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Macro Watch: Central bank bonanza; EU Council to discuss top jobs; flash PMIs


A number of central banks will hold their monetary policy meetings this week, the EU Council will discuss the bloc’s top jobs and the flash Purchasing Managers’ Index (PMI) readings for the US, eurozone and Japan will be published for June.  

The European Central Bank (ECB) Forum on Central Banking will take place in Sintra, Portugal. Central bank governors, academics, policymakers and financial market participants will gather for the annual three-day event to exchange views on key monetary policy issues. This year the Forum will examine macroeconomic convergence and monetary policy over the last 20 years and consider how to address the challenges for economic growth in the euro area in the future. Elsewhere, the US Trade Representative will hold public hearings on the possibility of raising tariffs to as high as 25% on $300bn worth of Chinese goods. Over the last month, the momentum towards reaching a US-China trade deal has faded, as exchanges between the two sides soured. The next significant deadline is the G20 summit in Japan at the end of June, where US President Donald Trump and Chinese President Xi Jinping are still expected to hold a bilateral meeting. The situation is highly uncertain. In the short term, our base case scenario assumes an indefinite extension of negotiations, which means that the last round of 25% tariffs on $200bn worth of Chinese goods would stick but no additional tariff increases will take effect. In the longer-term, our base case remains unchanged: we believe the relationship between the US and Chins will remain strained as structural issues – ultimately concerning technological dominance – are unlikely to be resolved any time soon.

In the UK, Conservatives MPs should have taken part in a series of votes to whittle down the 10 candidates in the Tory leadership race to two. The final two candidates will subsequently face the party’s 160,000 members in a vote that will decide the next leader of the party in July. Meanwhile, Eurostat, the European Union’s (EU's) statistics agency, will publish trade data for April. In Q1, the bloc’s exports enjoyed a mini recovery, with export growth increasing to 3% on a year-over-year basis in March. However, negative developments in manufacturing surveys do not bode well for trade data in coming months. Separately, the bloc’s final inflation reading – as measured by the Harmonised Index of Consumer Prices (HICP) – will be released. It is likely to be confirmed at 1.2% in May, with core inflation coming in at 0.8%.

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Forecasts suggest that New Zealand’s first-quarter GDP will come in at 0.5% quarter-on-quarter, down from 0.6% in Q4. Japan’s Ministry of Finance will release the country’s trade data for May. In April, export growth was unchanged at -2.4% year-on-year, while import growth picked up to 6.4% from 1.2% in the previous month. A stronger yen (which has appreciated by about 4.5% against the US dollar since late 2018) and increased uncertainty about tariffs have probably weighed on the country’s export performance. In the UK, inflation – as measured by the consumer price index (CPI) – probably edged down to 2% in May from 2.1% in the previous month. Core inflation probably declined to 1.6% from 1.8% on the previous month, reflecting the tail end of Easter-related distortions. In Canada, CPI inflation will probably move sideways in May, confirming that inflationary pressures are contained. The average of the Bank of Canada’s preferred core inflation measures edged down to 1.9% in May from 2% in the previous month. Elsewhere, consensus forecasts suggest that Argentina’s GDP growth will be roughly flat in Q1 at about -6.2% on a year-on-year basis. Meanwhile, Brazil’s central bank is likely to leave rates on hold at its monetary policy meeting. However, investors are focused on the chances of the government approving pension reforms rather than monetary policy. According to political watchers, the government is likely to pass a moderately ambitious pension bill this year, allowing savings of 500-700bn reais over 10 years. In the US, the Federal Open Market Committee (FOMC) will also hold its meeting. The Federal Reserve (Fed) is under significant pressure from the market to ease policy in H2: at the time of writing, the Fed Funds future market was pricing in an almost 85% probability of two (or more) rate cuts in H2. At this meeting, the Fed will probably keep policies unchanged, but the resulting communication will probably express an implicit dovish bias. Fed Chair Jerome Powell will likely provide reassurances that the Fed stands ready to support the current expansion if needed, in line with his recent remarks. The statement will also probably suggest that the Fed is monitoring downside risks from trade tensions and adverse international developments in general. The dot plot is likely to show a more dovish distribution of rates forecasts: the median dots will probably show unchanged interest rates at the current level of 2.25%-2.5% over the horizon (removing the 2020 rate hike they expected in March) and their averages will probably decline to suggest a dovish bias. The interconnected issues of trade tariffs, political interference and relevance of financial conditions are likely to feature prominently in the press conference.

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The EU Council will hold a two-day meeting, which will discuss the appointments to the EU’s top posts (the European Commission President, notably). It will also draft the agenda for the incoming European Commission. Meanwhile, the ECB will release its economic bulletin, which may include some interesting analyses on the state of the eurozone economy. Separately, the European Commission will release the bloc’s sentiment index for June. In May, economic sentiment in the eurozone increased to -6.5 from -7.3 in the previous month. Although this reading was well below its cyclical high of -3.4 (which it touched in December 2017), the index is still running above its long-term average of -10.5, which is testament to the relative strength of the labour market. It is Iikely to muddle through going forward. In the UK, retail sales should enjoy a modest boost in May, after coming in flat in the previous month. Overall, retail sales growth probably moderated in Q2, following a strong performance in Q1 (1.6% quarter-on-quarter). Consumption is likely to remain the main driver of growth this year, reflecting a solid labour market. A number of central banks will hold their monetary policy meetings. Central banks in Indonesia, Thailand and the Philippines are likely to step up their dovish rhetoric following the recent escalation of US-China trade tensions. Interest rate cuts are possible – and if central banks do not act this month, they are likely to lower rates in Q3. The Bank of Japan (BoJ) will also hold its monetary policy meeting. It will probably confirm its QQE policy with yield curve control, pinning the policy rate at -0.1% and the 10-year yield at zero. The BoJ is unlikely to consider changes to monetary policy this year ahead of the planned consumption tax hike in October. Meanwhile, the Bank of England (BoE) should stand pat on interest rates. However, it will probably strike a cautious tone as recent economic developments have been slightly weaker than it had previously expected in its May Inflation Report. The UK’s economic activity data was extremely weak in April, suggesting that GDP may contract in Q2 (compared to the BoE’s forecast of 0.2% quarter-on-quarter growth and down from an increase of 0.5% in Q1). In addition, inflation came in slightly weaker than the BoE expected in April, with the core component running below target. Employment growth has also slowed somewhat, and wage inflation has come off its recent highs. More fundamentally, Brexit uncertainty has continued to weigh on the UK’s economic outlook, while downside risks from external sources have also increased due to the recent re-intensification of international trade tensions. The BoE will probably maintain a weak and unconvincing tightening bias, reiterating that a few rate hikes will be appropriate, if Brexit is resolved in an orderly way. But for now, a firm wait-and-see mode will prevail. Elsewhere, Norway’s central bank is likely to buck the dovish central bank trend. It is likely to hike interest rates by 25bps to 1.25%, reflecting strong economic activity data. In addition, inflation has developed largely in line with the Norges Bank’s expectations.

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South Korea’s 20-day trade data will provide an early indication of Asian and global trade activity in June. South Korea’s export growth has been in negative territory so far this year, coming in at -11.7% year-on-year in May. Import growth has also been subdued, but it has improved in recent months, coming in at -0.1% year-on-year in May, up from a low of -17.3% in February. Japan’s core CPI inflation, excluding energy and fresh foods, is likely to be little changed at 0.5%-0.6% in May, signalling modest progress this year (core inflation averaged 0.4% in 2018). Meanwhile, investors will shift their focus to the flash PMI readings for June. The readings for the US, the eurozone and Japan will indicate whether the global economic slowdown continued going into H2. In May, the global composite PMI neared a three-year low of 51.2, reflecting a broad-based deterioration in major countries. In particular, the PMIs showed a slowdown in the US, where growth is converging to lower rates that have prevailed in the other developed economies. Elsewhere, Fed governor Lael Brainard and Cleveland Fed President Loretta Mester will host a Fed Listens meeting – part of the central bank’s official review of its strategy – in Cincinnati. The Fed’s conference on monetary policy strategy early this month had dovish implications. It suggested that unconventional policies are successful, and it supported the case for a shift to a make-up strategy. Fed officials will probably include those considerations in their decision-making process going forward. However, a decision on whether to adopt a new strategy will not be taken until next year. The Fed will probably fall short of committing itself to a new strategy, as that would tie its hands in the face of potentially evolving conditions. Policymakers will probably prefer to enhance the flexibility of the central bank’s framework.


US small-business optimism recovers in May, but remains off H2 2018 highs

Source: US Bureau of Economic Analysis, National Federation of Independent Business (NFIB) and the Institute for Supply MAnagement (ISM) as at June 2019. 

The US NFIB small-business optimism survey increased to 105 in May from 103.5 in April. While it has improved from the lows it experienced earlier this year, it is still running well below the highs it recorded in H2 2018. The ISM survey (which focuses on larger firms) has experienced similar dynamics in recent months, pointing to slower economic growth in the coming months. In the coming quarters, US year-on-year GDP growth is likely to slow to about 2% from 3% in H2 2018 and Q1 2019. Risks are skewed to the downside as an escalation of trade tensions would weigh on economic performance.


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