THINK Ahead: Fed Chair Powell on the defence

United States

• Powell's testimony (Tues): The main event will be Federal Reserve Chair Jerome Powell’s semi-annual Monetary Policy testimony to Congress. In a highly partisan environment, he will face criticism from certain members of the Republican Party for not cutting interest rates, aligning with the views of President Trump. Instead, he will emphasise the importance of the Fed’s independence and that in uncertain economic and political times, it will be the data that determines the path forward for interest rates. We continue to think that clarity on the inflation story – whether tariffs are a one-off price shock or if they prompt more sustained inflation pressures – may not come before the December FOMC meeting, meaning we will see just one rate cut this year. However, if the jobs market continues to weaken, that may well be a 50bp cut.
• Core PCE deflator (Fri): In terms of the macro data, the Fed’s favoured measure of inflation – the core PCE deflator – is expected to come in at a relatively benign 0.1%MoM, but this is very much the calm before the storm, with tariff-induced price hikes expected to become visible from July.
• Housing data (Wed): There is a significant amount of housing data due to be published. We know that affordability is stretched whichever way you look at it – interest costs, monthly mortgage payments as a proportion of disposable income and simple house price to income ratios – given the 50% appreciation in property prices since the Covid-19 pandemic and the surge in mortgage rates from sub 3% to 7% today. At the same time, we are seeing inventory levels rise and homebuilder sentiment hit new cycle lows. This all points to weak sales and construction activity with the growing threat of outright price falls.

James Knightley

Eurozone

• Eurozone PMIs (Mon): Monday’s PMI data will provide more insight into the eurozone's performance in the second quarter. Growth in the first quarter was inflated by strong frontloading of exports to the US, which already shows signs of reversal when looking at April industrial production data. The underlying trend is better captured by the PMI survey data, which has shown manufacturers remaining upbeat about prospects in April, possibly related to the inventory cycle finally turning. The larger worry is around services, which has seen its PMI drop below 50. Given that the service sector is the largest part of the eurozone economy, this adds to growth concerns. The June PMI will shed light on how serious the downward trend in services is at the end of 2Q.
• NATO Summit (Tues/Wed): Another key event next week is the NATO Summit in The Hague, where discussions may advance a new defence spending target. A target of 5%, including 3.5% on core defence spending, has been floated ahead of the meeting. For many eurozone countries, this will provide significant budgetary challenges for the years ahead if enacted.

Bert Colijn

Czech Republic

• Core inflation (Wed): Both consumer and business confidence likely improved in June, the former driven by solid real wage growth and the latter by hopes of reviving demand in manufacturing across Europe. The Czech National Bank faces potent headline and core inflation, and the recent shock to global oil prices will only foster the hawkish stance, with rates remaining stable in June and likely beyond. The Statistical Office is expected to confirm the headline GDP figures in the refined estimate, while we expect revisions to its expenditure components, namely more potent household demand.

David Havrlant