JFD Team | May 31, 2021 04:27AM ET
Following the RBNZ last week, this week, it’s the turn of the RBA to decide on monetary policy. We don’t expect any change, but it would be interesting to see whether they are still willing to expand their bond purchases in July. As for the data, Eurozone’s inflation and the US jobs report are among the highlights, as they may reshape expectations around the ECB’s and the Fed’s future policy plans.
Monday appears to be a light day, with the only release worth mentioning being Germany’s preliminary inflation data for May. Both the CPI and HICP rates are expected to have risen to +2.3% yoy and +2.5% yoy, from +2.0% and +2.1% respectively, something that would raise speculation for a similar reaction in Eurozone’s headline CPI, due out on Tuesday.
Markets in the US and the UK will stay closed. It’s Memorial Day in the US, while in the UK, it’s a Bank Holiday.
On Tuesday, during the Asian session, the RBA decides on monetary policy. At the prior meeting, officials kept policy unchanged, but noted, that, despite the strong economic recovery in Australia, inflation pressures remain subdued in most parts of the economy and that at the July gathering, they will consider further bond purchases.
With all that in mind, we expect RBA policymakers to stand pat at this gathering, but to reiterate the view that they may add to their bond purchases at the July gathering. The Aussie may slide somewhat in the aftermath of this meeting, but we expect its broader faith to depend on developments surrounding the overall market sentiment.
Later in the day, we get Eurozone’s preliminary CPIs for May. The headline rate is expected to rise further, to +1.9% yoy from +1.6%, while the HICP excluding energy and food rate is forecast to have ticked up to +0.9% yoy +0.8%. Although the headline rate is expected to match the ECB’s objective of “below, but close to 2%”, the weak underlying inflationary pressures suggest that the improvement in headline inflation may be due to transitory factors.
After all, last week, ECB Chief Economist Philip Lane has pushed against the inflation-is-back narrative, adding that markets will take years to return to pre-crisis levels and that stimulus is still needed to secure the recovery. On top of that, a week earlier, ECB President Christine Lagarde said that it is “essential that monetary and fiscal support are not withdrawn too soon”. Therefore, we don’t expect an increasing headline CPI rate in Eurozone to support the euro much at the time of the release, or hurt European equity markets.
The ISM manufacturing index for the month is also coming out and expectations are for an unchanged print, at 60.7. Staying at elevated levels, the ISM manufacturing index is likely to confirm that the US economy is recovering from the damages of the pandemic at a decent pace, but how the markets will be traded in the near term may depend more on the outcome of Friday’s employment report for the month.
On Wednesday, Asian time, Australia releases its GDP data for Q1, with the qoq rate expected to have declined to +1.0% from +3.1%, but the yoy one to have rebounded to +0.2% from -1.1%. In our view, although we may see an improvement in yoy terms, a second consecutive slowdown in quarterly terms may add more credence to the RBA’s choice to expand its stimulative efforts in July, and thereby hurt the Aussie a bit more.
Finally on Friday, the main event is likely to be the US employment report for May. Nonfarm payrolls are anticipated to have accelerated to 650k from 266k in April, while the unemployment rate is forecast to have slid to 5.9% from 6.1%. Average hourly earnings are expected to have slowed to +0.2% mom from +0.7%, but this is likely to take the yoy rate up to +1.6% from +0.3%, suggesting that increasing wages are likely to translate to even higher inflation in the months to come.
At the same time as the US jobs data, we get the employment report for May from Canada as well. The unemployment rate is expected to have ticked up to 8.2% from 8.1%, but the net change in employment is anticipated to show that the economy has lost much less jobs than it did in April. Specifically, it is expected to show a 22.5k jobs loss following a 207.1k tumble in April. In our view, this is not the best report Loonie traders could get, but it is better than the previous one. Thus, they may not sell the currency massively if the results are near their forecasts, especially if the GDP data, due out on Tuesday, come on the decent side.
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