Waiting for key central bank decisions

OVERNIGHT

Markets have started the week on a cautious note ahead of key central bank meetings with the Fed, ECB and Bank of Japan set to deliver their latest policy decisions in the coming days. Equities across the Asia-Pacific region are trading mixed, while US and European equity futures moved higher and pointed to gains on their open. The annual rate of producer price inflation in Japan softened in May, easing from 5.9%y/y in April to 5.1%y/y, reinforcing the view that CPI inflation will moderate in the coming months. Meanwhile, writing in the Scotsman newspaper, Bank of England external policy maker Jonathan Haskel noted that “it’s important we continue to lean against the risks of inflation momentum” suggesting that he is likely to support further hikes in UK interest rates in the coming months.

THE DAY AHEAD

Today’s lack of any data or (public) events means that it is an incredibly quiet start to what is otherwise likely to be eventful week. External member of the Bank of England’s Monetary Policy Committee, Ms Mann, is due to speak later today, but with the event being held under Chatham House Rules, the prospect of her comments being made public is low.

Over the remainder of the week, however, policy updates from the US Federal Reserve (Fed) and the European Central Bank (ECB) along with some key data releases in the UK and US should give markets plenty to digest. The latest policy decisions from the Fed (Wednesday) and ECB (Thursday) come hot on the heels of last week’s somewhat surprising decisions by the Bank of Canada and the Reserve Bank of Australia, both of which hiked by 25bp to 4.75% and 4.10%, respectively. The median expectation of the Bloomberg consensus for each pointed to both central banks leaving rates unchanged. Recent US data have been mixed with monthly payrolls data pointing to a tight labour market, but other signs indicating a softening economy as past interest rate rises feed through. That will probably be enough for the Fed to ‘pause’ rates at 5.00-5.25%. The ECB, however, is almost certain to raise them again by 25bp, which would mean rises in total of 400bp in since last summer. President Lagarde has said that there is ‘more ground to cover’ to bring inflation lower.

Early tomorrow morning, the first of two major UK data releases this week will be published. We expect the labour market statistics for April and May to show solid employment growth of 225k in the three months to April, but a slight uptick in the unemployment rate to 4.0% as previously inactive people return to the labour force. There appears little evidence yet of easing wage pressures and we expect annual growth in average weekly earnings (excluding bonuses) to rise again to 7.0% from 6.7%.

MARKETS

US Treasury yields have edged slightly higher in early trading, adding to the moves seen on Friday, and in the run up to Wednesday’s policy announcement from the Federal Reserve. The US dollar is broadly steady but remains down versus levels from a week ago. As a result, GBP/USD continues to trade close to, but just below, 1.26, with EUR/USD holding around the 1.0750 mark.