Weekly Market Outlook (10-14 June)

Upcoming events:

• Tuesday: UK Labor Market Report, US NFIB Small Business Optimism Index.
• Wednesday: Japanese Producer Price Index, Chinese CPI, UK GDP, US CPI, FOMC Policy Decision.
• Thursday: Australian Labor Market Report, Swiss Producer Price Index, Eurozone Industrial Production, US Producer Price Index, US Unemployment Claims.
• Friday: New Zealand Manufacturing PMI, Bank of Japan Policy Decision, University of Michigan Consumer Confidence.

Tuesday

The UK unemployment rate is expected to remain steady at 4.3%. Wage growth figures were also unchanged, with average income including bonuses at 5.7% and average income excluding bonuses at 6.0%.

Last month, data showed another rise in unemployment and job losses, but wages surprised to the upside. The Bank of England is more focused on inflation data at the momentSo, barring big surprises, the data is unlikely to change much for the central bank. The market expects a decline of 30 basis points by the end of the year.

Wednesday

US Y/Y CPI is expected at 3.4% vs. 3.4% previously, while M/M is expected at 0.2% vs. 0.3% previously. YoY core CPI is expected to come in at 3.5% vs. 3.6% previously, while MoM CPI is expected at 0.3% vs. 0.3% previously.

This will be a major market impact release since it comes on the same day as the FOMC decision, and will influence their views. (They will be able to see the report a day before.) This looks like it will have a nice binary outcome, with higher than expected numbers leading to a hawkish reaction and lower than expected readings leading to a more pessimistic repricing.

As a reminder, the market got a bit unstable last Friday as we got a hot NFP report where wage growth surprised to the upside and the unemployment rate rose to 4% (3.96% not rounded) hitting a new session high. Market prices are back to expecting just one rate cut by the end of the year as we continue to jump between one and two.

The Fed is expected to keep interest rates unchanged at 5.25-5.50% with little (if any) change in the statement. Emphasis will be placed on the Summary of Economic Projections (SEP) and Dot Plot. I see that the Fed expects to cut interest rates twice this year to bring it in line with market expectations.

This way, it will not be seen as pessimistic or extreme. Naturally, if we see a deviation from this baseline, the market reaction will be pessimistic if three cuts are expected, and dovish if only one.

The focus will then shift to Powell's press conference where he will likely maintain a neutral tone as the Fed continues to see inflation return to target but at a slower pace than expected.

These views are based on the current state of affairs and since we have the US CPI report on the same day as the FOMC decision, they may change.. In fact, if we get hot CPI numbers, market prices will likely change to show just one cut for the year (or even none).

Therefore, a Dot Plot will have a different impact on the market, with two cuts seen as more pessimistic and no cuts as hawkish. A hot CPI report is likely to have a greater impact compared to a cold report.

Conversely, if the numbers turn cold or identical, the original views should remain in place even though the market may react before the Fed's decision as risk sentiment is likely to return.

Thursday

The Australian labor market report is expected to show 39K jobs added in May versus 38.5K in April, and the unemployment rate to fall to 4.0% versus 4.1% previously. The data is unlikely to change anything for the RBA Which is expected to remain on hold until 2025. We will need a big surprise to trigger a repricing of interest rate expectations, otherwise the focus will remain on inflation numbers.

The US Y/Y Producer Price Index is expected at 2.2% vs. 2.2% previously, while the US M/M is expected at 0.2% vs. 0.5% previously. YoY Core PPI is expected to come in at 2.3% vs. 2.4% previously, while YoY/MoM PPI is expected at 0.2% vs. 0.5% previously. I don't expect this data to impact the market much since sentiment will be determined by the CPI and FOMC the day before.

US unemployment claims remain one of the most important releases to follow each week, as they are a convenient indicator of the state of the labor market. Initial claims continue to hover around cycle lows, while continuing claims remain steady around the 1800K level.

This has led to a weaker and weaker market reaction as participants become accustomed to these numbers. Initial claims this week are expected to be 227K vs. 229K previously, while there is no consensus at the time of writing on continuing claims although the previous release showed an increase to 1792K vs. 1790K previously.

Friday

The Bank of Japan is expected to keep interest rates unchanged at 0.00-0.10% and reduce its purchases of government bonds.
The speculation began last week We obtained reports from “people familiar with the matter” which were then confirmed by Governor Ueda’s comments.

This was perhaps the main reason for the strength of the Japanese yen even though it was mostly noise amid a rebound in global growth and a tightening repricing in other interest rate expectations in developed countries. In fact, if this trend continues, we can expect the yen to resume its depreciation against other major currencies.