Markets have been ultra-sensitive to data for some time now, going back to market pricing for hikes starting in late 2021. More recently, several strong US inflation prints have de-railed the potential for upcoming Fed cuts, while upside surprises have occurred in Canada, the UK and Australia in the recent weeks. Will these data points be determinant for upcoming central bank decisions? What important releases are to come?

Participants:

• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Michael Reid (Desk Strategy), US Economist
• Cathal Kennedy (Desk Strategy), Senior UK Economist
• Su-Lin Ong (Research), Chief Australia Economist
• Luis Estrada (Desk Strategy), LATAM FX Strategist

Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Jason Daw:

Hello and welcome to Macro Minutes. During each episode, we'll be joined by RBC capital Markets experts to provide high conviction insights on the latest developments in financial markets and the global economy. Please listen to the end of this recording for important disclosures.

Simon Deeley:

Finally, our new LA FX strategist Luis Estrada joins to provide an update on currency markets. So kicking off with Canada, heading into last Friday's jobs report market pricing was 60 to 65% for a cut at the June 5th meeting. The report showed an outsized 90 K increase in employment, but the unemployment rate was steady at 6.1% and even edged higher on an unrounded basis. This was due to an even larger increase in the labor force. As immigration has driven strong population growth and new labor market entrants and the job market has been unable to fully absorb them. Wage growth remains around 5% just under in this report, but other releases are tracking three to 4% and the BOC has noted some preliminary signs of moderation on this front. Overall, the jobs report lowers our conviction slightly for June cut, but we still see it as likely with a 70% probability.

The main data release ahead of June meeting is undoubtedly the May 21st VPI report. In complete contrast to the US, Canada has seen three straight prints averaging just 0.1% month on month. For CPI trim and CPI median our main core measures with even the service oriented super core measure trending lower currently at 2.8% on a three month annualized basis. What does the BOC need to see to cut on June 5th? Monthly prints for the core measures at 0.2% or lower would increase our conviction between 0.2 and 0.3% would be roughly neutral to our expectation for a cut and 0.3% month on month or higher would reduce our conviction level. The other main data release before June meeting is Q1 GDP on May 31st with our forecast and preliminary statistics Canada tracking at 2.5% boosted by a return of striking public sector workers in Quebec in January. The risk to our June cut call is that the data lacks the impetus for the BOC to cut with adjustment cuts in general less urgent for central banks they may see waiting to July as a reasonable option. Either way, we expect a sequence of cuts once the BOC does start to move. While we don't see it as a main impediment to near term cuts, a lack of these fed could cause a more cautious BOC later this year or early next year. For more on the situation south of the border, return to our US economist Michael Reed.

Michael Reid:

Great, thank you Simon. And looking ahead here to Q2, I think it's appropriate that we just got our first inflation report for the month of April here in the PPI release and what we saw there was an elevated print surprise to the upside, really does little to kind reverse some of the trends that we saw in Q1. Encouragingly we did see goods prices remain rather modest but worryingly we saw upside pressure coming in the services space and really what that means is the pass through to PC later this month will be rather strong and this really puts the fed in a tough spot given the data that we did see in Q1. We are looking for a CPI to step down slightly tomorrow relative to what we were seeing and notably in January and February, but still with a three 10th month over month print, which we are expecting in the core space that really just resets the clock in terms of what the Fed needs to see for a sustained path lower.

Simon Deeley:

Thanks very much Michael. Now we head to London to hear from Kal.

Cathal Kennedy:

Thank you Simon for this edition. I've got to focus a little bit more on the Bank of England from a European perspective and there's really two reasons for that. One is we had a meeting last Thursday, so it's still fairly fresh and the second is quite kind of a shift from the Bank of England in terms of its communication at that meeting. Now our expectation for some time has been that the Bank of England will deliver a first rate cut in August, but the MPCs language was still leaning or had a somewhat hawkish tilt to it, shall we say, certainly up until last week's meeting. So the question for the meeting last week was how would the MPC adjust this messaging to more explicitly signal that the rate cut we think it wants to deliver was imminent if you will. Now there are two ways that that was accomplished in the meeting.

The first was the vote split. A seven two split in favorable hold was significantly one of the deputy governors of the bank. So Dave Ramsden switching his vote from a hold to a cut, but the second was an adjustment to the MPCs language to a much more data dependent formulation. So the MPC is now saying that it will consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding. Now there was a second signal within the minutes as well, which basically pointed out that for those members continuing to vote for a rate hold, there was a varied burden of proof required for them to adjust their vote. So the message was free clear MPC meetings are live from here. We've a little over a 50% chance of a rate hike priced in for June and we're fully priced for August.

Now as noted by Governor Bailey at the meeting last week, there are two rounds of liver market data between last week's meeting and the next one in June. Now we think the MPC is placing greater weight on the inflation releases rather than those around the liver market and there's a good reason for that. We have an ongoing problem with response rates to labor for survey here in the uk, which mean where we and the bank and the NPC are treating what they're showing with a degree of caution. Now we had the first of those releases this morning showing the broad trends we've seen of late continuing in the UK are loosening in the labor market, but wage growth still elevated and coming down much more slowly in terms of inflation. We are moving into a new pricing period for UK regulated domestic utility prices and that should see headline CPI return to target for a period certainly between April and June.

But within that CPI releases those two CPI releases I mentioned services CPI will be key. That is the one that the MPC have repeatedly said that they are focused on. Now what they're looking for is services inflation, which surprised a little bit to the upside in the last release coming down from 6% to 5.5%. So a hefty drop if you will, in the next print due next week. Now our reading of the MPC is that for some of the nine member committee at least, or certainly for those holding their who voted for a hold last time, just the data coming out in line with the forecast will be sufficient for them to change their vote. So we don't need to see downward surprises in the data for a number of the MPC members. We just need to see it coming out in line with what the bank has set out in the May forecast round.

So for the Bank of England, the starting point for the cutting cycle is now much more data dependent than it was previously. As for what comes afterwards, our view for some time has been that the Bank of England will be cutting into a recovering economy with is still tied labor market. So we think that will limit the amount of easing they ultimately deliver and continue to just see two ray hikes this year. Now for the ECB, the case here is somewhat different. It has heavily telegraphed that is likely to begin its cutting cycle in June. Now there's been no let up on that rhetoric in recent weeks and our view is the remaining data that's released ahead of the meeting next month would have to show a significant surprise for the ECB to delay the start of its cutting cycle beyond the June meeting. However, the ECB has provided comparatively little guidance President Leard has just emphasized the flexibility and the need to remain data dependent. Now our review is the data is likely to lead EDE to adopt a fairly cautious approach. Measures of domestic inflation similar to the UK have remained sticky and the annual rate of services inflation has eased just zero three percentage points over the last six months. Recent activity data has also shown signs of an upward tick similar to what we saw here in the uk. So for the ECB we look for a total of just 75 basis points of cuts this year.

Simon Deeley:

Great stuff. Cathal. Now we turn to Su-Lin Ong in Sydney.

Su-Lin Ong:

Thanks Simon. Australian rates have settled down over the last week or so after some real weakness in underperformance following the stronger than expected Q1 inflation data and an RBA that discussed a rate hike at its recent main meeting and refused to rule out anything on the rate front. The consensus was the RBA retained a neutral bias, but we're a bit less relaxed about that and would suggest it's only a near neutral bias and probably really a very, very mild tightening bias. Look, the bar to hike is high. The RBA really doesn't want to hike anymore. It's been a pretty reluctant hiker over the last two years, but as we've always pointed out, 4 35 cash is pretty low by dollar block standards and only mildly restrictive in the context of this edition of macro minutes and data determination. The onus is very much on the data to weaken for the RBA to move to a firmly neutral bias and eventually think about some easing.

There's quite a lot of uncertainty and I think we'll need several months of data for a clearer picture, but we have to acknowledge that the starting point is stronger than we thought. The unemployment rate's basically been sub 4% for almost all of the last two years really tight and below full employment. We need clearer signs of sustained weakening in the labor market for the RBA to be more confident that inflation will move back to target within a reasonable timeframe. Without that key services and non tradable inflation is likely to remain higher than is consistent with Target. We'll get some key clues this week with April Labor Force on Thursday and Q1 wages on Wednesday. But we do expect both to confirm a tight and healthy labor market consistent with a patient RBA staying on the sidelines. We are recording this edition of macro minutes just ahead of the release of the Australian Federal budget and despite a likely second consecutive budget surplus for this fiscal year, which is pretty rare by international standards, we think we will see a return to sustained deficits and a mildly expansionary fiscal setting That'll be underpinned by across the board income tax cuts from the 1st of July and likely further cost of living measures that will boost disposable income and add to demand.

It's really not helpful for the Reserve Bank at this juncture and coupled with a likely doubling in government bond issuance next fiscal year, we expect the budget to be modestly negative for bonds support tighter swap spreads and keep some pressure on the curve to steepen.

Simon Deeley:

Very interesting to Lynn. Last but not least is Luis on fx.

Luis Estrada:

Simon. The theme of the call data dependent is a phrase that I have very strong thoughts about. Jerome Powell said, be clear in your reaction function and the market will do your job. So when the Central Bank says they will be data dependent, they're injecting volatility into the market, they're taking optionality, which is fine, but there are more elegant ways to do this. You have to understand, I come from an emerging market background where central banks are not stable jobs. It's a colorful art. They have to play with inflation politics now geopolitical events and hopefully they'll be able to some support to the growth. So I see a wide array of styles of central banking and I'd like to illustrate them with some Latin American examples. Chile by example, is a very Orthodox central bank. They have focus inward on their inflation and their inflation targets and for this reason they anticipated other central banks and east over 400 basis points taking their overnight rate to six and a 5% where they're at now.

But overall this has made the peso appreciate significantly over 17% in the last 12 months. And I think that is the very other extreme of the styles of Orthodox central banking. However, I'd like to showcase a third one, which is Brazil, their governor, Roberto Campos, I think he's a rockstar. He's been recognized as one of the best central bankers sometime in the past, and he's taken overnight rates in Brazil from 2% to 13% when we were coming out of Covid. And he has over the last 12 months his rates 325 basis points and he's been given the market great clarity of what is the BCV reaction function along this whole path. He has been given guidance of what's the BC v's main scenarios and what they are expected to do in the next monetary policy if meeting, if their scenario comes true. And recently he actually took some optionality from the market.

He made his guidance conditional and he actually executed on this optionality. He changed the guidance because his scenario was no longer valid and he actually came with a framework in which he had four scenarios in each scenario defined a different action path for the BCB. And these would depend on the level of risks that the market had on the disinflation path for Brazil. I think there's definitely very different styles, but what I would like to conclude is that I feel very strongly that the central banks build their credibility by communicating with the market. And if they're going to be data dependent for a period, they're taking volatility into the market, they're not building their credibility per se. They build their credibility when they reduce the volatility and they at least share what is the data they're dependent on. So those are my thoughts, a little piece of what's happening in latam. Thank you.

Simon Deeley:

Great. Thank you Louise. And thank you everyone for listening. We'll be back in two weeks time. Take care.

Speaker 7:

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