Originally published by AxiTrader
BACKGROUND
The past six months have been unique among the past nine years.
That's because the election of Donald Trump as US president, and the hope for reflation, combined with a lift in the performance of the flow of economic data in the US and across globe.
It was a coincidence of events and convergence of positives that changed the focus from central bankers who had hogged the limelight since rescuing the global economy from the depths of the financial crisis with scores of rate cuts and trillions of dollars of liquidity injections through quantitative easing.
It is this response from central banks, the slashing of interest rates to, and below, the zero bound along with the growth in central bank balance sheets which has been the key driver of markets - bonds, currency, and especially stocks.
It's no surprise that since the Fed was the first to undertake QE there has been a solid correlation between the expansion of these balance sheets - and the easy money that has been pumped into the global financial system - and the ebb and flow of the rally in US, and global, stock markets.
THE DECISIONS
The month kicks off with the RBA on Tuesday June 6, the ECB is next on the Calendar on June 8, before the FOMC decision on June 14 and the Bank of England on June 15.
All 4 meetings are important because all of them could see subtle - or distinct - shifts in the outlook for these banks.
The RBA
Australia's central bank meets Tuesday amid growing concerns in markets about the outlook for Australian growth across the rest of 2017 and into 2018.
Coming a day before the release of Australia's first quarter National Accounts the RBA board won't have the benefit of knowing how strong, or perhaps weak as many forecasters now predict, the economy was in Q1 2017.
Starting points are important. And the RBA was on the record numerous times in May
And the RBA was on the record numerous times in May with expectations that Australian growth would accelerate toward potential as the end of the mining boom drag and persistence of housing construction boom would combine with solid business conditions and employment growth - together with a lift in trading partner growth - to see Australian growth accelerate to potential around 3%.
That is now up for debate.
Expectations and Market Impact: The RBA is expected to remain on hold with a cash rate of 1.5%. There is little argument about that.
What will be important, and potentially market moving, is what RBA governor Phil Lowe says in his statement about the outlook for growth, consumption, housing, and employment. Equally important will be what he says about the Aussie dollar which is drifting lower and providing some stimulus.
The ECB
There is a battle raging between the hawks and the doves at the ECB over the future path of monetary policy across the EU.
The Bundesbank's president Jens Weidmann leads the Hawks who focus on the uptick in European data and wants changed communication about the rate of taper for the ECB's quantitative easing process.
But ECB president Mario Draghi leads a more dovish cabal of ECB policy makers who acknowledge that growth has picked up but who are equally cautious in the face of the reduction of inflationary pressure across the EU.
Expectations and Market Impact: Even amid this debate, the ECB is not expected to change the current ECB interest rate settings which remain at record lows.
Rather it is the conversation about the risks to the economy - which appear to have reduced - and the impact that would then have on the current bond buying program which runs at $60 billion euro a month, that will be the key focus. That's especially the case given that the victory by Emmanuel Macron in the French presidential election appears to have ended the existential threat to the EU project.
How Mario Draghi deals with that tension, and what he says about the outlook for growth, inflation and ECB QE will then drive European bond, stock, and foreign exchange levels.
The Fed
After raising rates once in December 2015 and again once in December 2016 the FOMC has raised rates once already in March this year. That hike was accompanied by economic projections which suggest that a total of 3 rate hikes was the most likely scenario across the course of 2017.
Current market pricing has the chance of a June rate hike at more than 90%. That's even after Friday's non-farm payrolls was so much weaker than expected. May's increase of 138,000 well undershot the markets 185,000 expectation while the deduction of 66,000 from the previous two months non-farm payrolls release added to the weak tone of the report.
But Fed speakers have recently been doubling down on expectations that June is "soon" and that another rate hike will follow later this year. Only Fed governor Lael Brainard and St Louis Fed president James Bullard have suggested the Fed could be one more and done.
Expectations and Market Impact: The latest read of the Citibank economic surprise index for the US printed -40.9 on Friday after non-farms and the bigger than expected trade deficit for April. That's the weakest read in this series since February 2016. And it would give the Fed ample cover to do as the minutes from the last FOMC meeting suggested and judge if the economic slowdown really is "transitory" as the Fed suggests.
But given the Fed is already in the lock-out period where members are not allowed to comment such a decision is unlikely as the market can't be pre-positioned or warned of such an outcome.
So the market is still pricing a 94% chance of a hike and it's what the FOMC statement accompanying their decision and then how Janet Yellen frames her press conference which is likely to impact markets. Already we are seeing the long end of the US bond curve rally flattening the curve as fixed income traders rethink the longer term outlook for the US economy. It's a similar situation with the US dollar.
The Fed is likely to try to retain calm, and posit that the US economy will recover from this flat spot. But any downgrading of the outlook would be acutely felt in bond and forex markets.
Bank of England
The UK economy has had somewhat of a wild ride since the Brexit vote a year ago on June 23. Data printed much stronger than forecast for many months running up to a high of 101.2 in February this year as the data easily and consistently eclipsed market forecasts.
That led many to question BoE governor Mark Carney, and his colleagues on the MPC, decision last August to drop the bank's policy rate to 0.25%. Indeed at the last two month's meetings, we have seen one dissent in favour of higher policy on the MPC by retiring member Kristin Forbes.
But with the data flow in the UK having collapsed in the past couple of months - the Citibank economic surprise index for the UK has fallen to -15.7 - there seems little chance the MPC will chance its stance or cautious outlook at this month's meeting.
Expectations and Market Impact: The election result is going to be an important input into the BoE's decision and the outlook for the economy in the months ahead. So to will the data flow between now and then. That said rates are likely to remain at 0.25%.
But what Mark Carney and his colleagues, and the almost simultaneous release of the MPC minutes, say about the outlook for the economy and interest rates will drive sterling and UK rates. At this early stage, before the election result, and a raft of data is released, it is more likely than not to remain cautious.