FX - The Week Ahead: Sweden’s inflation slows more than expected while labor market loosens further, supporting a dovish rate path

Cooler than expected inflation supports rate cut in August

• SEK: Sweden’s headline inflation slowed to 2.6% in June from prior month’s 3.7%. The core inflation rate, which strips out energy costs and the effect of interest rate changes, dropped to 2.3% in June. That was the lowest since December 2021, below all estimates in a Bloomberg survey as well as the central bank’s 2.5% forecast. The data lends credence to the Riksbank’s bet that price pressures are subsiding to an extent that will allow it to cut its benchmark rate two or three times before the end of this year. It also increases the likelihood that the bank will cut rates already at its next meeting in August.
   
• SEK: The CPIF measure of inflation that the Riksbank targets also fell to 1.3%, its lowest level in more than three years. While the drop can be explained partly by base effects from brisk price increases in June last year, the central bank has forecast that CPIF will remain below its 2% goal through this year and next.

Sweden’s labor market continues to loosen

• SEK: Registered unemployment increased by 0.8% MM in June, after 0.6% MM the previous month, and new vacancies continued to decline pretty fast (-40% YY), now fully normalised back to 2019 levels. However, job terminations dropped in June and have stabilised in recent months, albeit at relatively elevated levels. Despite signs of improvement in economic activity (more in soft data than in hard ones at least for 2Q), the labour market is continuing to loosen up, supporting further rate cuts ahead.

2Q hard data weakness should reverse in 2H

• SEK: May hard data suggest 2Q GDP may have declined again, after rising by 0.7% QQ in 1Q. May monthly GDP was up by less than expected (0.1% MM, consensus 0.4%), on track for a 0.9% QQ drop in 2Q, as industrial output and construction activity decline. Private consumption keeps retrenching (-0.4% MM in May on track for -0.9% QQ in 2Q) mirroring slowing hiring/rising unemployment and despite accelerating wage growth. Separately, SEB house price indicator posted another gain in June (52% net bal.) to its highest level since mid-2021, pointing to increases in house prices ahead. Comment: a poor set of hard data in Apr-May stands in contrast with improving business surveys (eg composite PMI above 50 for the first time since autumn 2022) and consumer confidence (the highest since Feb-22). This suggests 2Q GDP weakness may well reverse in 2H-24. Citi Research continue to expect the three more rate cuts from the Riksbank as inflation continues to abate and spare capacity to keep growing despite resuming GDP growth.

Week Ahead:

US – Fedspeak and retail sales

• USD: Fedspeak: Chair Powell will share his updated views on the economy after this week's softer CPI print during his interview with David Rubenstein on Monday. Citi Research expect Powell will emphasize that recent inflation prints are increasing his confidence that inflation will slow sustainably to 2% but Citi Research suspect he will still be careful not to give much specific guidance on the timing of a first rate cut. Comments from other Fed officials like Barkin, Waller and Kugler will also inform us on how the consensus among Fed officials is evolving after recent inflation data.
   
• USD: US Retail Sales for June, Headline Retail sales Citi forecast: -0.4%, median: -0.2%, prior: 0.1%, retail Sales ex Auto – Citi forecast: -0.2%, median: 0.1%, prior: -0.1%, Retail Sales ex Auto, Gas – Citi forecast: 0.1%, median: 0.4%, prior: 0.1%, Retail Sales Control Group – Citi: 0.2%, median: 0.1%, prior: 0.4%, Retail sales have been surprising to the downside in the last couple of months. Real goods spending peaked in December of last year and has been moving down to sideways since then as consumers pull back spending on some of the more discretionary categories such as goods, restaurants, and accommodation spending. Citi Research expect another softer retail sales print in June and project total retail sales will fall by 0.4%MoM. Auto sales will weigh on total sales this month as unit auto sales fell in part due to the cyberattack that affected dealers. Gasoline sales will continue to weigh on nominal retail sales as well with gasoline prices down by 3.8%MoM in CPI. Restaurant sales, the only services category in the report, should continue to be weak. Citi Research expect control group sales to increase by a modest 0.2%MoM following a solid 0.4%MoM increase in May. Strength should again be mostly driven by the non-store category. Overall, Citi Research continue to see downside risks to consumption data as some consumers feel the pressure of elevated prices and interest rates. Another downside surprise in June retail sales could make some Fed officials more worried about downside risks to activity.

Europe, UK – ECB rate decision, VDL vote in European parliament, Germany ZEW, UK CPI, UK employment

• EUR: ECB policy meeting:– Rates are likely to be unchanged on 18 July, Citi Research think unanimously. The statement may mention that more data will be available in September but, unlike in April, this will not be a guarantee of a rate cut. Growth and wage data have been weaker, inflation data stickier since the last meeting, leaving room for dovish or hawkish takes and little pressure for action. That could change with the growing prospect of US Fed rate cuts and further falls in inflation by September.
   
• EUR: VDL vote in European Parliament – Newly elected lawmakers are scheduled to vote on the European Council’s proposal to re-appoint Ursula von der Leyen for a second term on Thursday 1pm local time. VDL’s coalition of conservatives, social democrats and liberals have a clear majority, but parliamentary group discipline can be low in the EP, suggesting she may need support from the Greens or the ECR. A rejection could trigger significant turmoil and tensions in the council.
   
• EUR: Germany ZEW Investor Expectations July, Citi Forecast: 41.0, consensus: -41.8, previous: 47.5, ZEW Current Assessment, , Citi Forecast: -75.0, consensus: -75.5, previous: -73.8, The Sentix index dropped sharply in July and Citi Research expect the ZEW to follow after political turbulence in France and sticky inflation pushed yields higher. The weakening external picture may also play a role. Three successive declines would usually mark a turning point in the economic trajectory.
   
• GBP: UK CPI June YoY, Citi Forecast: 2.0%, consensus: 2.0%, previous: 1.9%, core CPI June YoY, Citi Forecast: 3.5%, consensus: 3.5%, previous: 3.5%, CPI service Citi Forecast: 5.6, consensus: 5.6%, previous: 5.7%, Citi Research expect headline CPI inflation to remain around 2% YY again. Core inflation, may ease to 3.5% YY (3.5-3.6% range) and services inflation print 5.5-5.6% (rounding up to the latter). Significant uncertainty remains on pass-through in hospitality. Accommodation services probably enjoyed a further strong month, but food-based services may have moderated. RPI should range 2.9-3.0% (likely to round down). For the MPC, below 5.6% on services may allow an August cut, more would likely push any easing to September.
   
• GBP: UK Vacancies April-June, Citi Forecast: 895K, previous: 904K, Pay rolled Employees (MM Change), Jun, Citi Forecast: -5K, previous: -3K, LFS Unemployment, Mar-May, Citi Forecast: 4.5%, consensus:4.4%, previous: 4.4%, LFS Employment Change (3M/3M), Mar-May, Citi Forecast: 35K, consensus: 45K, previous: -139K, Average weekly earnings, Citi Forecast: 5.6% 3M YY, consensus: 5.7%, previous: 5.9%, AWE Ex Bonus, Mar-May, Citi Forecast: 5.7% 3M YY, consensus: 5.7%, previous: 6.0%, The debate ahead of the wage data on Thursday is about the seasonals. Namely, given the recent propensity for sequential growth in private sector regular pay to overshoot in May versus April, could this happen again. This year Citi Research expect private sector regular pay to instead grow by 0.6% MM – the same as April. Citi Research see two-sided risks here. On the one hand, Citi Research may see stronger growth in the professional services complex that has underpinned this seasonal pattern. On the other hand, there may be some downside risk in these sectors as labour market conditions have continued to loosen.

Japan – Tertiary industry activity, nationwide CPI and trade

• JPY: Japan Tertiary industry activity index in May, Citi forecast 0.1%MoM, previous 1.9%MoM — The tertiary industry activity index likely rose 0.1% MoM in May after a 1.9% MoM increase in April, with the April-May average standing 1.1% above the first quarter average (-0.1% QoQ in Q1). Citi Research expect retailers’ index to increase 0.7% MoM in May for a second consecutive monthly rise after a 1.5% MoM advance in April. The index likely increased for business-related services and real estate alongside no change for living and amusement-related services and a drop for wholesale trade. As a result, Citi Research pencil in only a moderate rise for the overall index in May.
   
• JPY: Japan Nationwide CPI in June, Headline CPI Citi forecast 2.9%YoY, previous 2.8%YoY — Core CPI excluding fresh food Citi forecast 2.8%YoY, previous 2.7%YoY, Core CPI excluding fresh food and energy Citi forecast 2.2%YoY, previous 2.1%YoY — Citi Research expect nationwide core CPI (excluding only fresh food) to increase 2.7% YoY in June, up from a 2.5% YoY advance in May. Energy prices probably picked up as the government halved its subsidies for electricity and gas bills while core-core inflation likely inched up from +2.1% YoY in May to +2.2% YoY in June. The impact of yen depreciation likely materialized for some goods, including consumer durables. That said, this would not be strong enough to induce a rate hike in July, in Citi Research’s view.
   
• JPY: Japan Customs-Clearance Trade Balance in June, Citi Forecast: -¥282.7 bn NSA; -¥887.2 bn SA, previous: -¥1220.1 bn NSA; -¥618.2 bn SA — The customs-clearance trade balance likely came to a ¥282.7bn deficit before seasonal adjustment and a ¥887.2bn deficit after it in June (-¥1.2201trn and -¥618.2bn, respectively in May). The deficit after seasonal adjustment likely increased as exports probably decreased. The projections suggest real exports decreased and real imports increased on a MoM basis. Exports were on a weak note in the flash data for the first 20 days in June, possibly reflecting the impact of a production halt at several automakers in the month. Another possibility is weakening demand given that auto unit sales in the US and Europe are decreasing. Citi Research expect a muted rebound for goods exports in the second quarter with a potential negative contribution from net exports to GDP.

Commodity Bloc – New Zealand 2Q CPI, Australia employment report, Canada business activity survey and CPI

• NZD: NZ 2Q CPI, Citi forecast: 0.4% QoQ, 3.3% YoY, Previous: 0.6% QoQ, 4.0% YoY – The NZ CPI takes on increased importance after the RBNZ’s dovish pivot earlier this week. Citi Research are expecting sharp disinflation in headline inflation from 4% to 3.3%, as non-tradeables inflation is expected to decelerate. For now, Citi Research maintain the long-held view of 50bps rate cuts in November but see risks that it could occur earlier.
   
• AUD: AU June employment report MoM, Citi forecast: 33K, Previous: 39.7K, June unemployment rate MoM, Citi forecast: 4.0%, Previous: 4.0%, AU June participation rate MoM, Citi forecast: 66.8%, Previous: 66.8% – Citi Research expect the unemployment rate to remain unchanged at 4.0% but note that the LFS have been volatile and it’s best to focus on the trend rate of unemployment which is also likely to be 4%. Overall, absent of a large increase in unemployment, Citi Research expect the focus will be on the Q2 CPI print later in the month which will likely trigger another 25bps hike from the RBA.
   
• CAD: Canada BoC Business Outlook Survey (Q2): Recent surveys have shown that businesses continue to normalize their price setting patterns, although with business inflation expectations still towards the upper end of the target range. Rather than inflation expectations, Citi Research prefer other details in the BOS to inform inflation outlook. The share of firms indicating significant difficulty meeting demand has led average core inflation in the past, and similar to CFIB price plans, suggests core inflation close to around 2.5% by the end of the year.
   
• CAD: Canada CPI NSA MoM (Jun), Citi forecast: 0.1%, median: 0.1%, prior: 0.6%, CPI YoY – Citi forecast: 2.8%, median: 2.8%, prior: 2.9%, Consumer Price Index – Citi forecast : 161.6, median: NA, prior: 161.5 – After the first upside surprise in 2024 inflation data in May, Citi Research expect a moderation in CPI in June with a 0.1%MoM increase and the year-on-year reading pulling back to 2.8%. Factors like gas prices and recreation services should weigh on CPI, with components such as rents remaining strong. Certain elements of shelter inflation, namely homeowners’ replacement costs, should rise modestly again in June in line with rising new home prices. While this is a possible upside inflation risk as the BoC cuts rates, the recent increases in new home prices are not concerningly strong. The boost to CPI from rising mortgage costs should also continue to fade as interest rates decline.

Asia EM – China inflation, trade, money supply and new loans in focus this week

• CNH: China 2Q GDP (%YoY), Citi Forecast: 5.1, consensus: 5.0, previous: 5.3 — The annual growth target of around 5% could still be achievable, yet it will take time and more policy efforts to restore confidence. Citi Research expect only incremental measures in the rest of this year: [1] another round of property-supporting efforts, perhaps after the mid-year Politburo; [2] two additional 10bps policy rate cuts and one 50bps RRR cut; and [3] accelerated fiscal deployment without budget revision or bond quota expansion.
   
• CNH: China Industrial Production June (%YoY), Citi Forecast: 5.0, consensus: 4.8, previous: 5.6 — Demand weakness is indeed a downside for production, yet exports and policy efforts could still offset part of that in the near term.
   
• CNH: China Retail Sales June (%YoY), Citi Forecast: 3.5, consensus: 3.3, previous: 3.7— Even with the car trade-in-subsidy policy, consumers are still in a wait-and-see mood and have high expectations for further price cuts. The CPCA projected auto sales at -7.6%YoY in June from May’s -1.9%YoY (CPCA, June 20). The early start of the 6.18 promotion could also cannibalize some of June’s retail sales, and many merchants view their 6.18 sales as below expectation.
   
• CNH: China Fixed Assets Ex Rural (YTD %YoY), Citi Forecast: 4.0, consensus: 3.8, previous: 4.0 — Fiscal policy implementation could help, and the narrowing of PPI deflation should also help with the nominal reading. Property weakness could continue to be a concern though, and a pickup could be more distant with policy focus on destocking now.
   
• CNH: China Exports (%YoY) June – Citi Forecast 8.0, Consensus 8.0, Prior 7.6; Imports (%YoY) – Citi Forecast 4.0, Consensus 2.9, Prior 1.8; Trade Balance (USD $bn) – Citi Forecast 83.6, Consensus 83.7, Prior 82.62 - China’s composite shipping cost index surged 28.5% in the first four weeks with trade policy uncertainty. Baltic Dry Index, which represents global trade activity, rose in the same month. The latest flash manufacturing PMI in the US signaled a faster expansion, although the EU showed a deeper contraction. Coupled with the favorable base, Citi Research expect a higher export growth reading for June. Iron ore price has slightly declined in June, while oil price remained stable, combined with base effect, imports are expected to see an increase from last month.
   
• CNH: China Money Supply (M1, %YoY) June – Citi Forecast -6.0, Consensus -5.6, Prior -4.2; Money Supply (M2, %YoY) – Citi Forecast 6.8, Consensus 6.7, Prior 7.0 - monetary growth could continue to hinge on financial regulation. M1 growth could dip further before the conclusion of ban of manual interest adjustment, growth could stay soft at -6.0%YoY barring major revisions while M2 growth could be better at 6.8%YoY.
   
• CNH: China New Yuan Loans (CNY bn) – Citi Forecast 2500, Consensus 2150, Prior 950; Aggregate Financing (CNY bn) – Citi Forecast 3500, Consensus 3321, Prior 2065 - credit demand of both households and corporates could stay soft in June. Citi Research expect new loans at RMB2,500bn and new TSF could record RMB3,500bn with net financing of government bonds at ~RMB710bn in June. Households are dealing with multiple headwinds now, include consumption downgrade, property easing amid persistent weakness, as well as potentially a new round of mortgage prepayment.