June is going to be quiet the defining month in the high inflation world. Could we see signs that Stagflation could actually be come real at the back end of the year? Remember stagflation is define as high inflation, low growth and high unemployment. The first one is being met, the second and three currently as not. But this week could change the growth part.
Last week we saw US GDP for the first quarter revised slightly lower in its second estimate, from -1.4 per cent to -1.5 per cent annualised the expectation was for a -1.3 decline. The fall was down to inventories detracting. Should highly that personal consumption, beat expectations up 3.1 per cent and smashed estimates of 2.8 per cent, GDP was up 3.5 per cent versus the first quarter of 2021. That is not a positive sign. Then we have the construction and capital expenditure data from Australia last week that is feeding into this week’s GDP print. Before the data drop the expectation for the first quarter was a 0.8 per cent quarter on quarter now that has been revised down to just 0.1 per cent as construction and capex both contracted in the first quarter.
Yet all evidence points to further signs inflation is running rampant – which is why this month’s central bank meeting could be a blast. Expectations are for the Bank of Canada, Bank of England, Reserve Bank of Australia and of course the US Federal Reserve to raise their respective cash rates. There is even sings that the ECB could join the party in the coming month or two something unthinkable even as little as 6 weeks ago.
The backdrop to this is the Bank of New Zealand has now raised its official interest rates to 2 per cent in the space of 9 months. To think 12 months ago it was considering negative rates. June is going to really define how the rest of 2022 plays out from a central bank differential trade perspective. Which banks are going to go harder? Which are front-loading and which are slow and steady?
FX around up
EUR/USD has snapped out of late and did finish the week at $1.0730 – the Fed helped this ruling out 75 basis points, but that could reverse fast.
GBP/USD at $1.2600 it to was helped by the Fed, but also the BoE showing some signs of unison
USD/JPY slipped to ¥126.55 last week did recover somewhat but is now ¥3 off its highs and the easing is on.
AUD/USD is now range bounce between $0.7057 to $0.7110 means we need to wait to 7 June and the RBA to understand direction.