FX - The Week Ahead: US PCE cooler than expected, opening door for more dovish rates path

PCE inflation a positive signal for the Fed

• USD: Core PCE inflation rose 0.08%MoM in May, softer than Citi Research’s forecast of 0.15% and at the lower range of various forecasts. Core services excluding housing rose a soft 0.10%. Core PCE inflation in April was revised higher to 0.3% rounded, but revisions were modest on an unrounded basis, rising from 0.249% to 0.259%. Year-on-year core PCE pulled back from 2.78% to 2.57%.
   
• USD: Personal income was stronger than expected at 0.5%MoM with a strong 0.7% increase in wages and salaries. Spending in nominal terms rose a modest 0.2%, partly due to softer prices. This implied that the savings rate rose from 3.7%. to 3.9%. Real spending was somewhat stronger, rebounding 0.26% after a 0.1% decline in April. Goods spending rose 0.6% in real terms while services showed the softest increase since August 2023 at 0.10%. Real spending on medical services slowed to 0.15%, likely reflecting strong medical services prices.
   
• USD: Core PCE inflation even softer than Citi Research expected in May will be a welcome development for Fed officials. For now, Citi Research would not be surprised if officials maintain the script of being encouraged by recent inflation data but still needing to see more data to gain confidence that inflation is slowing. But this confidence should be gained with June data, the third favorable inflation print in a row. Citi Research expect similarly favorable 15-20bp increases in both core CPI and core PCE in June that would allow officials to signal more clearly at the July FOMC meeting that rate cuts are coming. Citi Research continue to expect the first cut in September even premised on slowing inflation alone.
   
• USD: As both growth and inflation slow further, spending details of the monthly personal consumption expenditures reports are becoming increasingly important. Income growth was surprisingly strong in May but Citi Research would expect further slowing as the labor market loosens and payroll job growth slows. But despite stronger incomes in May, spending did not rise further. A continued increase in the still-low savings rate could be a sign that consumers are increasing their precautionary savings in light of worsening employment prospects. Citi Research expect consumption in Q2 GDP equally as modest as downwardly revised 1.5% in Q1.

Week Ahead:

US – JOLTS jobs openings, employment report and June FOMC minutes

• USD: JOLTS job openings for May – Citi: 8015K, prior: 8059K, Citi Research expect openings to fall modestly to 8015k from 8059k. Citi Research continue to expect that the general trend over the coming months will be openings falling further. Citi Research will also be paying attention if the layoff rate in JOLTS picks up from very low levels with jobless claims data increasing in recent weeks.
   
• USD: Nonfarm Payrolls – Citi: 155k, median: 188k, prior: 272k, Private Payrolls – Citi: 140k, median: 160k, prior: 229k, Manufacturing Payrolls – Citi: 0k, median: 10k, prior: 8k, As consistently strong payroll job growth increasingly looks out of line with other labor market metrics, Citi Research continue to expect some convergence through softer payroll employment. This leads Citi research to expect more modest 155k jobs added in June with downside risks. Initial jobless claims have ticked up in recent weeks, similar to an increase in claims this time last year. In June 2023, this increase in claims was a reliable signal of the first downside surprise to payroll job growth relative to consensus expectations in over a year (at 209k initially). A similar modest increase in layoffs would suggest downside risk this year as well, especially as seasonal factors remain unfavorable, weighing on June payrolls by around 400k.
   
• USD: Average Hourly Earnings MoM – Citi: 0.4%, median: 0.3%, prior: 0.4%, Average Hourly Earnings YoY – Citi: 4.0%, median: 3.9%, prior: 4.1%, Citi Research expect another strong 0.4%MoM increase in average hourly earnings in June following a similar increase in May, with the year-on-year rate dipping to 4.0%. Like in May, part of this strength could reflect calendar effects. Earnings can sometimes be stronger in months where the payroll survey reference period (the pay period that contains the 12th) also contains the 15th of the month. Solid average hourly earnings could also reflect compositional issues, as we expect slowing job growth in sectors like leisure/hospitality. Job losses in lower-than-average wage sectors would have the effect of boosting the average wage. However, as Citi Research continue to expect the labor market to loosen (i.e. weaken) further, this should imply further slowing in average hourly earnings over the coming months.
   
• USD: Unemployment Rate – Citi: 4.0%, median: 4.0%, prior: 4.0%, The unemployment rate may be the most important part of the June employment report after two consecutive increases in April and May. Citi Research expect the unemployment rate to remain at 4.0% in June with two sided risks. At 3.96% in May, the unemployment rate is close to rounding back down to 3.9%. This downside risk could result from a bounce-back in employment in the household survey after a substantial ~400k decline in May. While employment has been running consistently softer in the household survey than in the payroll (establishment) survey, it is also still much more volatile month-to-month. Some rebound in employment would not be surprising and would not necessarily change the trend of still-softer household employment. Indeed, Citi Research expect employment in the household survey to rise by around 200k in June, but that a 0.1pp rise in the labor force participation rate, which fell 0.2pp in May, will keep the unemployment rate unchanged.
   
• USD: June FOMC minutes: The Fed will release minutes from the June FOMC meeting this week. Minutes will reflect Fed officials revising their dots higher for 2024 with 8 Fed officials penciling in two cuts, 7 penciling in one cut and 4 zero cuts. While Fed officials likely expressed that they continue to be highly attentive to inflation risk and that they need to see more data to get more confidence that inflation will slow down sustainably to 2%. June minutes will also likely highlight that Fed officials were encouraged by the softer April inflation print. More important than stale minutes will be comments from Chair Powell on Tuesday at a panel during the ECB forum in Sintra. Chair Powell could dovishly highlight the positive developments with inflation in recent months although he will be careful to mention that the Fed will need to see more data moving in the right direction before starting policy rate cuts.

Europe, UK – French election and UK election, Euro area flash HICP

• EUR: French parliamentary election – On Sunday the first round of the French legislative elections will take place. It may not provide full clarity about the eventual composition of the National Assembly. But it should narrow down the range of plausible outcomes and allow a better assessment of the risks of permanent political instability over the next year. Citi Research highlight the key pieces of information to look for.
   
• GBP: UK General Election – The UK will go to the polls next week with the latest data continuing to suggest a lead for the opposition Labour Party. The key moment will come at 10pm on Thursday where we expect the exit poll to suggest a 80+ seat majority. From there though policy challenges – including those associated with a severely impaired fiscal inheritance - will loom large. Citi Research think a Labour administration may offer some notable opportunities as far as the supply side of the UK is concerned, but also an accelerated fiscal consolidation initially. A second, still plausible, scenario would be a narrow majority and/or a hung parliament. This would pose greater risks from a fiscal perspective.
   
• EUR: Euro area June flash HICP – After Fr, It, Sp and Be HICP out, Eurozone HICP inflation for June looks on track for 2.4% YY (prior 2.6%), depending on Germany out next week. On core inflation, Italian core HICP inflation eased by 0.1pp to 2.1% YY, French and Spanish core HICP inflation rates were probably unchanged vs May and core was up in Belgium. Hence, Citi Research reckon EA core inflation may still ease to 2.8% YY (prior 2.87%), but risks are for an unchanged reading at 2.9%. Citi Forecast: 2.4% YoY, prior: 2.6% YoY

Japan – Tankan survey and real household spendings

• JPY: BoJ quarterly Tankan survey: Citi Research expect that large manufacturers’ business confidence DI will decrease from +11 in March to +10 in the June Tankan under the weight of sluggish domestic demand in China and yet another safety testing scandal in the auto industry. Meanwhile, the headline DI at large non-manufacturers will probably come to +34 in June, unchanged from March. Inbound demand continued to provide support but weak consumer spending was a drag. Citi Research expect solid numbers for capex plans for FY2024, especially given that companies had to carry some of the FY2023 projects over due to labor shortages. The biggest focus in the June Tankan will be on inflation-related numbers, including the corporate outlook for general prices and output prices, and the output price DI.
   
• JPY: Real Household Spending, (May): Forecast 0.2% YoY, previous 0.5% YoY, Real spending of all households (consisting of two people or more) probably increased 0.2% YoY in May after a 0.5% YoY advance in April. On a MoM basis, Citi Research pencil in a 0.6% increase in May after a 1.2% drop in April. Citi Research estimate real retail sales grew 0.7% MoM in May, driven by auto sales. Spending on services likely continued to grow moderately as well. Despite a renewed production halt in June for several models at some automakers, Citi Research expect consumer spending to rebound in the second quarter from the first quarter. Spring wage hikes look likely to start having a positive impact in and after the third quarter.

Commodity Bloc – Canada’s employment report

• CAD: Canada Net Change in Employment (Jun) – Citi: 20k, median: 25k, prior: 26.7k, Unemployment Rate – Citi: 6.3%, median: 6.4%, prior: 6.2%, Hourly Wage Rate Permanent Employees – Citi: 5.3%, median: 5.3%, prior: 5.2%, Citi Research expect continued lackluster employment growth in June of around 20k jobs added, a similar pace to last month. Recent strength in services employment could moderate with some rebound in goods sectors. While monthly employment gains averaging around 20-40k per month are consistent with a typical pre-pandemic pace of employment, this has not been nearly strong enough to keep up with a rapidly growing population. Even with some modest pullback in the participation rate after rising in recent months, Citi Research still expect the unemployment rate to climb further to 6.3% but with upside risks of a print that rounds to 6.4%. Slowing employment over the last two years has largely reflected weaker demand from domestic factors, namely higher interest rates. Wage growth could remain somewhat uncomfortably strong in June, rising to 5.3%YoY but with the increase largely due to favorable base effects. BoC officials have recently been somewhat more dismissive of strong wage growth. Citi Research expect in a further weakening labor market, wage growth will also slow further.