What did the data from last week indicate? The biggest release was the US labour market data for May, which recorded another big increase in non-farm payrolls, the latest rise of 339,000 comfortably outstripping the market consensus forecast of a 195,000 rise, and upward revisions to the last two months of data adding another 93,000 to the total. However, that strength in net payrolls growth was contrasted by weakness in the rest of the labour market figures. Average earnings growth slipped to 4.3% year-on-year from 4.4%, the unemployment rate rose to 3.7% from 3.4%, and underemployment also rose to 6.7% (prior figure was 6.6%).

Earlier in the week, the Challenger job cuts survey indicated that the pace of layoffs was increasing once again, and there are renewed signs of the housing market seeing lower demand for mortgages and house purchase. The good news from the US was that a bi-partisan agreement for the US debt ceiling was agreed, suspending the limit until 2025, when the next Presidential election will be out of the way. The deal agreed a tight limit on non-defence spending, which will be flat next year and up only 1% in 2025. It will mean spending will be around $1.5 trillion lower over a decade versus prior to the debt ceiling deal. There are no significant data or survey releases for the markets to focus on this week. 

In the UK too there are signs that the economy is in a more troubled place. Last week saw further signs that the UK housing market is in difficulty, with mortgage lending falling by almost £1.5bn, something that is rarely seen in the UK. The Nationwide house price data for May recorded a small fall in house prices in the latest month after the surprise rise in April. This suggests that despite weakness in housing demand, the housing market still has a dearth of supply to deal with. Already this week, the CIPS (Chartered Institute of Purchasing and Supply) services PMI (Purchasing Managers’ Index) for May was revised marginally higher.

The strength of services is surprising, given that recent corporate insolvencies data indicates a sharp increase in insolvencies and administrators being appointed. The only notable release for the remainder of this week is the May RICS (Royal Institution of Chartered Surveyors) house price balance. Given that we have seen the Nationwide house price data already, this is only likely to be a repeat of what is already known, and it is unlikely to suggest any improvement.

Finally, in Euroland there is industrial production data due. How much of March’s losses will be recouped by the April data? The German, Spanish and Italian figures are all due over the remainder of this week. The risk is that the rebound will be greater than markets are pricing for, which may offer the euro some much-needed assistance after a rough few weeks. 

The big question is whether the USD can build on its recent gains? The USD index has risen back above 104, with USDJPY back over ¥140, USDCNY over ¥7.10 and EURUSD trading around $1.07. The one currency that still seems to be performing solidly against the USD is the GBP, but even here gains beyond $1.26 (which has traded in recent weeks) appear to be hard to sustain. This week could be one of consolidation for the US dollar, and it will be next week, when we get the May consumer prices inflation figures and the Federal Reserve decides on interest rates, that could prove more noteworthy in terms of direction for the US dollar.

Other major central bank meetings are also due next week (Bank of England and European Central Bank). These could also prompt a significant amount of FX volatility if the outcome or the latest assessment varies from what’s expected. The Bank of England seems the most settled in terms of approving additional monetary tightening, but the UK economy is still the one set to underperform.

This week also sees monetary policy decisions from the RBA (Reserve Bank of Australia), the NBP (National Bank of Poland), BoC (Bank of Canada), RBoI (Reserve Bank of India) and the Peruvian central bank.
The only central bank that appears even remotely likely to be hiking interest rates is the RBA, but there are declining price pressures, monetary policy is already in restrictive territory, and wage inflation is below where the RBA expects it to peak. Another hike in Australia may feel like overkill, especially when other central banks appear to be holding off from additional tightening.
The path of conventional monetary policy tightening appears to be coming to an end, with the damage it is doing to activity far outweighing the benefits it is producing in terms of accelerating the return-to-target for inflation, in my view.