Fed signals fewer rate cuts in dot plot revision
Unless there is some sort of miracle with US May consumer price inflation figures (released on Wednesday), there is no chance of a US interest rate cut this week, in my opinion. Indeed, even if the figures surprise to the downside, I doubt that would stop the Federal Reserve from revising its expectations from three cuts to a maximum of two this year. The USD appears somewhat strengthened after both US non-farm payrolls and average earnings data overshot expectations. I suspect that none of this week’s releases from the US will prompt significant change to US interest rate expectations.
EU parliamentary upset spurs snap French elections
The EU parliamentary elections have not gone to plan for France and Germany. The SPD in Germany polled just 14% of the popular vote, behind the CDU/CSU and AfD. In France, President Emmanuel Macron called a snap lower house election after his party polled just 15% in the EU elections, less than half of Marine Le Pen’s National Rally share.
The EUR has underperformed since these events, and the French stock market also endured a large drop. The markets fear uncertainty and this is increasing, in my view. Despite signs that the Euroland economy might be in recovery, the European Central Bank may have to lower interest rates to deal with this increased uncertainty, in my opinion.
GBP risks around another UK labour market underperformance?
The pound has fallen against the USD but against the EUR is at an almost two-year high: it is above €1.18, but has dipped back beneath $1.27, having tested $1.28 only a few sessions ago.
This week doesn’t see a lot of UK data released, with labour market figures for April and May on Tuesday followed by monthly output, industrial production and index of services figures for April on Wednesday. The risks are that the labour market figures show a further reduction in employment demand, albeit caveated with risks of an increase in average earnings growth because of the National Living Wage, introduced in April.
April was a washout for retail activity (according to Office for National Statistics figures) because of bad weather. Could that see Q2 start with a contraction or stagnation in overall activity? The risks for the GBP are more downside against the USD, but the GBP could hold onto its gains versus the EUR (further upside this week looks limited, in my view).
Bank of Canada doesn’t wait for the Fed; Peru to cut this week
Other central banks look to loosen monetary policy, unwilling to wait for the Federal Reserve to start its own easing. The latest was the Bank of Canada (BoC), which last week was expected to lower interest rates, albeit there was no unanimous consensus. Economic problems in Canada appear to be elevated versus the US, and headline and core consumer price inflation rates are closer to target, which likely gave the BoC more comfort.
This week the Peruvian central bank looks likely cut interest rates. There is more consensus around the cut, and it won’t be its first, having adjusted the reference rate from 7.75% to 5.75% already. I suspect more cuts from South American central banks, albeit some caution remains in case this causes currency weakness, in my opinion.
