This week was dominated by events in the US. The FOMC kept policy rate unchanged at its Wednesday meeting as widely expected. The median of the updated dot plot now signals only one cut for this year, but it remains a close call. While four members expect no cuts, seven members lean towards one cut, and eight members still foresee two cuts. Overall, the updated projections continue to signal nine cuts by end-2026, unchanged from the March update, albeit that cuts have been postponed. We still expect Fed to cut rates twice this year, in September and December. Read more on Research US – Fed Review: We still see cuts starting in September, 12 June.
The FOMC meeting followed a softer-than-expected CPI print. Both headline and core inflation surprised to the downside in May, at 0.0% m/m and 0.2% m/m in seasonally adjusted terms. Overall, underlying inflation momentum continues to moderate in the US, as also confirmed by PPI data this week. Headline producer prices unexpectedly declined in May compared to previous month, and core prices stagnated. In euro area, inflation initially decelerated faster than in the US but the latest prints have been less convincing, see Global Inflation Watch – The Fed welcomes easing supercore inflation, 12 June.
Political uncertainty is on the rise in France. While the European Parliamentary election itself was not a market mover, the shock announcement by President Emmanuel Macron on Sunday to call snap election has spooked the markets. Macron’s Renaissance party suffered a massive defeat to Le Pen’s RN party, and Macron’s approval rating is at its lowest since 2018. The first round of the snap election will be held on 30 June and the second round on 7 July, and Le Pen’s RN party is expected to make significant gains. The party’s victory could derail reforms while also adding further friction to intra-EU relations. Reflecting this rising uncertainty, risk sentiment soured this week despite US yields declining on the back of the soft CPI print. European equities underperformed and euro depreciated versus the dollar and the Scandies.
Next week is again a busy one on the central bank front. Early on Monday morning, the PBOC will announce the key policy rate on the 1-year medium-term lending facility. The PBOC has signalled it prefers not to widen the rate spread to the US, which could lead to further depreciation pressure on renminbi. Hence, it is likely they will wait with the next cut until the Fed has kicked off its rate cutting cycle. The RBA will follow suit with a rate decision on Tuesday and is widely expected to leave the key rate unchanged. Similarly, we expect no changes on monetary policy by the SNB and the BoE on Thursday.
On data front, the week kicks off with the monthly batch of China macro data for May. A key focus will be on retail sales and whether China has any luck spurring more consumption with the new trade-in scheme of old for new consumer goods. In the euro area, the focus will be on the final release of May HICP data on Tuesday as well as the ZEW index from Germany. The highlight of the week will be the flash June PMIs due on Friday. The composite PMI has now been above 50 for three months in a row and we expect this to be the case also in June. In the US, we get May retail sales and industrial production data on Tuesday, and similarly to Europe, also the flash PMIs on Friday.
Full report in PDF.
