The Week Ahead

By Ronald Temple, Chief Market Strategist at Lazard

Headline US retail sales are expected to slip, but the less volatile control group is expected to rise.

The outlook: Despite abysmal readings of consumer confidence from sentiment surveys such as the University of Michigan Sentiment Index, retail sales have continued to grow by about 5% y-o-y. The control group, which excludes food services, gas stations, autos, and building materials, is a less erratic series which has also delivered relatively consistent growth despite volatile sentiment.

I expect retail sales growth to remain resilient until price increases caused by tariffs become more apparent and/or employment begins to weaken due to companies trying to identify cost cuts to offset tariff price pressures. That should translate to a relatively good set of numbers next week for the control group. Headline retail sales, on the other hand, are likely to be weaker as the prior month’s figure was inflated by front-loaded auto purchases to avoid tariffs

The FOMC is likely to hold rates constant.

The outlook: Markets have priced a 0% probability of a rate change at next week’s FOMC meeting with two 25-basis point (bps) rate cuts expected by year end. I continue to expect no rate cuts in 2025 as inflation reaccelerates due to tariffs and subsequently on the back of increased numbers of deportations.

Investors will carefully examine the Summary of Economic Projections (SEP) for signs of potential policy easing with the dot plot and macro forecasts being focal points. I expect another shift in the dot plot toward fewer rate cuts. In March, when the last SEP was provided, the median expectation was for two rate cuts by year end. The distribution of participant expectations for rate cuts was four for policy staying constant, four for one easing, nine for two cuts, and two for three reductions. In this SEP, I expect the distribution to shift toward fewer cuts even if the median remains a forecast for 50 bps of easing.

China’s monthly economic data are likely to reflect sluggish underlying growth.

The outlook: The May economic data from China are likely to show some of the stress created by US tariffs that exceeded 105% until negotiations in Geneva led the United States and China to back away from their most punitive trade measures. I expect domestic retail sales to remain lethargic relative to levels of growth enjoyed in the past while property investment continues to contract meaningfully on a y-o-y basis.

Absent major structural changes to the Chinese economy, I expect continued weakness as consumers grapple with significant loss of wealth from residential real estate, and as confidence is dampened by increased trade tensions with the United States and other trade counterparts.

The BoJ is likely to hold rates constant.

The outlook: Although headline inflation in Japan has been well above the BoJ’s 2% target, a rate hike is unlikely at next week’s meeting. Government measures to reduce rice and energy inflation should reassure the BoJ that inflation will be kept under control while also remaining near 2%.

The BoJ is also scheduled to provide an update on its tapering of quantitative easing. About a year ago, the BoJ announced it would reduce its purchases of Japanese Government Bonds (JGBs) by about JPY400 billion per quarter from a run rate of JPY5.7 trillion per year in July 2024 to JPY3 trillion by March 2026. Investors will be eager to see if the pace of taper is adjusted at this meeting with some advocating a slower pace of tapering to reduce the risk of JGB volatility while others advocate a faster pace to allow markets to function without as much interference from the BoJ.

While I am optimistic that Japan will be able to sustain its inflation normalization trajectory, I do not believe the BoJ has the latitude yet to further tighten monetary policy. Hence, I expect no 2025 rate hikes from the BoJ in contrast with market pricing of ~15 bps of policy tightening by year end.

Japan’s CPI inflation is expected to remain relatively stable well above the 2% target.

The outlook: Food prices, particularly for rice, could have a disproportionate impact on Japanese headline inflation in the months ahead with government measures to reduce consumer prices having a mitigating effect on inflationary pressure. Rice accounts for only 0.6% of the CPI basket, but prices have increased 98.4% from a year ago adding 61 bps to headline CPI and leading the government to announce releases of rice from emergency stockpiles with a goal of cutting prices in half. Energy subsidies have also resumed this summer. In April, electricity, which only accounts for 3.4% of the CPI basket, contributed 46 bps to inflation on the back of a 13.5% y-o-y price increase. A stronger yen is also likely to reduce import prices. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

The BoE is likely to hold rates constant.

The outlook: Markets are pricing less than a 10% chance of a rate cut from the BoE Monetary Policy Meeting next week. By year end, market prices suggest 53 bps of easing. The BoE will be responding to conflicting economic signals including a weaker-than-expected April GDP reading and sluggish employment metrics while at the same time grappling with surprisingly high inflation. Observers generally expect the BoE to shift to cutting rates at every other meeting with the 19 June meeting offering no policy change.

UK CPI inflation will be reported on 18 June.

The outlook: While no consensus expectation is yet available on Bloomberg, after the unexpectedly large increase in y-o-y inflation in April, investors will be looking for signs of subsiding price pressures. In April, a confluence of factors led to a surge in inflation with all metrics exceeding expectations. Most worrisome to some was the upside surprise in services inflation which rose 5.4% y-o-y versus the consensus expectation for a 4.8% increase and the March increase of 4.7%.

As a reminder, in April, UK inflation was exacerbated by a large increase in airline fares (+27.5% m‑o‑m and water and sewerage services (+26.1% m-o-m). Such large increases are highly unlikely to be repeated which should mitigate the upside in the m-o-m headline and y-o-y services inflation figures.

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