Ahead of the game: June 26, 2023

US equity indices fell this week on jitters around higher interest rates after Fed Chair Powell repeated comments from last week’s FOMC that policymakers see a compelling case for more rate hikes.

The recent rally in US equity markets has been a glorious display of animal spirits unleashed chasing AI-related technology - a move that we think has further to run. However, even in markets such as these, there will be pullbacks, as observed this week.

Locally, the ASX 200 gave back a good chunk of last week’s gains taking its lead from falls in offshore equity markets and as easing measures announced in China have thus far fallen short of expectations.

Punctuating the end of the ASX 200’s good run, a large European Bank downgraded the ASX 200 Consumer Discretionary sector. This move signals growing concerns over households grappling with soaring cost-of-living pressures, escalated inflation, and climbing interest rates - a sentiment likely to be echoed by other financial institutions in the near future.

In the UK, the BoE hiked rates by 50bp to 5% this week with a 7-2 vote. The decision to hike rates by a supersized 50bp resulted from recent wages and inflation upside surprises. The door is open for another 50bp rate hike in early August.

Next week, the key events will be inflation data in Australia (the Monthly CPI indicator) and inflation reads in Europe and the US.

As there have been some significant moves across various asset classes this month, there is the possibility of large month-end rebalancing flows in the market next week.

• Powell, in his Congress testimony, affirms case for more rate hikes
• UK inflation surprises, posting 8.7% YoY rise vs 8.4% expected
• BoE hikes rates by 50bp to 5%
• RBA's June Board meeting minutes less hawkish than expected
• PBoC counters Chinese economy slowdown, cuts 1yr and 5yr LPR
• US dollar index, the DXY, hits six-week low
• ASX200 sheds ~1.5% of last week’s gains
• Crude oil slides below $70 amid rate hikes from UK, Norway, Turkey, and Switzerland
• Bitcoin leaps 14% on BlackRock’s Bitcoin ETF application and anticipated China stimulus
• Wall Street fear measure, the VIX index, dips for the fourth week to 12.90 (-4.66%).
  

• AU: Monthly CPI Indicator (Wednesday, June 28, 11:30 am AEST)
• NZ: ANZ Business Confidence (Thursday, June 29, 11:00 am AEST)
• AU: Retail Sales (Thursday, June 29, 11:30 am AEST)
• AU: Housing Credit (Friday, June 30, 11:30 am AEST)

• JP: Retail Sales (Thursday, June 29, 9:50 am AEST)
• JP: Consumer Confidence (Thursday, June 29, 3:00 pm AEST)
• CH: NBS Manufacturing and Non-Manufacturing PMI (Friday, June 30, 11:30 am AEST)

• US: Durable Goods Orders (Tuesday, June 27, 10:30 pm AEST)
• US: CB Consumer Confidence (Wednesday, June 28, 12:00 am AEST)
• US: Fed Chair Powell Speech (Wednesday, June 28, 11:30 pm AEST)
• US: Bank Stress Tests (Thursday, June 29, 6:30 am AEST)
• US: Core PCE Price Index (Friday, June 30, 10:30 pm AEST)

• GE: Ifo Business Climate Survey (Monday, June 26, 6:00 pm AEST)
• GE: Gfk Consumer Confidence (Wednesday, June 28, 4:00 pm AEST)
• GE: Inflation Rate June (Thursday, June 29, 10:00 pm AEST)
• GE: Unemployment (Friday, June 30, 5:55 pm AEST)
• EA: Unemployment (Friday, June 30, 7:00 pm AEST)
• EA: Inflation (Friday, June 30, 7:00 pm AEST)

Break down

• Australia

Monthly CPI indicator

Wednesday, June 28 at 11.30 am AEST

At its meeting in June, the RBA surprised the market by raising the cash rate by 25bp from 3.85% to 4.10%. Choosing to look through softer labour market and retail sales data in May, the RBA focused on elevated inflation, rising unit labour costs, wages, and poor productivity.

“While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas. Unit labour costs are also rising briskly, with productivity growth remaining subdued.”

At the meeting, the RBA retained its tightening bias and noted that a further tightening of “monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve."

Focus now shifts to Wednesday's unveiling of the Monthly CPI indicator for May.

This month, the market anticipates a decline in the CPI indicator to 6.1% from April's 6.8%. A figure in line with this expectation, or lower, may suffice to convince the RBA to halt its series of rate hikes in July. Conversely, a result of 6.4% or more could likely prompt another RBA rate increase in July, propelling the official cash rate to 4.35%.

ABS monthly CPI indicator chart

• UK

EA inflation

Friday, June 30 at 7.00 pm AEST

Last month (May), inflation in the EA rose by 6.1%, the least since February 2022, falling further from the 10.6% high of October 2022. Core inflation edged lower to 5.3% from 5.6% in April.

In June, headline inflation is expected to fall to 5.6% from 6.1%, driven by a decline in energy bills, fuel costs and food prices. Core inflation is expected to remain stable at 5.3%.

Nonetheless, inflation remains well above the ECB's 2% target, and after the ECB raised its deposit rate this month by 25bp to 3.50%, the market is expecting two more 25bp rate hikes before year-end, which would take the ECB’s terminal rate to 4.00%.

EA headline inflation chart

• US

Core PCE price index

Friday, June 30 at 10.30 pm AEST

The Feds preferred measure of inflation, the Core PCE Price Index, unexpectedly rose by 4.4% YoY in April from 4.2% the previous month.

In May, the index is expected to fall to 3.9%, which would be the first time it has been below 4% since March 2021.

Nonetheless, a print of 3.9% would still be almost twice the Fed’s inflation target of 2% and will do little to ease elevated expectations that the Fed will raise rates by 25bp when it meets at the end of July.

US core PCE price index chart

Economics calendar

All times shown in AEST (UTC+10) unless otherwise stated