Hopefully, the weekend gave you a chance to catch your breath after “Super Thursday.”
True, Draghi managed to thread the forward guidance needle thus limiting the fallout from an ostensibly hawkish statement, and no, James Comey’s testimony didn’t catalyze a market crash.
But the fact that the fallout wasn’t immediate doesn’t change the fact that i) the ECB did indeed change their guidance and ii) the story the former FBI Director told raised more questions than it answered.
In the same vein, just because the promise of continued ECB accommodation limited the impact of the UK election shocker doesn’t change the fact that the UK now sits under a cloud of political uncertainty.
This week, we’ll get the Fed. And likely a whole lot of headlines out of the UK.
Further, we’ll get retail sales and CPI in the US. Oh, and the BoJ, SNB, and BoE – although those are likely to be non-events. Here’s BofAML:
The BoJ is likely to keep its rates and asset purchase targets unchanged, with focus still on potential changes to the “around JPY80tn” guideline for the pace of JGB purchases, which we think will stay for now. We believe the BoJ will be inclined to send a dovish message, differentiating itself from the Fed and ECB. In the UK, although data since the last meeting justifies a more dovish tone, we expect no change in policy from the BoE. We once again expect no change in policy from the SNB. They will likely remain consistent with previous statements, emphasizing persistent overvaluation of the CHF and reinforcing their readiness to intervene in FX or take further action if necessary.
For those looking to get a head start on the week, below find Barclays “Thoughts For The Week Ahead” followed by a full calendar from BofAML.
The surprise result in the UK election brings forward challenges for the Brexit negotiation and the GBP. The Conservative party lost its Parliamentary majority and will be forced to form a government with the support of North Ireland’s Democratic Unionist Party (DUP). The result undermines Theresa May’s authority and brings into question her long-term survival as party leader and PM. The UK faces the start of Brexit negotiations, scheduled for June 19, in a weakened position, as the Tories failed to obtain the clear mandate for an orderly hard Brexit they were looking for. We see the risks around the Brexit negotiation to have increased: the clock is ticking and will not wait for resolution of UK’s political uncertainty, while a hung Parliament leaves the PM vulnerable to the influence of small groups of MPs on the negotiations.
We expect greater near-term volatility in GBP, skewed to the downside, as the political situation evolves and Brexit negotiations begin. We still expect medium-term GBP appreciation, but tail risks of a worst-case, no-deal Brexit have risen. We place our GBP forecasts under review and close our two outstanding long GBP recommendations vs. EUR and AUD. However, we do not see the political turbulence in the UK as likely to affect broad risk sentiment or increase global volatility.
This week, we expect the FOMC to increase the target range for the federal funds rate by 25bp. The Fed looks determined to continue the gradual normalization of monetary conditions, including the reduction of its balance sheet and this week’s summer rate hike, despite the recent mixed performance of economic data. Although the softness in inflation and payrolls could be explained by transitory factors, likely to be reflected in Fed’s projections (Figure 2), the slowdown in job creation is consistent with late-cycle dynamics and, if sustained, could put into risk our call for a December hike.
With markets pricing more than a 90% probability of a hike at the June meeting, there is little potential upside for the USD coming from this week’s rate hike. However, markets will be attentive to the FOMC’s guidance on future action. In particular, the assessment on the inflation outlook, which has concerned the most dovish FOMC members, and the summary of economic projections, which should clarify the likelihood of another hike this year and the future rate path, will be watched. Chair Yellen is likely to address the plans for the balance sheet runoff at the press conference, although we believe the committee has not reached consensus on the end-state of the balance sheet yet.