FX - The Week Ahead: Do not rule out a double hit by the BoJ to raise rates and cut bond purchases at the July 31st meeting

Japan nationwide inflation gains further, weak yen likely to cause BoJ to modestly revise up its inflation forecasts

• JPY: In data released Friday, Japan’s nationwide core CPI (excluding only fresh food) rises 2.6% YoY in June, up slightly from a 2.5% YoY advance in May though the result is modestly weaker than consensus expectations for a 2.7% YoY increase. Meanwhile, CPI excluding fresh food and energy, i.e., core-core CPI, rises 2.2% YoY in June, also picking up a bit from a 2.1% YoY gain in May but with services inflation unchanged.
   
• JPY: Core inflation may slow temporarily in autumn — Going forward, Citi Research expect core CPI to rise 2.7% YoY in July and August. But there are likely upside risks should weak Yen effects materialize clearly. Thereafter, the resumption of government subsidies for energy prices may slow core inflation to the lower-2% range from September through November. Note however, Citi Research expect real wage growth to turn positive YoY in September as the spring wage hike results begin to be reflected in macroeconomic nominal wages.
   
• JPY: Only modest upward revisions likely to BoJ inflation forecasts in the July Outlook report — Citi Research expect BoJ’s core-core inflation forecasts to be upgraded to +2.1% YoY for FY2024 and +2.0% YoY for FY2025 in the upcoming July Outlook report. Mainly reflecting Yen depreciation, Citi Research expect upward revisions from +1.9% for both FYs in the previous report from April. However, depending on BoJ assumptions for FX cut-off rate and pass-throughs, there are upside risk to the inflation forecasts for both FY2024 and FY2025 though whether they are enough to raise BoJ’s wage hike projections in next spring and compelling the BoJ to hike rates at the July 31^st meeting remains to be seen.

Japan June customs trade data – net exports likely a drag on Q2 GDP growth but a domestic demand rebound likely the tailwind

• JPY: Data released this week shows Japan’s real exports rising 0.4% MoM in June after a 0.8% MoM drop in May, leading to a modest 0.9% QoQ gain in Q2 (-2.5% QoQ in Q1 and +0.1% QoQ in Q4). With supply disruptions in Q1 having eased, exports of motor vehicles rebounded, but only slowly. Meanwhile, goods imports outgrew goods exports in Q2 — real imports increased 3.4% MoM in June after a 0.4% MoM drop in May, leading to a 2.9% QoQ gain in Q2 (-4.4% QoQ in Q1).
   
• JPY: Japan’s trade deficit expanded in June — the trade balance was ¥224.0bn in surplus before seasonal adjustments and ¥816.8bn in deficit after seasonal adjustments in June (-¥1.2201trn and -¥644.3bn, respectively, in May). The trade deficit after seasonal adjustment increased as real exports stagnated. Net exports look likely to cut QoQ GDP growth by c0.3ppt in Q2 — Citi Research expect net exports to contribute c-0.3ppt to the QoQ growth rate of GDP in Q2. However, a domestic demand rebound will probably push GDP growth back into positive territory.

Week Ahead:

US – Q2 GDP (preliminary), S&P manufacturing and services and monthly core PCE data in focus this week

• USD: US Q2 GDP Annualized QoQ – Citi: 1.4%, median: 1.9%, prior: 1.4%; Personal Consumption – Citi: 2.0%, median: 1.7%, prior: 1.5%; Core PCE QoQ – Citi: 2.7%, median: 2.6%, prior: 3.7% - Citi Research expect real GDP growth of 1.4% in Q2, very similar to the increase in Q1 but with different details. Consumption could pick-up relative to Q1, rising 2.0%. Signals around manufacturing activity have been mixed lately, with strong imports of capital goods and rising industrial production suggestive of a pick-up in demand for investment goods, but with orders of durable goods remaining subdued. Investment in non-residential structures could fall and Citi Research expect a further slowing in government spending in GDP, reflecting that the substantial direct boost to activity from fiscal policies over the last two years is reaching a peak. Volatility in components like inventories and net exports could return in Q2, with a drag from net exports reflecting strong imports partly offset by a boost from building inventories. Based on forecasts for June core PCE and expectations for modest revisions lower to PCE in May, core PCE inflation is likely to rise 2.7%QoQ annualized.
   
• USD: US June PCE Price Index MoM -Citi: 0.1%, median: 0.1%, prior: 0.0%; PCE Price Index YoY – Citi: 2.4%, median: 2.5%, prior: 2.6%, Core PCE MoM – Citi: 0.2%, median: 0.2%, prior: 0.1%, Core PCE YoY – Citi: 2.5%, median: 2.5%, prior: 2.6% - elements of CPI and PPI lead Citi research to expect a 0.16%MoM increase in core PCE inflation in June, another very favorable monthly slowing in the Fed’s preferred inflation measure. Headline PCE inflation should rise a modest 0.1%MoM and moderate to 2.4%YoY, close to approaching the 2% target.
   
• USD: S&P US Manufacturing PMI – Citi: 51.5, median: 51.4, prior: 51.6; S&P US Services PMI – Citi: 55.3, median: 55.0, prior: 55.3 - manufacturing PMIs have diverged in recent months with S&P Manufacturing PMI staying in expansionary territory while ISM Manufacturing has remained below 50. Citi Research continue to see limited upside for manufacturing activity with a backdrop of elevated interest rates and expect S&P Manufacturing PMI to decline very modestly to 51.5 in July but with downside risks especially in the employment subcomponent. S&P Services PMI was also stronger compared to ISM Services in June. Citi Research expect the S&P Services PMI to be little changed in July but similar to manufacturing with downside risks as real services spending growth has slowed in recent months.
   
• USD: US June Personal Income – Citi: 0.4%, median: 0.4%, prior: 0.5%; Personal Spending – Citi: 0.4%, median: 0.3%, prior: 0.2%; Real Personal Spending – Citi: 0.3%, median: 0.2%, prior: 0.3% - personal income should rise 0.4%MoM in June, supported by a rise in wages and salaries and asset income. Personal spending should rise 0.4%MoM in nominal terms and 0.3%MoM in real terms after June retail sales surprised to the upside.

Europe, UK – Euro area and UK PMIs, German Ifo, euro area household inflation expectations and consumer confidence in focus this week

• EUR: Euro Area economic confidence – the purchasing manager indices (Wednesday) and the Ifo survey (Thursday) should give the first clean read on business confidence since the French elections. Citi Research expect both to follow the ZEW which should be a dent to optimism, but not a negative turn-around. This should also be apparent in further stabilization of consumer confidence (Euro Area on Tuesday). Euro Area Consumer Confidence, July – Citi Forecast -13.8, Consensus -13.5, Prior -14; Euro Area: Manufacturing PMI, July – Citi Forecast 45.4, Consensus 46.1, Prior 45.8; Services PMI, July – Citi Forecast 52.4, Consensus 53.0, Prior 52.8; Composite PMI, July – Citi Forecast 50.6, Consensus 50.7, Prior 50.9; German Ifo Business Climate, July – Citi Forecast 89.0, Consensus 89.0, Prior 88.6; Ifo Expectations, July – Citi Forecast 89.0, Consensus 89.5, Prior 89.0; Ifo Current Assessment, July – Citi Forecast 89.0, Consensus 88.5, Prior 88.3
   
• EUR: Euro area household inflation expectations – Citi Research expect the ECB’s CES inflation expectations to make further progress towards the 2% target (down from 2.8% to 2.7% YY on a 1-year horizon, stable at 2.3% over 3 years).
   
• GBP: UK Manufacturing PMI, July Flash – Citi Forecast 50.8, Consensus 51.2, Prior 50.9; Services PMI, July flash – Citi Forecast 52.1, Consensus 52.5, Prior 51.1 (Downside risks?)

Japan – Tokyo core CPI in focus this week

• JPY: Tokyo core CPI to increase 2.3% YoY in July – Citi Research expect the core CPI in Tokyo (the CPI excluding fresh food) to increase 2.3% YoY in July, up from a 2.1% YoY rise in June. With the termination of government subsidies, energy prices look likely to increase centering on electricity and gas prices. Meanwhile, CPI excluding fresh food and energy, i.e., core-core CPI, will probably moderate from +1.8% YoY in June to +1.7% YoY in July. Citi Research expect moderation in hotel charges and mobile phone charges, both reflecting the base effect. However, there is upside risk to core-core inflation if the impact of yen depreciation turns out to be more visible.

Commodity Bloc – BoC board meeting in focus this week

• CAD: Bank of Canada Rate Decision – Citi: 4.50%, median: 4.75%, prior: 4.75% - Citi Research expect the BoC to lower rates again this week to 4.50%, justified by slowing inflation but also due to rising growth concerns. The policy statement and remarks from Governor Macklem will likely continue to highlight the importance of inflation data in determining future rate cuts, with the pace of cuts possibly still characterized as likely to be “gradual”. But the risks are of a more dovish BoC on Wednesday. Both growth and inflation forecasts should be lowered in updated MPR forecasts. In April, inflation was described as likely to run above 2.5% through the end of the year before moderating closer to target in 2025. This outlook could remain largely unchanged, although with Q2 inflation realizing somewhat softer than expected in April. The statement could still acknowledge remaining upside risks, including from shelter inflation. The updated growth forecasts could be more consequential. Real GDP growth in Q1 at 1.7% was far below the BoC’s April projection of 2.8%. The April Q2 GDP forecast of 1.5% is in line with Citi Research’s own estimate based on stronger investment related to rising home sales and increased oil production, but assuming 1.5-2% growth rates in Q1 and Q2 would imply quarterly growth of close to 4% in Q3 and Q4 to reach the BoC’s average annual GDP forecast of 1.5% in 2024. Citi Research expect 2024 growth to be downgraded at least to around 1.0-1.2%. Updated policy guidance could be the most neutral aspect of the July decision. There is unlikely to be any notable changes to guidance.

Asia EM – PBoC LPR, Singapore CPI and MAS meeting in focus this week

• CNH: China 1-Year Loan Prime Rate (%) – Citi Forecast 3.45, Consensus 3.45, Prior 3.45; 5 Year Loan Prime Rate (%) – Citi Forecast 3.95, Consensus 3.95, Prior 3.95 - with no change in OMO or 1yr MLF rate so far in July, Citi Research see no change in the LPRs this month barring any major changes on the current interest rate system. That said, there could be acceleration of interest rate reforms post the 3rd Plenum, with a new interest rate corridor now set by the PBoC. MLF rate and LPRs could be the next step.
   
• SGD: Singapore MAS July 2024 Monetary Policy Statement - with 1H24 GDP growth likely close to MAS’s Apr MPS assumption, and consistent with a gradual closing of the output gap by end 2024, Citi Research see MAS staying on hold at the July MPS, with no change to the slope, width, or center of the policy band. The hurdle to ease is likely higher than the hurdle to tighten, on - (a) risk of resurgence in wage pressures on the cyclical recovery and policy-induced tightening of foreign labor supply, (b) expected gentler-than-expected moderation for core inflation in 2H24, (c) accommodation of structural REER appreciation from policy-induced wage catchup, and (d) the current 1.5% slope consistent in real terms, with expected 2025 core near the historical average of 1.8%. Competitiveness pressures from REER appreciation are unlikely to trigger easing unless the price stability mandate is threatened. Also released this week is Singapore CPI (%YoY) June – Citi Forecast 2.6, Consensus 2.8, Prior 3.1; CPI (%MoM) – Citi Forecast -0.1, Prior 0.7; Core CPI (%YoY) – Citi Forecast 3.0, Prior 3.1