MNI US OPEN - BoC Expected to Commence Easing Cycle

NEWS

MNI BOC PREVIEW - JUNE 2024: GDP Last Building Block for Rate Cut

Having been more divided over the viability of a June BoC rate cut, market consensus and pricing has begun to side with this week’s meeting as the start of the easing cycle, with a 25bps rate cut to 4.75% the most likely outcome. The sequence of softer-than-expected inflation prints has extended since the last decision, pointing to a further moderation of inflationary pressures and, likely, expectations. However, we don’t expect a declaration of victory on inflation from the BoC this week. Any potential rate cut should be accompanied by clear communication that the pace of easing ahead will be gradual and measured in order to prevent an even wider gap between US and Canadian rates – and the implicit impacts on the exchange rate.

MNI ECB PREVIEW - JUNE 2024: Expect an Insurance Cut in June

A June cut has been so well-telegraphed by the ECB that failing to deliver would result in significant loss of credibility. However, uncertainties over inflation persistence, the geopolitical backdrop, and the outlook for global monetary policy (principally the Fed) suggest that the June decision will be no more than an insurance cut at this stage with no new policy signals. Although still a relatively low probability outcome for now, we cannot fully discount the potential for a ‘one and done’ rate cut in 2024.

US/ISRAEL (BBG): Biden Bid to End Gaza War Falters as Israel, Hamas Push Back

Hamas has followed Israel in balking at President Joe Biden’s efforts to end their war in Gaza, with both sides saying their conflicting conditions for a permanent cease-fire must be met before they’ll even agree to pause fighting. A Hamas spokesman said Tuesday that Israel must commit to a permanent cease-fire and full withdrawal from Gaza. “We are waiting a clear Israeli stance on this,” the spokesman, Osama Hamdan, said Tuesday in Beirut. That came a day after Israeli Prime Minister Benjamin Netanyahu reaffirmed his position that the group’s political and military operations must be destroyed before the war is ended.

US (WaPo): Biden Announces New Asylum Cap in Bid to Deter Illegal Crossings

President Biden announced new measures Tuesday that will block migrants' access to the U.S. asylum system when illegal border crossings are at emergency levels, a move aimed at shoring up one of his biggest vulnerabilities to reelection in November. Biden's executive actions, effective at the end of the day Tuesday, impose broad restrictions on asylum as long as illegal border crossings remain above an average of 2,500 per day, administration officials said.

ECB (BBG): ECB’s Kazimir Believes First Interest-Rate Cut Is Nearing

The European Central Bank is likely to lower borrowing costs soon, according to Governing Council member Peter Kazimir. “Inflation is on a good trajectory, and I believe we are approaching the first reduction in interest rates by the ECB,” Kazimir said Wednesday in the financial stability report of the Slovak central bank, which he heads.

UK (MNI): First Debate a Dead Heat, Does Little to Shift Election Dial

The first televised debate of the general election campaign took place on the evening of 4 June, with PM Rishi Sunak facing off against Labour leader Sir Keir Starmer. The ill-tempered affair allowed both main party leaders to repeat their main campaign points repeatedly, but has done little to change pre-existing perceptions at least according to snap polls and betting markets. A snap poll by YouGov showed essentially a dead heat, with 51% saying Sunak won the debate to 49% saying Starmer was the victor.

CHINA (MNI): Beijing Stresses Private Sector Support

MNI (Beijing) China's government will aim to provide favourable monetary and financial conditions and ensure a solid foundation for private enterprises to integrate into the new development pattern of the economy better, senior policymakers from the National Development and Reform Commission said Wednesday. Meeting with private entrepreneurs, top officials noted China’s private economy acts as an important force towards modernisation and high-quality development.

JAPAN (BBG): Japan PM Doesn’t Plan Election Before LDP Leader Race: Yomiuri

Japanese Prime Minister Fumio Kishida doesn’t intend to dissolve the lower house of parliament for a snap election before the Liberal Democratic Party’s leadership race in the fall, according to a report by Yomiuri, citing unidentified government and party officials. Given public dissatisfaction over a slush fund scandal, Kishida will focus on restoring trust and achieving a virtuous economic cycle

JAPAN (BBG): Aging Japan’s Fertility Rate Slides to Record Low in 2023

Japan’s fertility rate dropped to a record low of 1.2 last year, in an eighth consecutive decline that underscores the challenges faced by the world’s most elderly country. The figure, an indication of the average number of children a woman is likely to produce over her lifetime, dropped below 1 in Tokyo, according to data published by the Ministry of Health, Labour and Welfare on Wednesday. The total number of births in Japan last year was 727,277, 5.6% less than the previous year, while the total number of deaths rose to almost 1.58 million, meaning the population shrank by 848,659, the 17th straight fall. The data exclude migration.

RBA (MNI): RBA Warns Against Reliance on Monthly CPI Print

The Reserve Bank of Australia Governor Michele Bullock has warned against focusing too heavily on volatile monthly inflation reads, noting June’s quarterly print will offer a far more comprehensive view on the direction of prices. Bullock told a senate estimates committee Wednesday the RBA needed quarterly CPI results to help confirm monthly data. “You don't have to go back long, maybe a few months, when monthly figures were all surprising on the downside, and everyone was saying, 'oh, inflation is growing much more quickly. Interest rates are going to come down really quickly.' Now they've surprised a little bit on the upside.”

INDIA (BBG): Modi Seeks to Shore Up His Coalition to Secure Third Term

Indian Prime Minister Narendra Modi is gearing up for coalition talks after his party lost its majority in parliament, forcing him to rely on allies to form a government for the first time since he stormed to power a decade ago. Modi’s Bharatiya Janata Party needs to secure the support of two regional allies, who are notoriously unreliable, to stay in office for a third term. The BJP-led National Democratic Alliance is expected to hold a meeting in New Delhi Wednesday afternoon.

THAILAND (BBG): Thai Government Eyes Tighter Grip on Central Bank After Spat

Thai Prime Minister Srettha Thavisin’s administration is discussing ways to exert more control over the country’s central bank after repeatedly clashing with the monetary authority on economic policy, according to people familiar with the matter. One of the measures under discussion focuses on the Bank of Thailand’s board chairman role, which will open up in September, the people said. While the chairman doesn’t have powers to dictate monetary policy, the official can evaluate the BOT governor’s performance as well as have a say in which outside experts join the Monetary Policy Committee.

MNI NBP PREVIEW - JUNE 2024: Continued Rate Stability

The recent below-forecast CPI readings are unlikely to dissuade the National Bank of Poland (NBP) from keeping monetary policy settings on hold. A familiar set of factors, including elevated core inflation, robust wage growth, loose fiscal policy, and the uncertainty around the magnitude of the pass-through from administrative decisions to inflation expectations will probably feature in official communications again. Lingering risks and uncertainties will justify an on-hold rate decision coupled with guidance pointing to a high probability of longer interest-rate stability, possibly through the rest of this year.

DATA

EUROZONE DATA (MNI): Disinflation in Core Goods Continues

• EUROZONE APR PPI -1% M/M, -5.7% Y/Y

Eurozone PPI for April remained in deflation for the eleventh successive month, although the energy component saw another increase in the Y/Y rate for the second consecutive month (entirely driven by base effects). This pushed the Y/Y PPI figure up to -5.7% Y/Y, although below consensus expectations (vs -5.3% consensus, -7.8% prior). The energy component remained in deflation at -14.7% Y/Y, the highest since June 2023, although as noted above this was driven entirely by base effects as on a monthly basis it saw its sixth consecutive fall at -3.6% M/M.

EUROZONE DATA (MNI): Services Firms Pass on Input Cost Rises to Protect Margins

• EUROZONE MAY FINAL SERVICES PMI 53.2 (FLASH: 53.3); APR 53.3
• GERMANY MAY FINAL SERVICES PMI 54.2 (FLASH: 53.9); APR 53.2
• FRANCE MAY FINAL SERVICES PMI 49.3 (FLASH: 49.4); APR 51.3

The May final services PMIs saw a 0.3pp upward revision in Germany to 54.2, while France (49.3) and the Eurozone as a whole (53.2) saw 0.1pp downward revisions. While Spanish and Italian respondents reported strong export growth in May, the German PMI noted a “a first – albeit marginal – increase in new business from abroad for 12 months” while France registered a “a sharp and accelerated reduction in non-domestic client demand”. However, the continued recovery in overall services demand meant employment growth was positive across the four major economies.

FRANCE DATA (MNI): France Industrial Production Y/Y Highest Since Nov'23

• FRANCE APR INDUSTRIAL PRODUCTION +0.5% M/M, +0.9% Y/Y
• FRANCE APR MANUFACTURING OUTPUT +0.4% M/M, +1.2% Y/Y

France Industrial Production printed slightly above expectations at +0.9% Y/Yin April (vs +0.7% consensus,, +0.7% prior), making it the highest since November 2023. On a monthly basis, it also outperformed printing +0.5% M/M (vs+0.3% consensus, -0.2% revised prior from -0.3%). The improvement was driven by manufacturing production (which accounts for over 80% of industrial production). This component rose +0.4% M/M (vs +0.3% M/M consensus; albeit from only three analysts, -0.4% revised prior from -0.5%).

SPAIN DATA (MNI): Tight Labour Market Pushes Input Prices Higher

• SPAIN MAY SERVICES PMI 56.9 (FCST:56.5); APR 56.2

The Spanish May services PMI was stronger-than-expected at 56.9 (vs 56.5 cons, 56.2 prior), mirroring the outperformance seen in the manufacturing PMI on Monday. The composite PMI was 56.6 (vs 56.2 cons, 55.7 prior). Details suggest a still-tight labour market continues to put upward pressure on input prices, with labour-driven capacity constraints and increases in wages cited.

ITALY DATA (MNI): Services PMI Cites Expansion in Export Sales and Employment

• ITALY MAY SERVICES PMI 54.2 (FCST:54.5); APR 54.3

The Italian May services PMI printed slightly softer than consensus at 54.2 (vs 54.5 cons, 54.3 prior), though remains in expansionary territory for the fifth consecutive month. The composite PMI was 52.3 (vs 53.2 cons, 52.6 prior), with Monday's weak manufacturing print dragging. Similar to the Spanish services PMI, respondents reported growth in export sales and employment, while input price increases continued to passed on to customers.

UK DATA (MNI): Services Report Suggests Cost Passthrough May Not Be as Weak as May MPR Forecasts

• UK MAY FINAL SERVICES PMI 52.9 (FLASH: 52.9); APR 55.0

This is the key from the UK PMI services report: "Amid reports of sustained salary pressures, greater supplier charges and increases in fuel costs, prices charged for UK services rose during May as businesses passed through higher expenses to their clients. That said, the rate of output price inflation eased to its weakest for over three years." The MPC was really focused in its May MPR on the fact that both the PMIs and Agents were seeing less passthrough of wage growth to output prices. But the wording here seems to suggest that the lack of passthrough may not be as sustained as previously thought.

JAPAN DATA (MNI): Japan March Negative Real Wage Narrows to -0.7%

The year-on-year drop of inflation-adjusted real wages, a barometer of households' purchasing power, narrowed to 0.7% in April from a 2.1% fall in March, preliminary data released by the Ministry of Health, Labour and Welfare on Wednesday showed. April’s real wages have stayed in negative territory for 25 straight months, its longest period, but marking the highest level since December 2022 when it fell 0.6%.The persistent negative real wages showed household income has not caught up with price rises but the degree of negative real wages is expected to narrow and move toward positive territory as early as the fourth quarter.

CHINA MAY CAIXIN SERVICES PMI 54.0 VS 52.5 IN PREVIOUS MONTH (BBG)
CHINA MAY CAIXIN COMPOSITE PMI 54.1 VS 52.8 IN PREVIOUS MONTH (BBG)

AUSTRALIA DATA (MNI): Aussie Q1 GDP Prints at +0.1% Q/Q

• AUSTRALIA Q1 GDP +1.1% Y/Y
• AUSTRALIA Q1 GDP +0.1% Q/Q

The Australian economy grew 0.1% in the March quarter, 10 basis points less then expected, while household spending rose 0.4% q/q, according to the National Accounts published by the Australian Bureau of Statistics Wednesday. “GDP growth was weak in March, with the economy experiencing its lowest through the year growth since December 2020. GDP per capita fell for the fifth consecutive quarter, falling 0.4% in March and 1.3% through the year,” noted Katherine Keenan, head of national accounts at the ABS.

FOREX: USD/JPY's Impressive Intraday Bounce Still Short of Weekly High

• Following the strong JPY rally this week, a moderate reversal for US yields  has seen the Japanese Yen retrace substantially overnight. USDJPY stands up  0.87% on the session, having risen back above the 156 handle, where it has been consolidating across the European morning. USD/JPY's intraday bounce has been solid and one-directional, however the pair remains lower on the week, and just over 100 pips off the opening levels printed Monday. JPY is the poorest performer in G10.
• NZD trades well, higher against most others to keep NZD/USD within range of the cycle highs and notable resistance at 0.6198. Clearance here would put the pair at the best levels since mid-March. Moves follow the firmer-than-expected print for China's Caixin Services PMI for May (54.0 vs. 52.5), which proved more market-moving relative to the mixed Italian / Spanish services PMIs released this morning.
• The Bank of Canada rate decision set for later today is expected to see the first cut of the cycle, with consensus looking for a 25bps cut to 4.75%. That said, a sizeable minority see the Bank holding until July (or later), leaving markets ~80% priced for a cut today. Those that see a July, rather than a June, cut cite Fed re-pricing, the dangers of US-CA rate differentials and the still-booming local housing market.
• Outside of the BoC, ADP Employment Change is set to cross ahead of the ISM services index data for May. Both figures will be carefully watched ahead of Friday's Nonfarm Payrolls release, at which markets expect 185,000 jobs added over the month. 

EGBS: BTP/Bunds Continues to Trade at ~130bp, Iberian Tightener Preferences Remain Evident

The recovery from yesterday’s lows in European equities and focus on the widely expected start to the ECB’s easing cycle continues to backstop widening episodes in the 10-Year BTP/Bund spread. The spread has been oscillating around 130bp since the start of May.

• Meanwhile, focus on the same monetary policy dynamics, coupled with fiscal progress in both Spain & Portugal, continues to promote a tightening bias for Iberian paper.
• Friday’s positive Spanish outlook (trend) move from Morningstar DBRS was the latest step on the favourable Spanish ratings trajectory.
• 10-Year SPGB-OAT spreads have recently hit levels not seen since the start of the sovereign debt crisis, with questions over the French fiscal outlook allowing that move to extend further in recent months
• Relative fiscal dynamics mean that Iberian tighteners have been a favoured sell-side play in recent times. Still, Commerzbank “continue to see value in SPGBs vs. OATs/semi-core as well as PGB-convergence trades vs. semi-core which are also hitting new lows."

GILTS: Under Pressure, Wider Against Peers

The early downtick in gilts holds, with core global FI on the defensive as bulls are unwilling to force a test of recent range lows in various benchmark yield measures.

• Futures trade as low 97.29, with initial support seen at yesterday’s base (97.08).
• The recent run higher in the contract is considered corrective at this stage.
• Yields are 3-4bp higher across the curve, with a light bear flattening bias.
• Gilts widen vs. EGBS across the curve.
• SONIA futures are 0.25-3.0 lower through the blues coming under modest pressure alongside gilts, although ranges remain tight and volumes relatively light.
• BoE-dated OIS sees similar, modest moves, with ~35bp of cuts showing through year end.
• The latest round of 3.75% Mar-27 gilt supply saw average results, with no tangible market impact to note.
• UK headline flow remains light, with yesterday evening’s Sunak-Starmer debate providing little to no fresh information.
• The Conservatives still face a huge deficit in the opinion polls.
• Final services PMI data suggested cost passthrough may not be as weak as the BoE’s May MPR forecasts.
• The local calendar is limited from here, which should leave focus on wider headline flow & spill over from U.S. data.

EQUITIES: Technical Uptrend in E-Mini S&P Remains Intact

Eurostoxx 50 futures traded lower Tuesday, extending the current bear cycle. The recent move down appears to be a correction, but note that support at the 50-day EMA, at 4966.80, has been pierced. A clear break of the average would undermine the short-term bullish theme and signal scope for a deeper retracement, towards 4894.90, a Fibonacci retracement. Initial resistance is seen at 5047.00, the Jun 3 high. The uptrend in S&P E-Minis remains intact, however, a corrective cycle has resulted in a pullback from the recent high of 5368.25 (May 23). The latest move down has seen price pierce support at the 50-day EMA, at 5219.79. A clear break of this average would signal scope for a deeper retracement. The recovery from last Friday’s low is a positive development, a continuation would open 5368.25, and a breach of this level resumes the trend.

• Japan's NIKKEI closed lower by 347.29 pts or -0.89% at 38490.17 and the TOPIX ended 39.26 pts lower or -1.41% at 2748.22.
• Elsewhere, in China the SHANGHAI closed lower by 25.796 pts or -0.83% at 3065.403 and the HANG SENG ended 19.15 pts lower or -0.1% at 18424.96.
• Across Europe, Germany's DAX trades higher by 97.88 pts or +0.53% at 18503.38, FTSE 100 higher by 9.57 pts or +0.12% at 8241.66, CAC 40 up 25.66 pts or +0.32% at 7963.83 and Euro Stoxx 50 up 34.59 pts or +0.7% at 4988.12.
• Dow Jones mini up 58 pts or +0.15% at 38846, S&P 500 mini up 6 pts or +0.11% at 5310.25, NASDAQ mini up 44.5 pts or +0.24% at 18745.5.

Time: 09:50 BST

COMMODITIES: WTI Futures Trading Above This Week's Lows

WTI futures have traded sharply lower this week and the contract remains soft. Price has cleared $73.24, the 76.4% retracement of the Dec 13 - Apr 12 bull leg. This reinforces the current bearish theme and signals scope for a continuation. Note that moving average studies are in a bear-mode position too, highlighting a downtrend. Sights are on $71.33 next, the Feb 5 low. Initial resistance is at $76.15, the May 24 low and a recent breakout level. A bear cycle in Gold remains in play for now, and the yellow metal is trading closer to its recent lows. The medium-term trend structure is bullish and the recent move down appears to be a correction that is allowing an overbought condition to unwind. Moving average studies are in a bull-mode position, highlighting an uptrend. A resumption of gains would open $2452.5 next, a Fibonacci projection. The 50-day EMA, at $2310.1, represents a key support.

• WTI Crude up $0.13 or +0.18% at $73.38
• Natural Gas up $0.06 or +2.36% at $2.645
• Gold spot up $6.7 or +0.29% at $2333.63
• Copper up $0.85 or +0.19% at $454.45
• Silver up $0.11 or +0.36% at $29.5985
• Platinum up $6.82 or +0.69% at $998.97

Time: 09:50 BST