Introduction

Major data from China and the US were posted in the week and the results are mixed. Industrial production is mostly soft but there's definitely strengths to be highlighted on the consumer side. Yet there's very little strength anywhere right now for inflation which is the central reason why central bankers are seeing the need to support growth and lower rates no matter how low rates already are.

The Economy

Monetary policy

In terms of policy, there were no surprises in the Swiss National Bank's June announcement as the key deposit rate was held, as expected, at minus 0.75 percent. Crucially for the currency markets, the central bank also retained its assessment that the Swiss franc (CHF) is still "highly valued" and reiterated its willingness to intervene as and when necessary to prevent any further and unwanted appreciation. However, the monetary authority also signaled that the deposit rate, rather than the longstanding target corridor for 3-month CHF Libor (currently minus 1.25 percent to minus 0.25 percent), will now become the focal point for policy in future communications. The SNB will aim to keep the secured short-term Swiss franc average overnight money market rate (SARON), already establishing itself as the reference rate for financial products, close to its policy rate going forward. The switch, which is technical, reflects uncertainty over the future of Libor as the UK's Financial Conduct Authority will only ensure its continued existence through to the end of 2021.

Otherwise, the SNB's statement was much as expected. Following a solid first quarter performance, real Swiss GDP growth this year is still put at 1.5 percent but the new conditional inflation forecast is slightly higher than in March. This year's call has been raised from 0.3 percent to 0.6 percent and in 2020 from 0.6 percent to 0.7 percent. However, at 1.1 percent, the 2021 projection has been trimmed a tick so the longer-term outlook remains soft. As usual, the updated predictions assume that the SNB policy rate remains at minus 0.75 percent over the entire forecast horizon.

With its hands effectively tied by the strength of the currency, the only question about this week's announcement is whether the SNB might be prepared to push interest rates still deeper into negative territory. As it is, the fact that it opted to make no change should not be seen as ruling out such a move in the future. Current levels of the CHF must be close to the central bank's pain threshold and should global geopolitical conditions deteriorate and/or the European Central Bank opt to ease further over the coming months, the resulting upside pressure on the Swiss unit could leave the SNB with little choice but to cut rates further.

Industrial production

Currency valuation isn't the central topic right now in China, at least for now, but industrial slowing is. Chinese industrial production grew a disappointing 5.0 percent on the year in May, slowing from 5.4 percent in April and below expectations. This is the weakest growth since 2002 and suggests that trade tensions with the US are indeed having a significant impact on the manufacturing sector. The fall in headline growth was largely the result of similar slowing in manufacturing output, from 5.3 percent to 5.0 percent. Auto production fell 21.5 percent on the year in May after falling 15.8 percent in April. Utilities output also weakened, up 5.9 percent after increasing 9.5 percent previously, while growth in mining output (evoking questions over Chinese rare elements) picked up from 2.9 percent to 3.9 percent.

Industrial production in the US has also been slowing though May's report had more than a few positives, up a stronger-than-expected 0.4 percent at the headline level but up only a modest and as-expected 0.2 percent for manufacturing. The overall capacity utilization rate was a bit stronger than expectations, up 2 tenths to 78.1 percent. Utilities output, always subject to weather effects, made the difference for May, up 2.1 percent following a 3.1 percent swing lower in April. But mining production rose 0.1 percent and, like manufacturing, pulled down the headline. The lack of punch for manufacturing came despite a strong 2.4 percent rise in vehicle output that, however, followed prior sharp declines. The selected hi-tech subcomponent was also strong, up 0.4 percent in the month. Business equipment and construction supplies both posted modest 0.2 percent gains in May. Though mixed, this report should be taken at its headline face value, that is a 0.4 percent overall rise is respectable enough, and though manufacturing was soft the gains for vehicles and hi-tech are positive.

Industrial production in the Eurozone has yet to be released for May but April's results were posted in the week. Excluding construction, output was down a slightly steeper than expected 0.5 percent versus March when it declined a sharper revised 0.4 percent. Annual change improved from minus 0.7 percent to minus 0.4 percent as tracked in the graph. The latest monthly slide would have been even deeper but for a 1.4 percent bounce in energy. Output fell 1.0 percent in intermediates, 1.4 percent in capital goods and 1.7 percent in durable consumer goods. Non-durables edged up 0.2 percent but only dented March's 1.2 percent drop.  Regionally, the downturn was dominated by Germany where output slumped 2.3 percent. Among the other four larger states performances were mixed with France posting a 0.4 percent gain and Spain advancing 1.7 percent but Italy contracting 0.7 percent after a 1.0 percent March fall. April's setback puts Eurozone industrial production 0.7 percent below its average level in the first quarter when it expanded 0.9 percent versus October-December. Absent any revisions, even should output recover its April loss in May, June would still need a monthly increase of at least 1.2 percent to hold the current quarter flat. Chances are that the sector will pull down second quarter GDP growth, a development that would not sit well with an ECB that is already more than a little concerned about the health of manufacturing.

Retail sales

Considered a leading indicator for overall economic change, industrial production is traditionally given heightened stature among economic indicators. Not far back in importance is consumer spending data which offer the largest piece of the here and now and which in China have been visibly slowing the past couple of years, yet not so much in May. Chinese retail sales in May rose 8.6 percent on the year, picking up from 7.2 percent in April and above the consensus forecast for 8.3 percent. The increase was broad-based, with stronger growth posted in nine of thirteen categories. Sales of communication equipment increased 6.7 percent on the year, up from growth of 2.1 percent in April, while growth in sales of home appliances picked up from 3.2 percent to 5.8 percent. Auto sales also rebounded in May, up 2.1 percent on the year after falling 2.1 percent in April. Year-on-year growth in rural retail sales rose from 7.8 percent to 9.0 percent, while urban retail sales growth strengthened from 7.1 percent to 8.5 percent.

Sales growth has also been slowing in the US though, like China, May proved an exception. Fives are strong number and they're wild in the May retail sales report out the US that mostly beat expectations and included sharp upward revisions to April. May's 0.5 percent headline gain missed Econoday's consensus by 2 tenths but that's where the shortcomings stop. Ex-auto sales, ex-auto ex-gas sales, and control group sales all rose 0.5 percent and all beat their respective consensus forecasts by 1 tenth. April headline sales were revised upward (you guessed it) by 5 tenths to a 0.3 percent increase. Other readings were revised 5 to 4 tenths higher with the control group, which is an input into GDP, now at 0.4 percent in April to provide a second strong showing. Consistent strength is the description for general merchandise, a large component that includes department stores and which posted gains of 0.7 percent in May and 0.8 and 1.2 percent in April and March. Nonstore retailers, at 1.4 percent in May, have shown similar strength with restaurants, at May's 0.7 percent, also very solid in a sign of discretionary strength. Less consistent have been auto sales, though they did rise 0.7 percent in May, and also building materials which edged up in May by 0.1 percent but follow prior weakness.

The 0.5 and 0.4 percent back-to-back gains in May and April for the control group are a very positive indication for personal consumption expenditures and will be lifting second-quarter GDP estimates. Retail sales data had been jaggedly saw toothed since December's collapse though the latest report, and its big upward revision, levels the view to show a favorable consumer trend. For the Federal Reserve, May's results will ease the pressure at the coming FOMC to open the door to a near-term rate cut.

Inflation

Central bankers, however, are less sensitive right now to changes in demand than they are to changes in inflation, which have been very low and pose the risk that they may become alarmingly low. Provisional consumer prices in France were revised a little softer in the final look at May. A 0.1 percent monthly rise, a tick less than previously estimated, made for a 0.9 percent annual inflation rate, also 0.1 percentage point short of its flash print and now down 0.4 percentage points from final April. This equals the lowest rate of inflation since July 2017. Reflecting an unwinding of April's Easter boost, the yearly rate in services declined sharply from that month's 1.0 percent rise to 0.6 percent. Transport, where prices fell 4.5 percent on the month after the previous 5.9 percent spurt, had a significant negative impact as did clothing and footwear where the yearly rate dropped 0.5 percentage points to minus 0.7 percent. Among the traditionally more volatile categories, inflation in energy eased from 4.8 percent to 3.4 percent and in food from 2.5 percent to 2.3 percent. Even so, the core rate still decreased from 0.7 percent to just 0.5 percent and so fully unwound April's bounce. Stripping out calendar distortions leaves a subdued and fairly flat trend in underlying inflation in France, a picture mirrored across much of the rest of the Eurozone. Pressure on the ECB for more accommodative action continues to gradually build.

Price data for the Reserve Bank of India are of special note as the bank has already cut rates three times this year in an effort to lift inflation. India's wholesale price index increased by only 2.45 percent on the year in May, down from 3.07 percent in April. This is the lowest level since mid-2017. CPI data released earlier in the week showed a modest increase in headline consumer inflation from 2.99 percent in April to 3.05 percent in May, still well below the midpoint of the Reserve Bank of India's target range of 2.0 percent to 6.0 percent. The decline in WPI inflation in May was broad-based across major categories of spending. Prices of manufactured products, which account for around 2/3 of the index, rose 1.28 percent on the year in May, down from 1.72 percent in April, while the year-on-year change in fuel prices fell sharply from 3.84 percent to 0.98 percent. Food prices rose 6.99 percent on the year, moderating from an increase of 7.37 percent previously.

Price data out of the US were also weak including CPI data that showed slumping rates of 1.8 percent overall and 2.0 percent for the core. Import prices aren't helping the Fed keep inflation up, falling at an unexpectedly deep annual rate of 1.5 percent in May as tracked in the blue line of the graph. Non-petroleum imports offer a core reading for import prices and here the results are no better, at minus 1.4 percent on the year. Export prices are down 0.7 percent on the year with agricultural prices contracting at a yearly 5.3 percent. The reference period for the US import and export report is the first week of the month which was just before the US increased tariffs on $200 billion of Chinese imports. Import prices from China fell 0.1 percent in May with this reading in the next report for June certain to be a focus of attention. Yet tariff effects over the past year have been difficult to pinpoint in US data and future tariff effects are of course unknown, but cross-border inflationary pressures are, tariffs or not, unusually subdued and for now will encourage global efforts to stimulate economic growth.

We end the week's data run with a warning of sorts, an unusual drop where it hurts most. Long-term inflation expectations at the US consumer level are down very sharply this month, to 2.2 percent for a steep 4 tenths decline from May in the 5-year outlook and the lowest reading in 40 years of available data on this question. The year-ahead reading for inflation expectations is also down sizably, 3 tenths lower to 2.6 percent. These data are compiled by the University of Michigan but a separate report by the Atlanta Federal Reserve on inflation expectations at the business level show no erosion, holding in the June report at a modest but steady 2.0 percent. Nevertheless, the crack in the 5-year consumer outlook, though it belies the risk of inflationary effects from rising tariffs, is certain to raise the pitch of the rate-cut debate at the FOMC.

Markets: Trade warfare and the use of US Treasuries

Rising demand for US Treasuries has been one of the most outstanding features of this year's global financial markets, contrasting as it does with the still strong gains for global stocks. Money is flowing into both markets, not one at the expense of the other. An adversarial dichotomy also has yet to appear in Chinese holdings of US Treasuries which have only edged lower the past year to $1.121 trillion in the most recent data which are for March. Yet Chinese holdings did show a visible dip to the $1.050 billion area when President Trump was elected in 2016 and given the current escalation in trade tensions, holdings could conceivably begin to move back down. Lack of Chinese buying isn't tied to a lack of available supply as Treasury issuance has been on the rise, but it may reflect, apart from possible selling by monetary authorities, the declining amount of dollars that Chinese accounts are receiving in US trade. Less dollars in hand, less Treasuries to buy. In any case, the chance that Chinese holdings of US Treasuries will begin to rise back to their $1.300 trillion peak earlier in the recovery would not appear to be very great at all to say the least. And though total demand for Treasuries right now is very strong, Chinese demand is not likely to be among the reasons why. However much Chinese authorities will or will not use the value of the yen to counter US trade moves, they already have an important and available tool in their hands. The US Treasury will update the latest on Chinese holdings with the Treasury International Capital report early in the coming week.

The bottom line

China is slowing, global trade is narrowing, and central banks are increasingly shifting toward stimulus. And it's inflation, or the lack of it, that is a special focus for monetary policy makers at a time of limited policy flexibility, as illustrated by the zero to sub-zero rates at the ECB and SNB. Yet the US Federal Reserve, whose policy rate is a comparatively dynamic 2.375 percent, does have room to move lower which it may soon begin to do. The spin that Fed Chair Jerome Powell puts on the latest inflation data are likely to be the most important part of the coming week's FOMC meeting.

**Jeremy Hawkins and Brian Jackson contributed to this article

Week of June 17 to June 21

Monetary policy fills a busy week beginning with the Bank of Japan and the Federal Reserve on Wednesday followed on Thursday by the Bank of England. Though no policy changes are expected at any of these meetings, the Fed is expected to set expectations for a near-term rate cut perhaps as early as their next meeting in late July. The slowing rate of inflation is a global concern for policy makers with consumer price reports to be posted in the UK, Canada and Japan. PMI flashes for June will take Friday's focus especially the manufacturing index out of Germany which has been in sharp contraction. US housing, which has been turning higher this year, will also be in focus with housing starts and permits out on Tuesday and existing home sales on Friday.

Germany: ZEW Survey for June (Tue 05:00 EDT; Tue 09:00 GMT; Tue 11:00 CEST)

Current Conditions, Consensus: 7.0

Business Expectations, Consensus: -9.3

Analysts back in May were more upbeat about current conditions yet turned slightly pessimistic on expectations. For June, current conditions are expected to hold at 7.0 vs 8.2 in May with expectations seen at minus 9.3 vs May's minus 2.1.

Canadian Manufacturing Sales for April (Tue 08:30 EDT; Tue 12:30 GMT)

Consensus Forecast, Month-to-Month: 0.5% 

Canadian manufacturing sales proved very solid in March, rising a monthly 2.1 percent led by transportation equipment and including primary metals. Forecasters see April rising 0.5 percent.

US Housing Starts for May (Tue 08:30 EDT; Tue 12:30 GMT)

Consensus Forecast, Annualized Rate: 1.240 million

Consensus Range: 1.205 to 1.250 million

Building Permits

Consensus Forecast: 1.290 million

Consensus Range: 1.270 to 1.300 million

Steady is the forecast for housing starts and permits in May which in April beat expectations for one of the best housing reports so far this year. Starts are expected to come in at a 1.240 million annual pace vs April's 1.235 million. The consensus for permits is 1.290 million which would be unchanged from April (revised from an initial 1.296 million).

Japanese Merchandise Trade for May (Tue 19:50 EDT, Tue 23:50 GMT; Wed 08:50 JST)

Consensus Forecast: -Y1,135 billion

Consensus Forecast: Exports Year-over-Year: -8.1%

Consensus Forecast: Imports Year-over-Year: 1.7%

A deficit of Y1,135 billion is expected for the May merchandise trade report vs what was a much lower-than-expected surplus of Y60.4 billion in April. Exports fell a sharp 2.4 percent year-on-year in April and are expected to fall an even sharper 8.1 percent in May while imports, which surged 6.4 percent in April, are expected to rise 1.7 percent.

Bank of Japan Announcement (no specific time Wed EDT; Wed GMT; Thu JST)

Change, Consensus: 0 bp

Level, Consensus: -0.1%

No change is expected for the Bank of Japan's announcement with the short-term policy rate for excess reserves remaining at minus 0.1 percent and the target level for the long-term 10-year yield at around zero percent. At its last announcement in April, the BoJ said that it would "persistently continue with powerful monetary easing".

UK Consumer Price Index for May (Wed 04:30 EDT; Wed 08:30 GMT; Wed 09:30 BST)

Consensus Forecast, Month-to-Month: 0.3%

Consensus Forecast, Year-over-Year: 2.0%

The CPI is expected to rise 0.3 percent month-on-month in May and 2.0 percent year-on-year. This would compare with a monthly and Easter-related 0.6 percent jump in April and a 2.1 percent yearly rate. For the Bank of England, inflation is roughly where it should be and is showing no obvious sign of any near-term divergence.

Canadian Consumer Price Index for May (Wed 08:30 EDT; Wed 12:30 GMT)

Consensus Forecast, Month-to-Month: 0.2%

Consensus Forecast, Year-over-Year: 2.2%

May consumer prices are expected at a monthly 0.2 percent gain for a yearly 2.2 percent rate. The CPI in April proved slightly higher than expected, at 0.4 percent monthly and 2.0 percent yearly gains.

US Federal Funds Target for June 18 & June 19 Meeting (Wed 14:00 EDT; Wed 18:00 GMT)

Consensus Forecast, Midpoint: 2.375%

Though no change is expected for the federal funds target rate of 2.375 percent in the June policy announcement, but expectations are building that the FOMC will signal a shift to rate cuts in subsequent meeting.

UK Retail Sales for May (Thu 04:30 EDT; Thu 08:30 GMT; Thu 09:30 BST)

Consensus Forecast, Month-to-Month: -0.5%

Retail sales have been trending higher but a 0.5 percent decline is the consensus call for May.

Bank of England Announcement (Thu 07:00 EDT; Thu 11:00 GMT; Thu 12:00 BST)

Consensus: Bank Rate: 0.75%

Consensus: asset purchase level: £435 billion

No change is once again the expectation for Bank of England monetary policy which, despite a standing bias toward tightening, is locked in place by not only the Brexit dilemma but also by general slowing in the global economy. Bank Rate is expected to stay at 0.75 percent and the QE ceiling at £435 billion.

Japanese Consumer Price Index for May (Thu 19:30 EDT; Thu 23:30 GMT; Fri 08:30 JST)

Consensus Forecast Ex-Food, Year-on-Year: 0.8%

No change at a still subdued year-on-year 0.8 percent pace is the call for ex-food consumer prices in May, well below the Bank of Japan's 2 percent target.

German PMI Flashes for June (Fri 03:30 EDT; Fri 07:30 GMT; Fri 09:30 CEST)

Manufacturing Consensus: 44.6

Services Consensus: 55.4

The manufacturing PMI, which has been mired in the mid-40s range, will be the major headline from Germany's PMI flash report for June, and forecasters aren't showing much optimism with the consensus at 44.6. In contrast, the services PMI is seen at a very solid 55.4.

Eurozone PMI Composite Flash for June (Fri 04:00 EDT; Fri 08:00 GMT; Fri 10:00 CEST)

Composite Consensus: 52.0

Manufacturing Consensus: 47.9

Services Consensus: 53.0

Forecasters see June's PMI composite flash for the Eurozone rising slightly to 52.0 vs 51.8 in May. The consensus for the manufacturing PMI is 47.9 with the consensus for the services PMI at 53.0.

US Existing Home Sales for May (Fri 10:00 EDT; Fri 14:00 GMT)

Consensus Forecast, Annualized Rate: 5.290 million

Consensus Range: 5.200 to 5.470 million

Existing home sales have been uneven this year though the 3-month average in the last report for April was still strongly positive as were gains in supply and firmness in prices. Existing home sales in May are expected to rise sharply to a 5.290 million rate vs April's 5.190 million.