Weekly house view | Fed in Focus

A big central banking week looms with meetings at the US Federal Reserve and the European Central Bank (ECB), and their respective policy decisions on Wednesday and Thursday. The Fed will have the latest US consumer price inflation data, expected to show a slowdown in May, to assess when it gathers on Tuesday. Both the Bank of Canada and Reserve Bank of Australia hiked rates last week, showing central banks’ priority remains fighting inflation rather than supporting growth. Chair Jay Powell and some Fed governors have recently signalled a willingness to skip a rate hike in June to better assess the impact of previous policy tightening and recent banking sector stress. While markets now see an almost 30% chance of a 25bps Fed hike, we expect it to pause this week but to make hawkish comments that leave the door open to a potential hike in July.

With the debt ceiling now agreed, the US Treasury Department plans to increase issuance of Treasury bills to continue financing the government and to gradually rebuild its cash balance. This is likely to lead to US T-Bill net issuances ending above USD1 trillion in 2023. With the debt-ceiling negotiations over, the VIX volatility index fell to its lowest level in three years last week and large-tech names gave back some outperformance to the benefit of cyclicals and small caps. We favour active management strategies in the second half of this year.

The euro area economy slipped into a technical recession over the winter, with revisions showing that GDP fell by 0.1% in both Q4 22 and Q1 23. The main detractors were consumption and government spending. Employment growth accelerated to 0.6% in the first quarter from 0.3% in the fourth quarter, outpacing GDP growth for the second consecutive quarter. We expect the ECB to hike rates by 25bps to 3.5% this week and to confirm it will stop reinvesting cash from maturing bonds bought under its Asset Purchase Programme (APP) from July. In the UK, house prices fell in May, the first annual decline since 2012.

Last week saw a big contrast between China and other Asian economies. Chinese exports fell 7.5% in May from a year ago, far more than expected, with exports to the ASEAN countries hit particularly hard. Chinese producer price inflation fell by 4.6% year-on-year in May, indicating some overcapacity in industrial sectors. By contrast, Japanese first-quarter GDP growth was revised higher to an annualized 2.7% on stronger capital spending. India’s first-quarter GDP rose by 6.1% year-on-year, mainly led by growth in capital spending and exports. We confirm our full-year 2023 GDP growth forecast of 7.2% for India.