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BoJ remains comfortable as the outlier among G10 central banks

JPY: BoJ bucks the trend of major central bank tightening by leaving monetary policy settings unchanged at Friday’s meeting (cash rate at -0.1% and a YCC target on the 10Yr JGB yield at 0% +/- 25bp). In the policy statement, BoJ adds the sentence that “it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices”, and Governor Kuroda in his press conference again describes sharp depreciation in the Yen as hindering corporate business planning. However, Governor Kuroda remains steadfastly dovish in his commitment to support BoJ’s YCC (yield curve control) policy by noting that “the Bank will not hesitate to take additional easing measures if necessary while expecting short- and long- term policy interest rates to remain at their present or lower levels”.
 
JPY: This leads Citi analysts to maintain their base case that change in BoJ policy may only come under a new governor who takes over in April 2023, though excessive Yen volatility and potential for political pressure from the Japanese government to contain FX volatility, could see a 30%-40% likelihood to adjustments under Governor Kuroda with the September (21-22) board meeting sees as the earliest timing. This is premised on an LDP victory in July’s Upper House elections and a consequent strengthening of PM Kishida’s support base. If the BoJ does adjust its policy settings, it is likely to be in the form of – (1) broadening the range of fluctuation in 10Yr JGB yields (currently ±0.25%) while maintaining the target (c0%), (2) raising the yield target outright, or (3) shifting the YCC target to the 5yr JGB maturity from the current 10Yrs. Of these, alternative 3 seems the most likely (Citi analysts).
 

Another solid Australian labor force print points to RBA lifting the cash rate by 50bps in July

AUD: In data released Friday, Australia’s unemployment rate comes in unchanged at 3.9% in May (Citi & consensus; 3.8%) despite a large 60.6k increase in employment (Citi; 20k, consensus; 25k), offset by an increase in the labor force participation rate from 66.4% to 66.7% (Citi and consensus; 66.4%). Citi analysts point to the strong 60.6k increase in employment, a record-high labor force participation rate of 66.7%, and a steady, multi-decade low unemployment rate of 3.9% suggesting the Australian labor market is now close to, or below, levels consistent with full-employment, which will likely generate wage pressures over the coming year. Citi analysts therefore reconfirm their view that the RBA will likely lift the cash rate by another 50bps at the July Policy Board Meeting but now follow up with +50bps hikes across August and September and a +25bps in November for a year-end cash rate of 2.6%, followed by a year-end cash rate of 3.1% in 2023. This represents a significant upward revision to the team’s prior forecast.
 

Negative Omicron hit to NZ Q1 GDP hit won’t stop RBNZ raising rates further this year 

NZD: New Zealand’s GDP growth falls by -0.2% in Q1, underwhelming consensus for +0.6% and below Citi’s +0.2% forecast. The surprise result means YoY GDP growth eases considerably from 3.1% to 1.2%. The result also undershoots RBNZ’s 2.5% forecast published only last month and leaves NZ GDP growth around 1pp below potential growth. Citi analysts expect GDP growth to recover in Q2 (1.5% but with downside risks) due to economic reopening, still accommodative rate settings, rising wages and a record low unemployment rate. That said, the 2022 year-average GDP growth is now likely to be lower at 2.2% (down from 2.8%) before moderating.
 
NZD: Citi analysts now look for two +50bp rate hikes from the RBNZ at the next 2 MPC meetings (13 July and 17 August) followed by 2 +25bp rate hikes (5 October and 23 November) for a 2022 year-ended OCR of 3.50% thanks to higher expected NZ CPI inflation of 6.2% in 2022 (from 5.6%) but pencil-in rate cuts beginning Q2 2023 for a terminal OCR of 2.75% in Q3 2023 on the back of slower growth GDP (1.5% from 2.3% prior forecast) and CPI inflation (2.7%) in 2023. Within inflation forecasts, Citi analysts expect NZ CPI to come back within the bottom half of RBNZ’s target band in H2’ 2023 that may allow it to lower the OCR to 2.75% in Q3 2023.
 

Week Ahead – Fed, ECB and BoE speak, French legislative elections

USD: Fed speak - the two most important appearances this week will be Fed Chair Powell's semi-annual testimonies before the Senate Banking Committee and the House Financial Services Panel. There could be some slight hawkish nuances if Powell makes it clearer that 50bp increments are the new baseline pace or if he puts 100bp hikes more concretely on the table in case future inflation prints surprise to the upside. The week also sees speeches from Waller, Bullard, Mester, Barkin, Harker and Daly. St. Louis Fed President Bullard and Governor Waller have consistently been the most hawkish FOMC members.
 
EUR: EU Summit 23/24 June – the provisional agenda foresees discussions on the rise and divergence of sovereign borrowing costs (will ECB President propose a “grand bargain” where the ECB creates an anti-fragmentation tool and member states progress towards more risk sharing) and relations with the UK.
 
EUR: France: second round of legislative elections – seat projections after the first round suggest that Macron’s Ensemble alliance would remain the largest group in parliament but could fall short of a majority. And even if a majority is secured, deteriorating loyalty to parties as a consequence of the decline of traditional formation could mean Macron needs new partners. In this regard, statements from the center-right as well as from moderates within the left-wing NUPES alliance could give a clue which way Macron may lean.
 
Euro Bloc: ECB & BoE – a plethora of ECB rate setters will be speaking. Citi analysts remain skeptical that ECB President Lagarde’s appearance in the European Parliament’s Economic and Monetary Affairs committee will yield insight ECB staff’s thinking on the anti-fragmentation tool. But national central bank governors’ intervention will matter to judge where intervention threshold may settle or what conditions may be attached. BoE: What is the message? – having all but jettisoned their ‘guidance’ in June, five of the nine-person committee will be talking this week. The key question will be the balance of the growth and inflation risks in UK, and the associated burden of proof to an outsized move. The bigger questions surround UK data and developments in services inflation, the Agent data on wages and prices and the Decision Maker survey data.
 
EUR: Euro area data releases: Euro Area (flash) PMI Manufacturing, June: Citi Forecast 54.1, Consensus 54.0, Prior 54.6;  PMI (flash) Services, June: Citi Forecast 54.5, Consensus 55.5, Prior 56.1;  PMI Composite Output, June: Citi Forecast 54.0, Consensus 54.1, Prior 54.8; German Ifo Business Climate, June: Citi Forecast 93.8, Consensus 92.5, Prior 93.0; Ifo Expectations, June: Citi Forecast 87.5, Consensus 87.1, Prior 86.9;  Ifo Current Assessment, June: Citi Forecast 99.0, Consensus 98.8, Prior 99.5.
 
GBP: CPI and (flash) PMIs: Will inflation join in the upside surprises? – Citi analysts expect UK CPI to print at 9.2% YY in May, with an uptick in goods, services and food inflation M/M all behind the small acceleration. If realized, this would leave CPI inflation in line with the BoE forecast from May, though upside risks loom for the months ahead. Both the EA and US have seen upside surprises in May on the back of core goods and rental prices respectively. Read across into UK inflation is limited in both cases, with core goods inflation in the EA lagging UK developments, rather than leading. CPI Inflation, May: Citi Forecast 9.2% YY, Consensus 9.2% YY, Prior 9.0% YY; BoE Forecast: 9.2% YY (May MPR); CPI Core, May: Citi Forecast 6.3% YY, Consensus 6.0% YY, prior 6.2% YY (goods inflation uptick). UK PMI Manufacturing, June Flash: Citi Forecast 54.5, Consensus 53.8, Prior 54.6;  PMI Services, June Flash: Citi Forecast 52.0, Consensus 53.0, Prior 53.4 (expectations suggests downside risk)
 
JPY: Japan Nationwide Consumer Prices, Overall (May): Citi Forecast 2.3% YoY, Previous: 2.5% YoY; Excluding Fresh Food: Citi Forecast: 2.0% YoY, Previous: 2.1% YoY; Excluding Fresh Food and Energy: Citi Forecast: 0.7% YoY, Previous: 0.8% YoY – Citi analysts expect nationwide core CPI (excluding only fresh food) to rise 2.0% YoY in May, down from a 2.1% YoY but advance from April as energy’s boost moderates. The team expects core CPI excluding special factors to rise 1.15% YoY in May as in April and overall CPI to increase by 2.3% YoY in May (+2.5% YoY in April), while CPI excluding fresh food and energy likely gains 0.7% YoY (+0.8% YoY). Citi analysts estimate that the core CPI inflation will remain elevated at or over 2% YoY for the rest of the year.
 
CAD: Canada CPI NSA MoM (May) – Citi: 1.1%, median: 1.0%, prior: 0.6%; CPI YoY – Citi: 7.4%, median: 7.3%, prior: 6.8% - May CPI is likely to show inflation climbing still even higher than in the BoC’s most recent inflation forecasts, rising 1.1%MoM and to 7.4%YoY. Strength should again be largely broad-based across various goods and services prices with rising interest rates likely leading to the mortgage cost component becoming a larger boost to shelter prices in CPI, even if higher mortgage rates eventually lead to softer home prices. Overall, home prices have started to decline in data for April and May, which should lead to a slowing in new home prices that matter even more for CPI. The general trend of price pressures though remains strong and broad-based across various types of goods and services. This should be evident in core inflation measures continuing to climb higher, closer to 5% on average, over the coming months.
 

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