European Breakfast Briefing - June 12, 2024

European Breakfast Briefing

Market Snapshot

• Dollar rangebound near one-month highs ahead of CPI and FOMC's decision
• APAC equities slide as investors remain cautious ahead of NY hours
• China CPI for May rose less than expected, adding to worry re: lingering deflationary pressure; PPI came in better than projected
• Japan's PPI for May accelerated at its quickest pace since August '23; USD/JPY retains hold above 157
• Australian Treasurer Chalmers says he does not expect the Australian economy to continue experiencing stagflation

Highlights

China

1. May PPI -1.4% Y/Y; BBG median -1.5%; Apr -2.5%
2. May CPI +0.3%; BBG median +0.4%; Apr +0.3%
3. The PBOC fixed the yuan at 7.1133 per Dollar (vs 7.1135 prior), stronger than the estimates of 7.2544 (vs. 7.2621, per the BBG dealer poll)
4. The PBOC made no change to net liquidity levels today via open market operations, selling 2bn yuan of 7-day reverse repos at 1.80% against maturities of 2bn

Japan

1. May PPI +2.4% Y/Y; BBG median +2.0%; Apr revised +1.1%, was +0.9%
2. May PPI +0.7% M/M; BBG median +0.5%; Apr revised +0.5%, was +0.3%

New Zealand

1. Apr Net Migration SA 7380; Mar revised 5620, was 4910

South Korea

1. May Unemployment rate SA 2.8%; BBG median 2.8%; Apr 2.8%
2. May Bank Lending To Household Total KR1109.6t; Apr KR1103.6t

Singapore

1. MAS Survey of Professional Forecasters

Asian Morning Session

The Dollar is flat at ~105.250 at writing, holding near Tuesday's one-month high (at 105.459) ahead of the much anticipated US CPI and FOMC later today

• See DXY technical analysis here, weekly edition here

To recap matters from Tuesday, US NFIB small business optimism for May was the sole data release that came out from the US, showing a minor improvement to print 90.5 (BBG median 89.7; Apr 89.7). A net 15% of small business owners plan to hire, rising by three points in May to hit the highest in '24 - suggesting that the headline number should continue to improve in the months ahead - see NFIB report

FOMC-dated OIS now price in a cumulative ~37bp of rate cuts through calendar '24, down from ~48bp seen before the release of US NFPs last Friday. For tonight's FOMC monetary policy decision, the OIS markets have completely priced in a hold in rate

Focus in the space ahead will center around the upcoming US CPI for May and the FOMC monetary policy decision due tonight (more details below) - till then, the G10 FX (and other assets) should remain quiet

APAC equities slide as participants remain cautious ahead of US calendar risk. Most APAC stocks are lower, with losses led by Hong Kong (HSI -1.4%) as auto shares led decline ahead of Europe's tariff decision. Shares also fell in Japan (Nikkei 225 -0.8%). Meanwhile, the NZ and South Korean stocks are largely flat. Elsewhere, the three major US equity benchmarks closed between -0.3% to +0.9% higher apiece, with NASDAQ leading gains - buoyed by a rally in Apple (+7.3%). Apple notched fresh record high after introducing "AI for the rest of us", unveiling the long-awaited AI features in the WWDC presentation

Gold remains in a rangebound to print at ~$2,315/oz at writing, virtually flat in Asia-Pac dealing to extend the pullback from May 20 ATH at $2450.07/oz, sitting just above Friday's one-month low at $2286.86/oz. ICYMI, the PBOC halted an 18-month gold buying streak recently

WTI and Brent trade at ~$78.35/bbl and ~$82.25/bbl respectively, extending the climb from their four-month lows at $72.48/bbl and $76.76/bbl made last Tuesday, putting the benchmarks on track to record a fifth daily win in the past six sessions. The recent gains seen in oil (since last Wednesday) are likely driven by a "buy on dips" sentiment, noting that oil saw a significant ~10% plunge in the benchmarks in the preceding week

CHINA: The highlight out of the session has been the release of Chinese price metrics for May, although little by way of a meaningful reaction has been seen so far in the yuan. Chinese CPI showed inflation rising by marginally slower than expected (+0.3% Y/Y; BBG median +0.4%; Apr +0.3%), maintaining its toehold in positive territory for a fourth straight month. Factory gate prices were a little better than projected (-1.4% Y/Y; BBG median -1.5%; Apr -2.5%), falling for a 20th straight month, although the magnitude of decline narrowed quite significantly

Looking at the CPI, the continued weak run of inflation (CPI last hit 2.0% back in Jan '23) will do no favours for perceptions of weakness in China's economy at present, particularly in domestic demand. On its face, the data will be unable to dispel prevailing worry re: lingering deflationary pressure, noting that the CPI reading was modestly negative on a M/M basis - even with economic policy support measures that were rolled out earlier this year. In any case, the release likely provided nothing new by way of an update to expectations for Chinese policymakers to step in to support the economy, with participants continuing to look for rate cuts by the PBOC as soon as later this month (PBOC's MLF ops will be on 17 Jun)

• See USD/CNH technical analysis here

JAPAN: The PPI for May came in firmer than expected, accelerating at its quickest pace seen since August '23 (+2.4% Y/Y; BBG median +2.0%; Apr revised +1.1%, was +0.9%), with an upward revision noted to the April figure as well. Import prices (+2.5% M/M; Apr +2.0%) rose at a far quicker pace than export prices (+1.5% M/M; Apr +2.2%), reflecting recent yen weakness - and perhaps portending further contribution of yen weakness to domestic price pressures, taking reference to recent BOJ warnings re: the matter. From a commodity-based M/M perspective, increases in prices across the "electric power, gas, and water" (+0.31 ppts) and "nonferrous metals" (+0.25 ppts) categories contributed to much of the rise in producer prices in May, with much more muted shifts seen in other groups - see BOJ release here

USD/JPY retains hold above 157: USD/JPY prints ~157.20 at writing, virtually flat in early Asian hours to extend the climb from last Tuesday's three-week low at 154.55

• See USD/JPY technical analysis here, weekly edition here

With the pair now back above 157, intervention threat narratives have also seeped back into the market. However, until a clearer picture of the Fed finally embarking on their rates cut program emerges (which tonight's FOMC will shed light on), or if the market starts to view that the BOJ is finally in a position where they can aggressively hike rates, the still intact uptrend in USDJ/PY and wide US-Japan rate differentials could continue to entice market players to continue the carry trade and test the possible intervention thresholds at 158-160

Also of note, there is a large USD/JPY option expiry with a total notional of $1.34B is due today, with a strike price of 156

AUSTRALIA: Treasurer Chalmers said earlier in the session that the government is "cautiously confident" it can bring the economy in for a soft landing despite the elevated borrowing cost and very weak Q1 growth, describing the current situation as a "soft landing on a narrow runway". He does not expect the Australian economy to continue experiencing stagflation (low growth, high inflation). He also noted that the Australian labour market remains resilient, while emphasizing that inflation needs to moderate further (and quicker)

ICYMI, ANZ on Tuesday said that they now see the first RBA rate cut of this cycle coming only by February '25, breaking ranks with the other "Big 4" calls (they largely see a cut in Nov '23), with ANZ saying that the above-expectations Q1 CPI reading "makes it hard to see the RBA being sufficiently confident that inflation will return to and stay in the band by the time the November meeting comes around". While the economy has slowed, "particularly across private final demand", getting to "an appropriate balance between the level of demand and supply is likely to take a little longer than expected"

AUD/USD is slightly firmer to trade at ~0.6616 at writing, climbing higher from Monday's one-month low of 0.6576. Of note, the current spot is hovering near a large AUD/USD options expiry with a strike price of 0.6615 due today, amounting to a total notional of A$1.33B

• See AUD/USD technical analysis here, weekly edition here

NEW ZEALAND: StatsNZ released net migration data for April '24, showing a net gain of ~98.5K people for the year ended Apr, marking an 11-month low, and declining from the ~106.4K (revised down from ~123.4K) seen for the year through to March '24. On its face, the report adds to already-firm expectations that the peak of the impulse in net inbound migration has passed. Taking a closer look at the data, the continued slowdown in the pace of inbound net migration has continued to have more to do with a rising (and record) pace of outbound migration, rather than a proper moderation in migrant arrivals - although the impact on wage/housing price pressures will likely lean to the downside in any case, which may give the RBNZ confidence of a moderation in domestic inflation in the coming periods, given a few more months of data on this front - see StatsNZ release here

NZD/USD prints at ~0.6145 at writing, virtually unchanged in Asia to extend the pullback from its three-month high (at 0.6215) made last Thursday

• See NZD/USD technical analysis here, weekly edition here

European Preview

Over in Europe, the UK's monthly GDP print for April should (per BBG median) suggest that economic activity is cooling, after growing 0.4% M/M in March, also consistent with weaker signs from retail sales and PMI - recalling that retail sales gauges for April came out all surprising to the downside

ECB Governing Council members scheduled to speak today include Patsalides, Vujcic, Guindos, and Nagel

Turning to NY hours, the main two highlights for the week, US CPI for May and the FOMC monetary policy decision are due tonight

To start, the headline CPI for May is expected to show the inflation growth rate cooling off a tad to print +0.1% M/M (vs +0.3% prior), a welcoming relief that is likely driven by declining energy prices, putting the headline figure at +3.4% Y/Y. Meanwhile, the more important core CPI is expected to rise 0.3% M/M, while the Y/Y figure dips slightly to +3.5%, putting it well on its downward path

For more on US CPI, see US - May CPI Preview

Next, for June's FOMC monetary policy meeting decision, the Fed is widely expected (per BBG median) to keep borrowing costs unchanged at 5.25%-5.50% for a seventh consecutive meeting. Thus, the focus will shift towards Fed Chair Powell's post-meeting presser as well as the updated dot plot for clues on the Fed's policy path ahead. This decision could be also seen as one of the most pivotal this year, with Powell likely to provide the clearest hint yet to their rate cut timeline. Meanwhile, the dot plot should show two 25 bps rate cuts this year, compared to the three cuts in the March edition

Delving into the details, recall that after the upside surprises earlier in Q1, April's headline CPI cooled to +3.4% Y/Y for the first time in three months - a welcoming sign to the Fed. Meanwhile, more signs of the labour market cooling are surfacing (despite May's massive NFP beat), with the latest unemployment print in May coming in surprising to the upside (4.0% Y/Y; BBG median 3.9%; Apr 3.9%). Finally, recent economic activities have also cooled by more than expected, with Q1 personal consumption - the economy's main growth engine recently - advancing less than the first estimate, coming out at +2.0% Q/Q (BBG median +2.2%; prior +2.5%), underscoring a loss of momentum in Q1 '24 after seeing continuous upside surprises in economic activities in '23, as waning pandemic-era savings and slower income growth weigh on households and businesses

To sum up the aforementioned developments, we expect communications to provide the clearest hint on the Fed rate cut timetable. Even with the BOC and ECB going ahead to cut their benchmark rates last week, The Fed will likely stick to their stance and say that more data is required to confirm that inflation is on a sustainable path downward - especially as inflation largely remains sticky

For more on FOMC, see Things That Stick Out: FOMC Preview Edition

On the data front,

US

1. Weekly MBA Mortgage Applications will be published. (vs -5.2% prior)
2. May CPI MoM is expected to increase by 0.1% (vs 0.3% prior)
3. May CPI Ex Food and Energy MoM is expected to increase by 0.3% (vs 0.3% prior)
4. May CPI YoY is expected to increase by 3.4% (vs 3.4% prior)
5. May CPI Ex Food and Energy YoY is expected to increase by 3.5% (vs 3.6% prior)
6. May CPI Index NSA is expected to be 314.365 The previous reading was 313.548.
7. May CPI Core Index SA is expected to be 318.561 The previous reading was 317.622.
8. May Real Avg Hourly Earning YoY will be published. (vs 0.5% prior)
9. May Real Avg Weekly Earnings YoY will be published. (vs 0.5% prior)
10. May Monthly Budget Statement is expected to be -$275.0b The previous reading was -$240.3b.
11. June FOMC Rate Decision (Upper Bound) is expected to be 5.5% (vs 5.5% prior)
12. June FOMC Rate Decision (Lower Bound) is expected to be 5.25% (vs 5.25% prior)
13. June Fed Interest on Reserve Balances Rate is expected to be 5.4% (vs 5.4% prior)
14. June FOMC Median Rate Forecast: Current Yr is expected to be 4.875% (vs 4.625% prior)
15. June FOMC Median Rate Forecast: Next Yr is expected to be 4.125% (vs 3.875% prior)
16. June FOMC Median Rate Forecast: +2 Yrs is expected to be 3.125% (vs 3.125% prior)
17. June FOMC Median Rate Forecast: Long-Run is expected to be 2.750% (vs 2.563% prior)

UK

1. Apr Monthly GDP (MoM) is expected to be 0.0% (vs 0.4% prior)
2. Apr Monthly GDP (3M/3M) is expected to increase by 0.7% (vs 0.2% prior)
3. Apr Industrial Production MoM is expected to fall by -0.1% (vs 0.2% prior)
4. Apr Industrial Production YoY is expected to increase by 0.3% (vs 0.5% prior)
5. Apr Manufacturing Production MoM is expected to fall by -0.2% (vs 0.3% prior)
6. Apr Manufacturing Production YoY is expected to increase by 1.5% (vs 2.3% prior)
7. Apr Construction Output MoM is expected to be 0.0% (vs -0.4% prior)
8. Apr Construction Output YoY is expected to fall by -1.8% (vs -2.2% prior)
9. Apr Index of Services MoM is expected to fall by -0.1% (vs 0.5% prior)
10. Apr Index of Services 3M/3M is expected to increase by 0.8% (vs 0.7% prior)
11. Apr Visible Trade Balance GBP/Mn is expected to fall by -£14200m The previous reading was -£13967m.
12. Apr Trade Balance GBP/Mn is expected to fall by -£1400m The previous reading was -£1098m.
13. Apr Visible Trade Balance Ex Precious Metals will be published. The previous reading was -£14686m.
14. UK Apr Trade Balance Ex Precious Metals is expected to fall by -£2300m The previous reading was -£1817m.

Germany

1. Apr Current Account Balance will be published. The previous reading was 27.6b.
2. May F CPI YoY is expected to increase by 2.4% (vs 2.4% prior)
3. May F CPI MoM is expected to increase by 0.1% (vs 0.1% prior)
4. May F CPI EU Harmonized MoM is expected to increase by 0.2% (vs 0.2% prior)
5. May F CPI EU Harmonized YoY is expected to increase by 2.8% (vs 2.8% prior)

Ireland

1. May New Vehicle Licences will be published. The previous reading was 17755.

Taiwan

1. Bloomberg June Taiwan Economic Survey

Thailand

1. June BoT Benchmark Interest Rate is expected to be 2.5% (vs 2.5% prior)

India

1. May CPI YoY is expected to increase by 4.85% (vs 4.83% prior)
2. Apr Industrial Production YoY is expected to increase by 4.5% (vs 4.9% prior)

TREASURIES CLOSE

TREASURIES CLOSE, 20.01GMT

Treasuries opened higher as trading got underway in Asia and edged up over the first few hours of trading

There was ongoing wariness over elections in Europe and some small bouts of short covering as a result

A few hours into the session, a block of 1.5k FVU4 was lifted at 106-01*2

The modest uptick in treasuries stalled mid-morning in Asia, and the complex ranged into the European session open

China reported cross-border trips increased 45.1%y/y during a 3-day holiday

Japanese May Machine Tool Orders rose to +4.2% y/y vs. -8.9% prior

Treasuries wobbled as Europeans came online then resumed their advance as employment data in the UK softened a touch

UK April Average Weekly Earnings held steady at 5.9% vs. 5.7% f/c. Ex-bonus, the move was unchanged at 6.0% vs. 6.1% f/c

UK April 3-month ILO Unemployment Rate rose to 4.4% from 4.3% prior and unchanged f/c

UK Employment Change was -139k from -178k vs -98 f/c while May Payrolled Employees Monthly Change was -3k from -36k vs -10k f/c

ECB's Simkus said that interest rates can be cut further if the central bank is sure the 2% inflation target will be met but added that it was too early to declare victory on inflation

ECB's Villeroy commented that the recent rate cut marked a 'decisive orientation' and that Fed policy should not greatly affect the ECB's then added that the central bank should neither rush nor procrastinate on cuts as there is 'significant leeway' to cut further and remain restrictive

ECB s Rhen said the central bank would not pre-commit to a particular rate path

There was also chatter that French President Macron is considering a potential resignation in case of a right wing victory in the early elections he called yesterday

ECB s Lane said that disinflation had been faster tan expected cand called last week s rate cut timely . Lane added that further cuts would be possible with enough progress towards the 2% goal

The treasury advance stalled following the UK auction, and the complex ranged into the North American session crossover

The UK Gilt sale generated a record order book

A source close to President Macron denied reports about his resignation

As trading got underway Stateside, yields were 2 to 6bps lower with spreads a touch steeper

US May NFIB Small Business Optimism beat at 90.5 vs. 89.7 expected/prior

The treasury complex came under pressure in choppy trading with treasuries paring gains into the European session close

Dealers positioned for the afternoon s 10-year raffle

The Treasury announced that it will sell

$60bln 17-week bills Wednesday

$70bln 4-week bills (reopening) Thursday

$70bln 8-week bills (reopening) Thursday

The Treasury auctioned $75bln 42-day cash management bills which drew 5.270% with 58.03% allotted at the high. The bid to cover was 2.87. Indirect bidders were awarded 49.7% and directs 7.3% which left primary dealers with 42.9%

The $46bln 52-week bill auction drew 4.915% with 25.35% allotted at the high. The bills had a bid/cover ratio of 2.87 vs. 3.00 previously and a prior 5-auction average of 2.91. Indirects came away with 48.3% vs. 68.1% previously and a prior 5-auction average of 66.4%, while directs were awarded 3.1 vs. 3.1% last and a prior 5-auction average of 2.9%, which left dealers with 48.8% vs. 28.8% previously and a prior 5-auction average of 30.6%

The $39bln 10-year note reopening had strong indirects. The notes drew 4.438%, stopping through the 1:00PM screen bid of 4.458% by 2.0bps with 43.69% at the stop. The bid/cover was 2.67 versus 2.49 previously and a prior 5-auction average of 2.49. Indirects took 74.6%, the largest showing since February 2023, versus 65.5% last month and a prior 5-auction average of 65.7%, while direct bidders came away with 11.6% versus 18.7% last and a prior 5-auction average of 17.2%. Primary dealers were awarded 11.6% versus 15.7% previously and a prior 5-auction average of 16.9%

Following the strong auction results, treasuries jumped higher

Shorts scrambled to cover ahead of Wednesday s CPI data and Fed decision

The New York Fed RRP demand was $410.449b. There was $0.002bln accepted from the same amount bid in the New York Fed repo operation

Heading into the close, treasuries were higher, spreads were flatter, and equity indices were mixed

FX CLOSE

Macro

European elections reverberate for second day in otherwise quiet pre-FOMC session

• EUR extends losses, France-Germany bond spread trades 65 bps, widest in more than four years
• Most analysts dismiss move as a short-term blip, but could be something
• BdF cuts growth forecasts for next two years, rating agencies lurk

US rates ease ahead of CPI report Wednesday

• Whisper number lower than 3.4% consensus, good 10-yr auction gives lift to Treasuries
• All action tomorrow centered on Fed s dot plot revisions
• See: Things That Stick Out: FOMC Preview Edition

FX

Dollar mixed, most action in EUR pairs Tues

EUR under pressure for third day

• Sovereign bond spreads widen sharply, suggests maybe something bigger at play
• France potentially poses bigger risk than Italy

GBP outperforms as cross dives for third day

• UK serves as temporary haven from Euro political fallout
• April wages data sticky at 5.9% (3m/yoy) vs 5.7% exp
• BOE on similar trajectory as Fed with 1 ½ rate cuts priced for 2024

JPY steadies as tool orders turn positive for first time since Dec 2022

• May Machine Tool orders jump to 4.2% y/y from -8.9% prev

CHF highest vs EUR in two months on Euro political uncertainty

• Eur/Chf approaches 200 dma support at 0.9590-00

CAD struggles despite huge housing number

• April Building Permits up 20.5% m/m from -12.3% prev, fastest pace in four years

AUD underperforms as business confidence dives

• NAB Business Confidence falls to -3 in May from +2 prev

NZD outperforms on cross, AUD rolls over in risk-off APAC session

DATA RELEASES

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