot impact.

As we noted on June 3:

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