Economic Analysis

Although the FOMC statement in March was close to the statement of the last meeting, the hawkish expectations and the "dot chart" surprised the markets. Some Fed members are now predicting an interest rate hike by the end of 2023! Federal Reserve Chairman Powell will testify Tuesday on the "Federal Reserve's response to the coronavirus." Markets are eagerly awaiting his testimony for more information from the Federal Reserve. We will also have the BOE after the Fed on Thursday. The last time they met, the central bank cut its bond-buying program from 4.4 billion pounds per week to 3.4 billion pounds per week. Will they keep dropping? In addition, the key data that will be released this week includes the following: Manufacturing PMI, global services and core US personal consumption sources. Will the data show other central banks should cut, too?

Surprise!!

Over the past 15 months, the Federal Reserve has been buying bonds at a rate of $80 billion in Treasuries and $40 billion in Mortgage-backed security. At the FOMC meeting on Wednesday, via the "dot chart" and later in the press conference, the Fed indicated that talk of curtailing these purchases had begun. This has surprised the markets, and this is very normal! The Fed has been saying that the current inflation is transient and that it will focus on maximizing employment while inflation is rising. Remember, non-farm payrolls have been worse than expected for the past two months, barely indicating "minor increases" that show the labor market is on its way to a "sustainable" recovery, as shown in March. Fed officials now show a "point chart" that they expect two rate hikes in 2023. Plus, 7 out of 18 members see an increase next year!

The next question is about timing. Economists expect the Fed to announce tapering at either the Jackson Hole symposium in August or the Federal Open Market Committee meeting in September. (The September meeting will be the next time the growth and inflation forecasts are released.) Fed Chairman Powell will testify on Tuesday of this week regarding the Fed's response to the coronavirus. Watch for any clarification from the upcoming meeting or any clues as to when the reduction will start.

More tapers?

On Thursday, the Bank of England will get its chance to decide whether it wants to continue reducing its bond purchases. Last week, the UK reported a drop in the number of jobless claimants by 92,600 versus an expected drop of 62,000. This is of course much better than expected. Additionally, the April release has been revised from -15,000 to -56,000! This indicates that UK employment is on its way back. Their industrialization is strong, but as with most countries, inflation is high. One big negative data released on Friday showed that Core Retail Sales were -1.4% vs. +1.5% expected. Retail sales, excluding gasoline, were -2.1% vs. 1.4% expected.

Another issue the Bank of England has to take into account is the coronavirus. As the country was on the verge of fully lifting all restrictions, health officials felt it necessary to delay lifting restrictions until mid-July, citing an increase in new cases due to the mutating delta. This will give more time for more citizens to get vaccinated before the economy fully reopens. Therefore, the BoE may not be in a hurry to further reduce at this meeting, until they see what the situation will be like with the lifting of restrictions postponed by one month.

Economic data

Although the economic calendar is light this week, markets will get their first look at Markit Manufacturing and Services PMIs for June. This will give central banks a better view of how these industries will continue in their countries. In addition, the US will release its core PCE price index for May, which is one of the Fed's preferred inflation metrics. The current forecast for the May reading on an annualized basis is 3.5% versus 3.1% in April. This is well above the Fed's 2% inflation target. Here are the most important key data expected for this week:

Monday

- Australia: Retail Sales (May)

European Union: ECB President Lagarde's speech

Tuesday

- European Union: Consumer Confidence Index (June)

- US: Existing Home Sales (May)

- United States: Fed Chair Powell's testimony - Fed's response to the coronavirus pandemic

Wednesday

Globally: Manufacturing and Services PMI (June) (Europe - Germany - France - Britain).

- Japan: Bank of Japan monetary policy minutes

- Canada: Retail Sales (APR)

- US: New Home Sales (May)

Crude oil stocks

Thursday

- Germany: Ifo Business Climate (June)

- United Kingdom: Bank of England interest rate decision

- US: Durable Goods Orders (MAY)

- United States: GDP growth rate - final (Q1)

Friday

- Japan: CPI in Tokyo (June)

- Germany: GfK Consumer Confidence (JUL)

- United States: personal income (May)

- US: Personal Spending (May)

- United States: PCE Core Price Index (May)

- United States: Michigan Consumer Confidence Final (June)