An understandably dovish market reaction to the BoJ delaying QT and (possibly) rate hikes

Bank of Japan’s QT decision pushed back to July, rate hike now unlikely in July

• JPY: Friday’s BoJ board meeting leaves the target range for short-term rates unchanged but also pushes back the timeline on reducing its asset purchases to the next meeting in July where it would collect views from market participants and then decide on a detailed plan for reduction during the next one to two years. The BoJ indicates that the decline in JGB purchases will likely be "substantial," but refuses to give any indication of the pace and timing as details will be decided in July itself. According to the BoJ’s website, a “Bond Market Group” meeting with buy/sell sides and commercial banks will be hosted between now and July’s meeting for this purpose. The BoJ currently holds around $4.8trn of assets, or 1.3 times Japan’s GDP.

• JPY: Governor Ueda on Friday, is surprisingly optimistic on the outlook for demand-led inflation in Japan, saying consumer spending will “pick up” and also indicates a July rate hike is “of course possible” But markets slash the odds of a July rate hike in any case to ~20% as the comments are seen more in the context of a general statement than a signal for a rate hike. Investors conclude that with QT now the major topic for the July meeting, it would make it more difficult for the BoJ to raise rates at the same time. Governor Ueda however, does indicate he would examine the range and sustainability of FX fluctuations, its pass-through to domestic prices, and how this might affect wage hikes ahead of the July meeting. But Citi Research and JPY OIS rates now expect the BoJ to hike 25bp in October instead.

Week Ahead:

US – retail sales, industrial production, housing data and June PMIs in focus this week

• USD: US May Retail Sales – Citi: 0.4%, median: 0.3%, prior: 0.0%; Retail Sales ex Auto – Citi: 0.3%, median: 0.2%, prior: 0.2%; Retail Sales ex Auto, Gas – Citi: 0.5%, median: NA, prior: -0.1%; Retail Sales Control Group – Citi: 0.5%, median: 0.3%, prior: -0.3% - real goods spending was weaker in Q1 and started the current quarter on a weaker footing as well, as signs that consumers are starting to feel the pressure of higher rates and inflation are building. Citi Research expect some rebound in goods consumption in May with total retail sales rising by 0.4%MoM. Control group sales should rise by a solid 0.5%MoM though with real disposable incomes mainly moving sideways and credit card borrowing growth slowing, risks to the forecast are to the downside and in general, Citi Research continue to expect that consumer spending will slow in coming quarters.
   
• USD: US June (preliminary) S&P US Manufacturing PMI – Citi: 51.1, median: 51.0, prior: 51.3; S&P US Services PMI – Citi: 54.2, median: 53.4, prior: 54.8 – the S&P PMIs surprised stronger in May with the manufacturing PMI jumping back into expansionary territory. Citi Research expect some modest pullback in S&P Manufacturing PMI to 51.1 from 51.3 with mainly downside risks, in particular, to the employment subcomponent of the manufacturing PMI. In general, a meaningful pick up in manufacturing activity is unlikely with interest rates still very elevated and weaker goods demand at the start of the year. S&P Services PMI should also pullback somewhat to 54.2 from 54.8 in the June preliminary reading with mainly downside risks. The employment index for services has remained in contraction and could continue to stay weaker in June.

• USD: US May housing Starts – Citi: 1333k, median: 1368k, prior: 1360k; Housing Starts MoM – Citi: -2.0%, median: 0.6%, prior: 5.7%; Building Permits – Citi: 1445k, median: NA, prior: 1440k; Building Permits MoM – Citi: 0.4%, median: NA, prior: -3.0% - Citi Research expect data on new housing construction to remain soft in May, with a decline in total housing starts to 1333k. Both single family and multi-family starts should decline in line with recent declines in building permits though building permits could rise modestly to 1445k in May. Markets will be paying close attention to building permits of single-family homes in particular, as this is one of the more leading indicators of housing demand. And while the level of housing currently under construction remains elevated, a drop in new projects will mean total construction activity declines further as previously started projects begin to be completed and are not replaced with new construction.

• USD: US May Industrial Production – Citi: 0.2%, median: 0.4%, prior: 0.0%; Manufacturing Production – Citi: 0.2%, median: NA, prior: -0.3%; Capacity Utilization – Citi: 78.6%, median: 78.6%, prior: 78.4% - total industrial production and the largest subset of manufacturing production should rise a modest 0.2%MoM in May. For manufacturing, this would follow a 0.3% decline in April and would be consistent with aggregate manufacturing activity moving largely sideways. After briefly rising above 50, the ISM manufacturing index has declined again in recent months with a large drop in the new orders subcomponent, although the S&P manufacturing PMI has been higher. Stagnant manufacturing activity is likely to continue in the coming months.
   
• USD: US May Existing Home Sales – Citi: 4.06m, median: 4.15m, prior: 4.14m; Existing Home Sales MoM – Citi: -1.9%, median: 0.3%, prior: -1.9% - Citi Research expect another decline in existing home sales in May to 4.06 million from 4.14 million as higher rates weigh on demand. Importantly, weaker sales this year more clearly reflect softer demand compared to last year. Over the last ~6 months, listings of homes for sale have increased to the highest level since pre-pandemic. Weak sales now more clearly reflect softer demand as average 30-year fixed mortgage rates remain close to 7%. This increase in supply and weak demand should mean downward pressure on home prices.

Euro area, UK – BoE, SNB, Norges Bank meetings and euro area & UK flash PMIs for June in focus this week

• EUR: Euro Area recovery watch: ZEW and PMIs — the Sentix index already signaled further improvements in investor confidence. The focus this week is on an improving ZEW current assessment (Tuesday), rather than just rising expectations. Citi Research also expect further improvements in the purchasing manager indices (Friday), with a skew towards manufacturing. That would allow growth without exacerbating tight labor markets. Finally, consumer confidence (Thursday) should rise. German ZEW Expectations, June – Citi Forecast 52.0, Prior 47.1 (focus on current assessment); ZEW Current Assessment, June – Citi Forecast -68.0, Prior -72.3; Euro Area: ZEW Expectations, June – Citi Forecast 54.0, Prior 47.0; Euro Area: Consumer Confidence, June – Citi Forecast -13.7, Prior -14.3; Euro Area PMI Manufacturing, June – Citi Forecast 48.0, Prior 47.3; PMI Services, June – Citi Forecast 53.0, Prior 53.2; PMI Composite Output, June – Citi Forecast 52.5, Prior 52.2.
   
• GBP: UK: Turning a corner? — after the recent disappointing GDP data, the PMI and GfK releases will offer a further opportunity to assess macroeconomic momentum. Citi Research expect consumer confidence to tick up, but only marginally – echoing the YouGov release. For the PMI’s, Citi Research see some upside risk from a fundamental perspective. But the seasonal adjustment between May and June last year was quite profound, and negative and this may lead the services PMI to fall. UK GfK Consumer Confidence, May – Citi Forecast -16% bal, Consensus -16%, Prior -17% (Stabilizing, rather than improving?); Retail Sales inc. Fuel, May – Citi Forecast 2.0% MM, Consensus 1.6% MM, Prior -2.7% MM (Trend still softening); Retail Sales ex. Fuel, May – Citi Forecast 1.8% MM, Consensus 1.3% MM, Prior -3.0% MM; UK PMI Manufacturing, June – Citi Forecast 51.5, Consensus 51.3, Prior 51.2; PMI Services, June – Citi Forecast 52.5, Consensus 53.0, Prior 52.9.
   
• GBP: Bank of England: Not re-assured yet — Citi Research expect the MPC to hold policy rates steady this week at 5.25%. While the MPC had teed up a cut in June, subsequent data have failed to cooperate. This leaves the MPC still in search of necessary re-assurance. Citi Research expect the vote split to be unchanged at 7-2. The key question is whether there is a nod in the committee’s deliberations to an easing burden of proof to a cut – i.e., suggesting a further round of data could prove sufficient. For now, the committee will likely err on the side of optionality. Bank of England Bank Rate – Citi Forecast 5.25%, Consensus 5.25%, Prior 5.25% (Unchanged 7-2 vote split).
   
• GBP: UK CPI: State or time contingency — Citi Research expect UK services CPI to moderate this week from 5.9% to 5.5%. The risks around this forecast are balanced. Headline CPI will likely print at 2.0% and core at 3.4%.
   
• CHF: SNB Preview: Keeping Powder Dry - following the first rate cut in G10 in March, Citi Research expect the SNB to pause this week as growth strengthens at home and abroad and partners ECB and Fed delay some of their rate cuts. However, when global rate cuts start in earnest, the SNB may have to cut more. No reason for a hawkish outcome — spot inflation at 1.4% and the SNB’s inflation forecasts likely at 1.2% in 2026 will remain on target (if slightly higher than in March) and the latest strengthening of the Franc in the wake of the French election announcement suggests the SNB will want to avoid a hawkish message. But no pressure to cut now — growth at home will likely be revised up from 1% to 1.5% this year and also foreign growth has been stronger than expected while confidence indicators keep recovering. Amid sticky inflation, the ECB and Fed are hesitating to cut rates, which widens the expected interest rate differential to the SNB compared to March. Both developments allow the SNB to time cautiously the few rate cuts it has left given its policy rate is (at best) only 50bps above neutral. Good reasons to keep the powder dry — Citi Research continue to see a potential battle for the SNB against unwarranted Franc appreciation over the next 18 months when other central banks start cutting more earnestly. Tough job for Jordan’s successor — the tools to fight appreciation—negative interest rates with tiering plus FX purchases—are well established in the SNB’s toolbox, but Jordan’s successor may need to consider other tools to manage FX volatility. SNB Policy Rate – Citi Forecast 1.5%, Prior 1.5% (keeping powder dry).
   
• NOK: Norges Bank: Fading Chances of Any Rate Cut in 2024 - the RNR survey last week confirmed that economic growth in Norway is resuming. Alongside house prices back at all-time highs and still-strong wage inflation, this significantly reduces the pressure on the Norges Bank to ease monetary policy any time soon. Citi Research expect the Norges Bank to leave the policy rate at 4.5% at this week’s meeting and to revise the rate path slightly higher, signaling no cuts at least until December. Citi Research change their base case view and now expect the first rate cut to occur in December (vs September previously). Norges Bank Policy Rate – Citi Forecast 4.5%, Prior 4.5% (rate path revised higher, first cut in Dec at the earliest).

Japan – Nationwide core CPI and customs – clearance trade balance in focus this week

• JPY: Nationwide core CPI to increase 2.6% YoY in May — Citi Research expect nationwide core CPI (excluding only fresh food) to increase 2.6% YoY in May, up from a 2.2% YoY gain in April. An increase in renewable energy surcharges likely drove power prices upward. Meanwhile, CPI excluding fresh food and energy likely increased 2.2% YoY in May, down from a 2.4% YoY rise in April. Inflation for goods likely continued to slow.
   
• JPY: Customs-clearance trade deficit likely remained almost flat in May — the customs-clearance trade balance likely came to a ¥1.2049trn deficit before seasonal adjustment and a ¥548.4bn deficit after it in May (-¥465.6bn and -¥560.8bn, respectively in April). The deficit after seasonal adjustment likely remained almost the same. The Citi Research projections suggest both real exports and real imports increased on a MoM basis. Exports probably grew as the impact of auto supply disruptions eased. Exports of tech-related good may have also increased.

Commodity Bloc – RBA board meeting, NZ Q1 GDP, BoC minutes and Canadian retail sales in focus this week

• AUD: June RBA Board Meeting: Citi cash rate forecast; 4.35%, Previous; 4.35% - the data since the May Policy Board Meeting has generally been favorable to the soft-landing view. The two labor force prints since the May Monetary Policy Meeting have generally been in-line with expectations of only a gradual loosening in the labor market, with an unemployment rate of 4.0% in May that is in-line with the Bank’s forecast for Q2. Fiscal policy innovations have been more complicated, but the RBA has previously noted that it has already accounted for Stage 3 tax cuts in its forecast. The Bank’s headline inflation forecast in May however did not account for the subsidies announced at the Federal and State levels. Consequently, the Bank’s year-end 3.8% headline inflation forecast is stale and irrelevant. The most hawkish data print has been the monthly CPI for April, with higher-than-expected goods prices, but most of this was seasonal. On balance, the data since May has been broadly neutral, and if anything, marginally skewed to the upside on inflation. But the Bank’s reaction function remains asymmetric - downside risks to the labor market are considered more important than upside risks to inflation. Thus, the Bank is unlikely to change course from its message in May, where it stated that it was “vigilant to upside risks”. In May, the Board considered two options of hiking or keeping rates unchanged. This was only revealed in the Minutes. The Board might once again consider the two options, but given the asymmetric reaction function of the RBA, Citi Research see risks that they may opt to not consider hiking in this meeting.
   
• NZD: NZ Q1 GDP Citi QoQ forecast; 0.1%, Previous; -0.1%; Citi YoY forecast; 0.2%, Previous; -0.3% - Citi Research expect New Zealand to emerge from recession in Q1, but only just, with a 0.1% increase in aggregate economic activity. Citi Research expect service industries to contribute 0.2pp to GDP while goods-producing industries are expected to subtract around 0.1pp from GDP growth. The risk to the Citi Research forecast is for a flat Q1 GDP growth print. If the Citi Research forecast of a 0.1% increase in quarterly activity is correct, yearly growth will improve from -0.3% to 0.2%. The RBNZ is aiming for a slightly higher 0.3% YoY. GDP growth has previously printed weaker than the Bank’s forecast yet failed to change the monetary policy reaction function. The Bank remains almost solely focused on high non-tradeables inflation that partly reflects weak productivity growth.
   
• CAD: Bank of Canada Summary of Deliberations – the summary of deliberations of the June decision to cut the policy rate by 25bp will be important to understanding the likelihood of future cuts at each upcoming meeting. Rather than the rate cut itself, the more surprising element of the meeting was the dovish nature of the communication from Governor Macklem. While the summary could mention a gradual pace of cuts, there was limited emphasis on a very cautious nature of policy making at the meeting itself. Instead, guidance from Macklem was that “it is reasonable to expect further cuts to our policy interest rate.” This suggests Macklem may be somewhat more concerned about the growth outlook than what is currently penciled in for April forecasts. Any prolonged discussion around downside risks to growth in both the US and Canada would be dovish. Citi Research continue to expect that downward revisions to growth forecasts in the July MPR will prompt another cut at that meeting. Further weakening in the labor markets in both the US and Canada would mean cuts continue in September, October and December.
   
• CAD: Canada Retail Sales (Apr) – Citi: 0.8%, median: 0.7%, prior: -0.2%; Retail Sales ex Auto – Citi: 0.4%, median: NA, prior: -0.6% - Citi Research expect a 0.8%MoM increase in retail sales in April, closely in line with Statistics Canada’s preliminary estimate for a 0.7% increase. Sales excluding autos should rise 0.4% but much of this increase could reflect stronger gas prices. Excluding autos and gas, retail sales should remain more muted across categories. Further weakening in the labor market will likely continue to weigh on consumption through the second half of the year.

Asia EM – China’s IP, retail sales, FAI as well as LPR rates in focus this week

• CNH: China Industrial Production (%YoY) May – Citi Forecast 6.4, Consensus 6.0, Prior 6.7 - industrial production could stay solid at 6.4%YoY thanks to the base effect and robust exports. Notably, contraction in crude steel output narrowed to -2.1%YoY in the first 20D of May from -5.7%YoY in April.
   
• CNH: China May Retail Sales (%YoY) – Citi Forecast 2.5, Consensus 3.0, Prior 2.3 - retail sales could remain sluggish, up 2.5%YoY, slightly better than in April. Even with the car trade-in-subsidy policy, the CPCA projected slower auto sales at -5.3%YoY in May (CPCA, May 23, 2024).
   
• CNH: China May Fixed Assets Ex Rural (YTD, %YoY) – Citi Forecast 4.6, Consensus 4.2, Prior 4.2 - Fixed Asset Investment growth could regain its upward trend with accelerating issuance of government bonds, hitting 4.6%YoY Ytd.
   
• CNH: China’s 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 – Citi Research don’t expect any change in the PBoC’s policy rate (1yr MLF) this week and thus no changes in 1yr and 5yr LPRs as well this time. Both domestic and external constraints for PBoC could be increasingly binding. USDCNY is at the weakest level within the year, and the banks’ NIMs dropped to a new low of 1.54% in 24Q1.