-->A dovish June FOMC meeting but rate cuts contingent trade uncertainty worsening
- The Fed FOMC June meeting largely meets dovish expectations. Key highlights of the Fed statement and dots – (1) Dot projections show 7 members calling for two 25bp cuts in 2019 (versus none in March), 8 unchanged but with a dovish lean; (2) US growth forecasts are barely changed, but the statement gives a nod to rising uncertainty on the outlook, a dovish turn on inflation (expectations) language, dissent from President Bullard who votes to cut and removal of "patient" and replacing with "closely monitoring" for the Fed’s reaction function.
- Fed Chair Powell follows up with comments after the FOMC meeting – (1) emphasizes trade uncertainty….trade conflicts have turned to greater uncertainty, and our contact surveys may be starting to show through incoming data that “the risk of less favorable outcomes has risen.” (2) Inflation – “is moving back up to the objective but at a slow pace. Moreover, weaker global growth may continue to hold…”.(3) On the dots, notes “though some participants wrote down policy cuts and others have not, but the latter group agrees the case for additional accommodation has strengthened..”. (4) When asked about the pros and cons of a 50bp cut, Powell says “… it's wise to react, for example, to prevent a weakening from turning into a prolonged weakening. In other words, sort of an ounce of prevention is worth a pound of cure. I think that is a valid way to think about policy in this era…”. This particular comment helps July pricing jump from -24bps of cuts to -32bps.
Citi analysts’ base case - cuts on the table but not a done deal
- Citi analysts note that the market has reacted dovishly to the June FOMC (Treasuries yields and USD down). But while the statement and dots keep cuts as early as July squarely on the table, the outcome does not change Citi’s base case for “no cuts in 2019” – which Citi analysts note also remains the base case of a slim majority of Fed officials. The statement removes “patient” to replace it with “closely monitoring” conditions - this likely signals that the committee will cut rates should downside risks to the outlook materialize. Citi analysts also say that should the Fed cut, the most likely scenario is a 50bp cut in July and an early end to balance sheet reduction.
- Citi analysts also remind us that the greenback tends to weaken in the 1-2 months heading into the first cut of the cycle. With positioning relatively light, the trend is unlikely to change this time around and there remains further room for tactical USD weakness should the Fed gear up for action.
Resistance to Draghi’s dovish Sintra speech within the ECB more apparent; UK core CPI at 2 year low as sterling impact fades
- ECB President Draghi’s unexpected explicit acknowledgment this week at Sintra that additional stimulus will be delivered if the outlook does not improve appears to be meeting resistance from other members of the ECB Governing Council with ECB sources indicating that many have been surprised by Draghi’s speech with clear differences of opinions about what to do next . Reuters News has spoken to six sources on the sidelines of the ECB symposium in Sintra and the report confirms that we don’t yet know how much support Draghi has for this stance within the Governing Council, and that the July 25 meeting will only likely focus on the various contingencies in greater detail than announce any policy easing measures.
- UK CPI inflation, targeted by the BoE eases from to 2.1% YY in April to 2.0% YY in May, as expected (consensus and Citi 2.0%) while core inflation moves further away from the BoE’s 2% (headline) inflation target and edges down to 1.7% YY in May (consensus 1.6%, Citi 1.8%), the lowest level since early 2017, suggesting that the positive contribution to inflation from sterling’s 2016 deprecation appears to be drawing to a close. BoE expects inflation to average 2.1% YY in 2Q but the May print suggests a marginal downside risk to that, which could be aggravated by weaker oil prices.
- BoE PMC meeting tonight: MPC Split Emerging? The Bank is still guiding to gradual rate hikes. Contrary to other economies, the UK has experienced nearly two years of above-target inflation and faces a tight labor market. Citi analysts see a chance for up to two dissenting votes but an August rate hike is no longer base case as the Bank's smooth Brexit assumption may still be the most likely path, but no-deal could become a bigger risk quickly. The dovish wind blowing through global monetary policy has also tilted the balance against a 2019 BoE rate hike. Rates View - BoE is talking hawkish, but the market is ignoring it and pricing cuts. The same happened in 2017 but this time the data is weaker and cliff-edge risk is closer. That compromises any hawkish protest or vote split.
Stronger-than-expected Canadian inflation keeps BoC cuts unlikely
- Stronger-than-expected Canadian inflation keeps BoC cuts unlikely - headline CPI rises a stronger-than-expected 0.4%MoM in May and 2.4%YoY and indicates cuts from the BoC this year are unlikely. As a result, Citi analysts expect BoC rates to remain unchanged at least through the end of 2019 and likely into 2020. While global trade uncertainties have increased downside risks for the global growth outlook, domestic data continues to signal a rebound from a temporary slowdown. Two of the three core measures also rise in May – pointing to still-solid core inflation due to recently stronger wage growth, and an expected-closing of the output gap could signal building inflationary pressures later in the year.
G20 meeting between Xi and Trump back on
- Statement from the Chinese state media this week - (1) President Xi agrees to talks with Trump during G20 (at June end); (2) President Xi hopes the 2 sides can keep in contact on resolving the US – China trade dispute; (3) President Xi hopes the US treats Chinese firms fairly.
- This is an extract from the Daily Currency Update, dated June 20, 2019. Please approach a Citigold Relationship Manager if you would like more information.