Introduction

Mario Draghi fired the week's first rate-cut shot on Tuesday, saying that stimulus would be needed "in the absence of improvement" and that the European Central Bank would consider easing "in coming weeks". This points to action as early as the bank's July 25 policy meeting, with either a shift to an accommodative bias or actual easing such as rate cuts or new quantitative easing. And for the Federal Reserve, whose June meeting followed on Wednesday, the US economy is no longer in the "good place" it was in the early spring. Jerome Powell confirmed the general strength of the US economy but conceded that risks to the outlook are building and the case for new accommodation has risen. These signals mark the biggest policy reversals for both of these banks of the economic cycle.

The Economy

Monetary Policy

Slowing economic growth and lack of price pressures – all against a backdrop of rising uncertainties – set the stage for a Federal Reserve policy statement that pointed squarely at rate cuts in coming meetings. For now the Fed kept its target rate unchanged at a range of 2.25 to 2.50 percent with an implied midpoint of 2.375 percent. But in the accompanying statement officials removed the word "patient" when referring to policy and warned that uncertainties over the outlook had "increased". Policy makers still saw inflation holding near their 2 percent objective though they noted that inflation compensation (the price investors pay for inflation protected securities) was "declining". Economic activity was downgraded from "solid" to "moderate" though the labor market remained "strong" according to the statement.  Household spending was described as "picking up" but business spending, characterized at the last meeting six weeks ago as slowing, was moved down to "soft".

Powell focused on business spending in his press conference, citing weakening trends in global business sentiment, in global manufacturing and also cross-border trade. The assessment of the board, as articulated by Powell, was that the risk of less favorable outcomes had increased. Eight of the 15 FOMC members agreed that the future path of the Fed funds policy rate was more likely than not to be lower, a view punctuated by the first dissent among the committee's voters (9 to 1) in Jerome Powell's tenure which began early last year.

The Fed took no action on its quantitative tightening path (which is due to conclude in October), though Powell did confirm that, should the Fed begin to increase policy stimulus, balance-sheet strategy could be changed to conform with the Fed's needs. Powell would not take questions on the value of the dollar repeating that currency issues are the responsibility of the White House. When asked about the possibility he could be demoted by President Trump, Powell said the law is clear, that he has a 4-year term which he fully intends to serve out.

As widely anticipated, the Bank of England once again left Bank Rate at 0.75 percent and the QE ceiling at £445 billion (£435 billion gilts). Unlike the Fed, this vote was indeed unanimous at 9-0. Importantly too the BoE retained its tightening bias which, however, assumes there is a smooth Brexit, the chances for which they conceded have fallen. In fact, with uncertainty about Brexit now compounded by the race for the next UK Prime Minister, the policy options open at this month's deliberations were even slimmer than at the time of the last meeting in May.

Members thought underlying growth had weakened slightly in the first half of the year and was running a little below its potential. The forecast for second-quarter GDP growth was shaved from 0.2 percent to 0.0 percent, as relatively strong gains in household consumption continue to be offset by weak business investment. Yet the labour market remains tight and recent data on employment, unemployment and regular pay were judged to be in line with expectations contained in the May Quarterly Inflation Report.

In sum, as far as the BoE is concerned, not a lot has changed since the last set of discussions. Come the next policy meeting in August, at least the new occupant of No. 10 should be safely installed but the outlook for Brexit is likely to be as uncertain as ever. As such, it would be no surprise if no change will be repeated then as well.

The Bank of Japan left its monetary policy settings unchanged at this month's meeting. As it has since early 2016, the BoJ's short-term policy rate for excess reserves remained at minus 0.1 percent while the target level for the long-term 10-year yield remains at around zero percent. Officials' assessment remains that the economy is "expanding moderately" and they expect this to continue. In his post-meeting press conference, BoJ Governor Haruhiko Kuroda noted that officials do not believe additional policy stimulus is necessary at present but stressed that they would act "without hesitation" if required. Kuroda argued that officials have a range of policy options available to them, including lowering short-term rates, lowering long-term rates, and expanding asset purchases. Officials reaffirmed their commitment to keeping policy accommodative until inflation is above their 2.0 percent target and stays there "in a stable manner". In line with previous comments, they consider that policy rates will need to remain at "extremely low" levels at least until early 2020.

Inflation

Yet 2.0 percent inflation for Japan may still be wishful thinking. Japanese data showed a small dip in both headline and underlying measures of consumer inflation in May, providing more evidence that reaching the BoJ's target remains a slow process. The headline consumer price index rose 0.7 percent year-on-year in May after advancing 0.9 percent in April and was flat on the month after increasing 0.1 percent previously. Weakness in May was largely driven by utilities charges, up 3.2 percent on the year after rising 4.4 percent previously, and transportation and communication costs, down 0.4 percent after dropping 0.2 percent. The year-on-year change in food prices picked up slightly from 0.7 percent to 0.8 percent while the year-on-year increase in housing costs was steady at 0.1 percent. Core CPI, which excludes fresh food prices, rose 0.8 percent on the year in May, down from 0.9 percent in April, and fell 0.1 percent on the month after rising 0.1 percent previously. The Bank of Japan's preferred measure of underlying inflation, CPI excluding fresh food and energy prices, increased 0.5 percent on the year in May, down from 0.6 percent in April, and also fell 0.1 percent on the month after April's 0.1 percent rise.

International Trade

Japan's merchandise trade balance shifted from a surplus of Y56.8 billion in April to a deficit of Y967.1 billion in May. Exports, as tracked in the graph, fell 7.8 percent on the year in May after dropping 2.4 percent in April. The deeper year-on-year decline in Japan's exports was broad-based across major trading partners and was broadly in line with not only the prior week's Chinese data but also Singaporean data that also indicated trade flows were subdued in May. Japanese exports to China fell a yearly 9.7 percent in May after dropping 6.3 percent in April, with year-on-year growth in exports to the US slowing from 9.6 percent to 3.3 percent and exports to the European Union dropping 7.1 percent after falling 2.6 percent in April. Exports to most Asian economies also fell on the year in May.

Imports tell the same story with year-on-year growth weakening from an increase of 6.5 percent to a fall of 1.5 percent. Weaker import growth in May was also broad-based across most categories. The value of petroleum imports did increase 10.6 percent on the year in May after rising 13.8 percent in April, but imports of chemicals fell 10.5 percent after increasing 1.5 percent previously. Imports of food, manufactured products, electrical machinery, machinery, and transport equipment also recorded weaker year-on-year growth in May.

Singapore trade data for May also showed troubles for both exports and imports. Singapore's non-oil domestic exports fell 15.9 percent year-on-year in May after falling 10.0 percent in April. Total imports fell 0.5 percent on the year after advancing 7.6 percent in April. Weaker non-oil export growth in May was largely driven by a sharper drop in electronics exports, down 31.4 percent on the year after contracting 16.3 percent in April. Non-electronics exports also weakened, down 10.8 percent on the year after April's 8.0 percent drop. Export growth weakened for seven of Singapore's top ten trading partners in May. Exports to China fell 23.3 percent on the year in May after a decline of 5.9 percent in April, while year-on-year growth in exports to the US slowed from 2.2 percent to 0.2 percent. Exports to the EU fell 10.0 percent on the year after dropping 25.4 percent previously.

Composite activity

A heavy run of June flash readings in the week were on balance slightly positive, showing perhaps less moderation than in May. Eurozone business activity was just marginally firmer than expected in June but still too soft for comfort. At 52.1, the flash composite output index did hit a 7-month high but was up only 0.3 points versus May. The gain was mainly due to an improved performance by the service sector where the flash PMI climbed 0.5 points to 53.4, also a 7-month peak. But the manufacturing counterpart managed only a 0.1 point gain to 47.8 and so remained stuck in recession territory.

Aggregate new orders showed a modest advance despite another fall in manufacturing but a rise in services was not enough to prevent a fresh decline in combined backlogs, their fourth decrease in a row. Still, employment continued to expand modestly as manufacturing was broadly unchanged while services registered sustained growth. Nonetheless, business confidence deteriorated in both sectors and, combined, hit its lowest level since October 2014. Similarly in the US edition of this report also released in the week confidence was the weakest in 7 years of available data on this question. And like Europe, inflation readings in the US moderated with selling prices posting their smallest increase since November 2016.

Regionally in Europe, France (52.9 after 51.2) picked up some momentum but Germany in June (52.6) was only unchanged. For the rest, activity levels declined to the weakest point since November 2013, with services running at 5-1/2 year lows and manufacturing output falling for the first time in six years. For the ECB, there is little in this report to revive confidence that its current policy stance will return inflation back to target. Price pressures would seem to be diminishing and economic growth is not accelerating. A fresh round of policy accommodation, as suggested by Mario Draghi, is probably not very far away.

Manufacturing

The composite index for Germany of 52.6 was in line with market expectations yet manufacturing continued to contract with this flash PMI at 45.4. Though this is up about a point, the level remains substantially short of the 50-breakeven mark. The offset, as it has especially been in Germany, has been services which at 55.6 expanded at a marginally faster rate than in May. But doldrums is the monotonous theme for German manufacturing with output contracting along with new orders and backlogs as well. Not surprisingly, inflationary pressures eased as manufacturers' costs fell at their sharpest pace since April 2016. German growth is still very lopsided and wholly dependent on services. Overall, the picture remains disappointingly soft.

The PMIs in the US are a relatively recent addition to the economic calendar and are still upstaged by long standing regional reports including two that are clearly showing sudden cracks. Whether tariff effects are to blame is uncertain but the Empire State report (produced by the New York Fed) has suddenly shifted deep into the negative column. At minus 8.6, June's index was far below Econoday's consensus range and the worst showing since October 2016. The monthly change, at minus 26.4, was the steepest fall on record in data going back to 2001. New orders came in at a 3-year low of minus 12.0 with this monthly change at negative 21.7 for their steepest single-month downswing in nearly nine years. Unfilled orders fell 17.9 points to minus 15.8 with employment also in the negative column at minus 3.5. Shipments are still moving out the door, at plus 9.7 this month but down 6.6 points from May. Inflation readings were mixed with input pressures remaining elevated but selling prices easing noticeably.

Weakness was also apparent in the Philadelphia Fed manufacturing index which likewise came in below Econoday's consensus range at only 0.3 for a 16.3 point decline from May. Input costs slowed very sharply with selling prices slowing even more so, down nearly 17 points to only 0.6 and pointing to the emerging risk of price discounting. Respondent commentary isn't included in either of these reports but tariff actions and tariff threats are the likely culprit. Note that additional US tariffs were levied against $200 billion of Chinese imports in May with additional tariffs on $300 billion of other Chinese imports possibly moving higher at the beginning of next month.

Housing

The Reserve Bank of Australia released minutes of its meeting earlier this month when it cut its policy rate to a new record low. Yet not a central concern for policy makers was the falling trend in home prices. Australia's residential property price index fell 3.0 percent in the first quarter after falling 2.4 percent in the fourth quarter. This is the fifth consecutive drop in house prices. Year-on-year change in the index, as seen in the graph, deepened from 5.1 percent contraction to a decline of 7.4 percent. Weakness in the headline index was again largely driven by significant price falls in the two largest cities, Sydney and Melbourne. Sydney house prices fell for the seventh consecutive quarter, down 3.9 percent on the quarter after falling 3.7 percent previously, with prices there now down 10.3 percent on the year. Melbourne house prices fell 3.8 percent on the quarter after dropping 2.4 percent previously with prices 9.4 percent lower on the year. Weakness in housing, especially outright price declines, can be a symptom of deeper troubles (including for the banking sector) though RBA officials have been describing recent weakness as no more than a "process of adjustment".

Housing in the US came off a poor year in 2018 and, helped by more and more favorable mortgage rates, has been moving higher in uneven steps so far this year. Existing home sales in May came in on the strong side of expectations at a 2.5 percent monthly gain but the details are less strong than the headline. The month's 5.340 million annual sales rate was well short of February's 5.480 million and 1.1 percent under the 5.400 million pace in May last year. The 3-month average, which helps smooth out bumps that are typical in US housing data, was down 0.9 percent at 5.253 million (as tracked in the blue line of the graph). But May's results were still a relief especially a 4.0 percent monthly jump in the median price to $277,700 for year-on-year growth of 4.8 percent. Another positive was a strong and very welcome 4.9 percent rise in the number of resales on the market, to 1.920 million. New home sales have been doing better than resales in the US (climbing toward a 700,000 rate as tracked in graph's the green line) but both are climbing for a 2019 housing year that looks to get an increasing lift from lower mortgage rates which, for conventional 30-year fixed loans, have fallen nearly 10 basis points this month alone to an average 4.14 percent.

Markets: Rate-cut promise makes the difference for stocks

Global shares posted solid gains in the week, boosted first by Draghi's comments on Tuesday pointing to a possible ECB rate cut that was followed on Wednesday by the Fed's shift away from a neutral to an accommodative bias. Both news events fell after Asia was closed but gains the following day (as seen in the red columns of the graph) show the effect. The Shanghai rose 3.6 percent in the week for a year-to-date gain of 19.8 percent. Germany's Dax rose 2.0 percent in the week for a 16.9 percent 2019 gain while the Dow isn't far behind, gaining 2.4 percent on the week and up 14.5 percent on the year. And the gains for stocks are not coming at the expense of bonds where demand also rose in the week, a contrast indicating that at least some investors continue to seek safety. The yield on the US 10-year Treasury yield fell 3 basis points in the week to 2.06 percent after briefly trading under 2 percent. One victim in the week was the dollar which didn't benefit from the Fed rate-cut move. The dollar index fell 1.3 percent in the week to push the index into the negative column for the year, now at minus 0.7 percent.

The bottom line

However uncertain the US-China trade outcome may be, neither the Fed nor the ECB are likely to take tangible action unless economic data over the next several weeks show unmistakable erosion. And though manufacturing indications are clearly soft, a bounce back for the sector can't be ruled out given, if nothing else, easy comparisons with prior weakness. And a jump back in payroll growth in June, for instance, could quickly water down expectations for a rate cut at the Fed's July meeting. But the physical impact of ongoing tariff actions is clearly affecting global trade especially in Asia and is showing early effects in US data as well, if not on output then at least on the outlook for output including the Fed's own expectations.

**Jeremy Hawkins and Brian Jackson contributed to this article

Week of June 24 to June 28

The coming week is dominated by US economic data especially durable goods orders on Wednesday and PCE price readings on Friday, two reports that have not been meeting Federal Reserve expectations. The week opens on Monday with Germany's Ifo survey of business confidence followed on Tuesday with the business climate indicator out of France. Both of these reports are fighting multi-year lows. New home sales will be posted on Tuesday for a US housing sector that has been trending higher. Consumer confidence in the US has been holding firm and will also be updated Tuesday. The key to Wednesday's US durable goods report will be core capital goods orders which have been slowing noticeably and which drew the attention of Jerome Powell at June's FOMC press conference. Forecasters here aren't calling for much strength nor are they for Friday's key US inflation readings with both total year-on-year PCE prices and most importantly the core expected to slump further. Japanese industrial production and retail sales data as well as the KOF leading indicator out of Switzerland will be released earlier Friday.

German Ifo Survey for June (Mon 04:00 EDT; Mon 08:00 GMT; Mon 10:00 CEST)

Consensus Forecast: 97.5

The consensus for Germany's Ifo survey of business confidence is 97.5 in June vs what was at the time a surprisingly low 97.9 in May and the weakest showing since November 2014.

French Business Climate Indicator for June (Tue 02:45 EDT; Tue 06:45 GMT; Tue 08:45 CEST)

Consensus Forecast: 106

After a 4-year low in April at 101, the business climate indicator improved to 104 in May with a gain to 106 the call for June.

US New Home Sales for May (Tue 10:00 EDT; Tue 14:00 GMT)

Consensus Forecast, Annualized Rate: 680,000

Consensus Range: 649,000 to 710,000

Driven by low mortgage rates, new home sales have a been a major positive of the 2019 economy with the last report for April showing a very sharp rise in prices as did last week's report on existing home sales in May. Modest acceleration is the sales expectation for May new home sales where Econoday's consensus is at 680,000 vs 673,000 in April.

US Consumer Confidence Index for June (Tue 10:00 EDT; Tue 14:00 GMT)

Consensus Forecast: 132.0

Consensus Range: 129.5 to 135.0

The consumer confidence index jumped to a stronger-than-expected 134.1 in May reflecting what was a robust assessment of the labor market which, however, did not prove to be in line with May's very soft employment report. For June, forecasters are looking for a slight dip in confidence to 132.0.

US Durable Goods Orders for May (Wed 08:30 EDT; Wed 12:30 GMT)

Consensus Forecast, Month-to-Month Change: 0.0%

Consensus Range: -4.8% to 0.6%

Durable Goods Orders, Ex-Transportation

Consensus Forecast: 0.1%

Consensus Range: -0.2% to 0.2%

Core Capital Goods Orders (Nondefense Ex-Aircraft)

Consensus Forecast: 0.2%

Consensus Range: 0.1% to 0.5%

Forecasters see durable goods orders unchanged in May following a very weak April where total orders fell 2.1 percent. The great weakness of April's report was a 1.0 percent decline in core capital goods orders (revised from 0.9 percent) which are expected to rebound but only modestly, by 0.2 percent in May. For ex-transportation orders, a 0.1 percent increase is expected. Boeing aircraft remain a wild card in this report reflected in low end expectations for the headline.

US International Trade In Goods for May (Wed 08:30 EDT; Wed 12:30 GMT)

Consensus Forecast, Month-to-Month Change: -$71.9 billion

Consensus Range: -$74.0 to -$70.0 billion

Forecasters see widening for the May goods trade gap to $71.9 billion from $70.9 billion in April (revised from an initial $72.1 billion). Exports have been declining but so have imports.

Eurozone: EC Economic Sentiment for May (Thu 05:00 EDT; Thu 09:00 GMT; Thu 11:00 CEST)

Consensus Forecast, Economic Sentiment: 104.7

The European Commission's economic sentiment index has fallen for ten months in a row, losing 1.6 points in April to what was a lower-than-expected and broadly weak 104.0. For May, the consensus is for partial bounce back to 104.7.

Japanese Industrial Production for May (Thu 19:50 EDT; Thu 23:50 GMT: Fri 08:50 JST)

Consensus Forecast: 0.3%

Industrial production is expected to rise 0.3 percent in May following a 0.6 percent gain in April that reflected strength for vehicles, production machinery and transport equipment. Year-on-year, output was down 1.1 percent in April.

Japanese Retail Sales for May (Thu 19:50 EDT; Thu 23:50 GMT: Fri 08:50 JST)

Consensus Forecast, Year-over-Year: 1.2%

Retail sales are expected to improve to year-on-year growth of 1.2 percent in May after missing expectations with only a 0.5 percent rate of growth in April. Sales of motor vehicles dropped sharply in the last report.

Switzerland: KOF Swiss Leading Indicator for May (Fri 03:00 EDT; Fri 07:00 GMT; Fri 09:00 CEST)

Consensus Forecast: 94.9%

The KOF Swiss leading indicator is expected to rise to 94.9 percent in June after, in what was a second straight month of disappointment, falling 1.8 percentage points to 94.4 percent in May. Conditions deteriorated for banking & insurance, consumption and foreign demand.

US Personal Income for May (Fri 08:30 EDT; Fri 12:30 GMT)

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.1% to 0.4%

Consumer Spending

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.2% to 0.5%

PCE Price Index, Month-to-Month Change

Consensus Forecast: 0.1%

Consensus Range: 0.1% to 0.2%

PCE Price Index, Year-on-Year Change

Consensus Forecast: 1.4%

Consensus Range: 1.4% to 1.5%

Core PCE Price Index, Month-to-Month Change

Consensus Forecast: 0.1%

Consensus Range: 0.1% to 0.1%

Core PCE Price Index, Year-on-Year Change

Consensus Forecast: 1.5%

Consensus Range: 1.5% to 1.6%

Consumer spending slowed in April but slightly better strength at 0.4 percent is expected in May. Personal income is expected to rise 0.3 percent vs April's 0.5 percent increase. Price readings in this report have been subdued and are expected to slump in May with the core PCE index seen at plus 0.1 percent for the monthly rate and slipping further to 1.5 percent year-on-year. The overall PCE index is seen at a monthly 0.1 percent with the on-year at 1.4 percent.