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RANsquawk Week in Focus (week commencing 19 May 2019)

FOMC MINS PREVIEW (22nd May)

At its April/May meeting, the FOMC unanimously decided to hold the FFR target between 2.25-2.50%, as expected, though cut the IOER by 5bps to 2.35%. The statement saw the Fed acknowledged a "solid" rate of growth (upgrading its view, as expected), while pointing out that inflation -- both overall and core -- has eased , downgrading its view to 'below 2%', while also dropping its reference to low rates being a function of low energy prices. The Fed noted that job gains have been solid, though growth of household spending and business fixed investment has slowed. Fed Chair Powell attempted to navigate a neutral line in his press conference, reiterating the messages of the statement, while emphasising the appropriateness of the Fed's policy stance, and the familiar message of neutral, seasoned with patience. The Fed chair added that while business fixed investment and household spending had slowed, he sees it rebounding. Risks have moderated since the beginning of Q1, (data from China and Europe, disorderly Brexit pushed back, progress on trade talks with China, where the gains would be seen over time). Powell said the Fed was strongly committed to a symmetric inflation target; core inflation fall was unexpected, but likely transitory (this affirmation would prove to be the turning point during the presser, from a markets perspective). Powell says the policy stance is currently appropriate and does not see the case to shift rates in either directions (on a few occasions reiterating that the current policy stance was appropriate); he said the IOER was a technical adjustment that does not represent any shift in the Fed's policy stance; the FFR remains the central bank's primary policy tool; he also said that the Fed could look at the possibility of a repo facility at upcoming meetings. Fed Chair Powell was pressed on conditions that the Fed would need to see before considering cutting rates, though he seemed reticent to be drawn in, instead reiterating the Fed's policy targets. Asset prices were elevated, but not extremely so, though has some concern about corporate leverage; overall though, he does not see evidence of overheating. The FOMC had a discussion on the composition of the balance sheet; a decision will need to be taken at future meetings, and any changes will be telegraphed well in advance, Powell said.

EU ELECTIONS (23rd May)

May 23rd-26th will see EU citizens take to the polls to elect 751 MEPs from the 28 member states (inc. UK) with the election taking place against a backdrop of increasing populism across the continent and rising anti-EU sentiment. Investors will be watching the election for any signs of European disintegration. In terms of the order of play, the vote count in each nation will commence when polls close in each member state with the results to be released from Sunday 26th May at 2100BST when polling stations in all countries have shut. Note, exit polls will be published after all polling stations have closed with results updated throughout the night. In terms of the outcome, Danske Bank concludes that the EPP will remain the largest faction in Parliament with the S&D to remain in second place. However, the EPP and S&D will likely lose their absolute majority (for the first time since the 1970s) amid the backdrop of populism and French President Macron throwing his weight behind the ALDE. Furthermore, doubts over whether or not the populist factions will be able to provide a united front under the potential leadership of Italian Deputy PM Salvini, could help limit the influence of anti-EU sentiment within the decision-making process. In terms of the overall market impact, given the potential outcomes discussed above which will most likely see the preserving of some sort of status-quo between pro-EU parties, analysts broadly believe that the elections will not be too much of a market-mover; a view backed by Goldman Sachs. However, any surge in allocations for anti-EU parties would likely challenge this view, albeit, Danske Bank believe that any impact on the periphery wouldn’t be particularly significant. Please click here for a full detailed overview of what to look out for this week and the potential knock-on effects for key appointments within Europe.

EZ PMIs (23rd May)

Aside from the European elections, Thursday is also PMI day in the Eurozone with manufacturing, services and composite readings for May all due for release. In terms of expectations for the EZ-wide metrics, manufacturing is forecast to rise to 48.2 from 47.9, services is expected to rise to 53.0 from 52.8 with the composite reading set to tick higher to 51.8 from 51.5. Ahead of the release, analysts at RBC highlight that the data will be used as an opportunity by markets to gauge expectations for Q2 growth prospects. However, the Canadian Bank cautions that “risks to the outlook appear to be weighing on sentiment at present” and cite the example of Q1 composite survey data indicating “growth of 0.2% q/q compared to an actual outturn of 0.4% q/q”. As such, analysts conclude that market participants instead should not just focus on the headline print but whether the “services sector has remained resilient in the face of the weakness of manufacturing”.

JAPANESE CPI (24th May)

Timelier data for Tokyo CPI signals that the national measure will accelerate in April, and the consensus looks for CPI to rise at a rate of 0.9% Y/Y (prev. 0.5% Y/Y). "Energy inflation in Tokyo eased a little as electricity and gas inflation dipped," Capital Economics said, "but this was more than offset by a surge in fresh food inflation." The consultancy is expecting a similar trend to be seen in the national data. Tokyo's underlying inflation gauges have been firmer than the national measures recently, but the core national measures are still seen ticking up; ex-fresh food is seen at 0.9% Y/Y vs 0.8% prior, and the ex-fresh food and energy measure is seen at 0.5% Y/Y vs 0.4% prior. CapEco says that "the slowdown in producer prices of consumer goods in recent months points to weaker goods inflation," and accordingly, it thinks "that national underlying inflation remained flat at 0.4%. In fact, it will probably fall in the coming months due to lower mobile phone tariffs and the introduction of free childcare."

JAPAN GDP (20th May)

The Street expects quarterly GDP to contract by 0.1% Q/Q (0.5% prior) and the Y/Y rate is seen at 0.2% (prev. 0.3%). Leading indicators do not augur well: Industrial production saw the sharpest decline in nearly 2 years, while labour market data showed Q/Q total hours falling at the sharpest rate on record. "Our GDP tracker, which is compiled from industrial production, hours worked and the BoJ's consumption activity index, points to the sharpest fall in output since 2014’s sales tax hike," Capital Economics says, "but still, our forecasts for each individual component of GDP suggest that the decline will be a little less pronounced." The consultancy says that the drag from net exports in the Q4 may have faded, while there were probably some strength in public and residential investment. "All told, we expect GDP in Q1 to contract by 0.6% Q/Q, which would reverse the 0.5% Q/Q rise in Q4," and looking further ahead, CapEco thinks that GDP will recover in the Q2 and Q3. "In particular, consumption should start to pick up as consumers bring forward spending ahead of the tax hike. But spending will slump once the tax has been raised." It is worth keeping in mind reports that the Japanese government is mulling downgrading its assessment of the economy next week, Reuters reported, as the US/China trade war exacts its toll on Japanese exports and factory output, a government source said; the move might fuel speculation that Japan may delay the planned sales tax hike planned for October) (it would be the third delay). Any decision to delay the tax would likely need to be made before Upper House elections in the summer. The BOJ's next Tankan survey (released 1 July) will offer clues as to whether the sales tax hike would likely be delayed again.

RBA MINUTES (21st May)

Tuesday will see the release of the RBA minutes from its May meeting, which will shortly be followed by comments from RBA Governor Lowe on the economic outlook and monetary policy. In the May statement, the board failed to adopt an explicit easing bias, deciding to focus solely on the labour market, stating that "ongoing subdued rate of inflation suggests that a lower rate of unemployment is achievable while also having inflation consistent with the target." Since then, the jobs data released earlier this week showed a better than expected headline at +28k, with the Y/Y rate of job growth rising to the best since June 2018 at 2.6%. However, the unemployment rate ticked up to 5.2%, and underutilisation jumped to 13.7% from 13.0% (highest since June 2018). UBS said that overall, the labour market is worse than the RBA's repeated view that it "remains strong"; while jobs growth remains solid, unemployment is now trending up, and the broader underutilisation rate (measuring spare capacity) has increased by even more, clearly meeting the RBA's key 'scenario' to cut rates, the bank believes. The minutes are likely to show further concern on the domestic outlook whilst also giving more “meat on the bone” in regard to the labour market threshold at which the RBA will act. Turning to Lowe, some desks believe that the governor will use the speech to pave the way for rate cut in June amid the disappoint employment data. Nonetheless, any hints on the timing of a future rate cut will be priority, with money markets now pricing in an above 80% chance of a June cut alongside barrage of banks calling for two cuts to the Cash Rate this year.

INDIA ELECTIONS (23rd May)

The seventh and final round of Indian elections will take place over the weekend (19 May), and the count should be completed by 23 May, with results set to be published on Thursday. ING's analysts say the result seems too close to call, though its base case remains that Narendra Modi will retain power. The most recent polls also suggest that Modi's National Democratic Alliance will win by a thin margin. "We believe the markets are priced in for such an outcome," ING says, "The outperformance of Indian markets and the INR since February, after the terror attack in Kashmir and the nationalistic sentiment fuelled by the government's handling of the same, reflects increased investor confidence of the incumbent staying in power." But ING warns that, judging from anti-incumbent sentiments that swept through last year's state-level elections in Chattisgarh, Madhya Pradesh, and Rajasthan, there remains a risk for a potential surprise.

SARB PREVIEW (23rd MAY)

The consensus is for South Africa's Reserve Bank to hold rates at 6.75% on Thursday, but SocGen notes that the market is pricing a small chance of a rate cut: "The 1x4 FRA prices in a 4bp decline in the SARB repo rate, as the forwards edged lower following the 8 May elections and is consistent with the recent appreciation of the ZAR. On a one-year horizon, FRAs are pricing in slightly more than a 50% probability of a rate cut." The SARB will premise its decision based on its new forecasts in its updated Monetary Policy Report (MPR). "Based on the language of the MPR, we expect the central bank to keep its monetary policy unchanged on 23 May, and see greater risks of rate hikes through the remainder of 2019," SocGen argues. The bank notes the April MPR placed heavy emphasis on inflation expectations, and its model sees inflation (and inflation expectations) converging to 4.5% by 2021, though the forecasts in April also were consistent with a higher repo rate, beginning in Q2. "The updated May projections will probably see a tug of war between stronger inflationary pressures from abroad (some depreciation of the rand and higher oil prices versus the assumptions in March) and between poor domestic economic performance (higher unemployment, weak output due to Eskom’s load-shedding, and depressed confidence)," SocGen says. "The projected path of inflation, inflation expectations, and the repo rate will be crucial factors in the MPC’s decision making, together with the assessment of risks (external demand and investor sentiment)." Accordingly, the updated forecasts might show that a higher repo rate is required to anchor inflation (and expectations). "According to the MPR, the country’s growth woes are ‘largely structural’ – and therefore a looser monetary policy wouldn’t help much," SocGen argues, "on the other hand, a ‘structurally lower inflation rate [would be] a useful contribution to [economic] growth’ – and that is consistent with a stable or higher repo rate, pushing inflation expectations lower." The bank says that given the current domestic economic weakness and risks to external demand, it sees the SARB standing pat, but it also expects that the rand will continue to weaken, and the next policy move will probably be a hike rather than a cut, but warns that if the current market and economic trends persist, a rate hike could be on the table in 4Q19 or 1Q20.

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