Macroeconomics: The Day Ahead for 6 May

Markets continue to ride the US administration’s trade tariff roller-coaster with the latest moves on the film and pharma industries serving to undermine the likely misplaced optimism on the US striking trade deals in the near future with anything but relatively small economies (Taiwan is a small economy, despite its huge footprint in the semiconductor arena). The statistical schedule is modest with Asian and continental European Services PMIs to digest along with as expected French Industrial Production and a robust though largely seasonal fall in Spanish Unemployment, and little else ahead other than US and Canadian Trade. A smattering of central bank speakers (ECB/BoE), the rubber stamping of Merz as the new German Chancellor accompany the likely highlight of the day, the US EIA’s monthly Short-term Energy Outlook, which follows the OPEC+ production increase at the weekend, but will be of more interest for how it adjusts its US production outlook given the downward pressure on oil and gas prices. Another busy run of US corporate earnings will likely find its highlights in results from ADM, AMD, Constellation Energy, Duke Energy, Marathon Petroleum, Marriott, Mosaic and Peabody Energy.

Yesterday’s slightly better-than-expected rebound in the Services ISM and last Friday’s labour data should serve as a reminder that how the impact of tariffs on the US will show up in hard data will be anything but uniform, above all in timing terms. It also needs to be remembered that the positive impacts on the US economy from the IRA and the CHIPS acts will continue to accrue for at least a few months in terms of funding flows from the govt. Furthermore, employers in the US may not be enthusiastic about new hiring, but given their difficulties in finding suitably skilled labour, and the clampdown on immigration, they will be wary of rapidly paring staffing levels, except where the impact of tariffs is or has been pretty much immediate, as per the the example of UPS’ 20,000 layoffs. That is not to say there will not be serious impacts, but merely to highlight that the initial stages will be rather haphazard – another reason why the Fed, despite immense pressure from the administration, will stick with a reactive policy stance, though by the time of its mid-June meeting, it will likely have changed its tune. However, markets also need to understand that the current economic environment (i.e. in terms of the real, not the financial economy) is one in which monetary policy impacts will be heavily subordinate to fiscal and legislative, a stark contrast to the low interest rate and QE decade. While interest rates are having and will have an impact on the state of government budgets, it is still the stock of outstanding debt that matters far more than the cost of servicing it.

RECAP: The Week Ahead – Summary: 

This week’s run of data and events features the FOMC (no change) and BoE (25 bps rate cut) policy meetings, while a relatively light data schedule of data sees World Services PMIs/ISM, China Trade, German Orders, German & French Industrial Production & Trade, Japan’s Labour Cash Earnings & Household Spending, US Non-farm Productivity, Canadian labour data along with inflation data from Brazil, Mexico and Turkey, and Saturday sees the release of China’s CPI and PPI. Elsewhere rates are seen on hold in Norway & Sweden, a further 25 bps cut is expected in Czecia, and Poland’s NBP to resume rate cuts after a protracted pause with a 50 bps cut to 5.25%, while Brazil’s BCB COPOM is forecasts to hike rates a further 50 bps to 14.75%, while a major economic conference takes place in Iceland on Friday through Sunday. The commodity space looks to the US EIA’s Short-Term Energy Outlook (STEO), Canada’s Statscan monthly grains S&D report and Brazil’s monthly report on Coffee production, while Commodity Trading Week Europe takes place in London. On the trade tariff wars front, the US is talking up the possibility of trade deals being finalized, with a sharp rally in the TWD on Monday on speculation that Taiwan may be the first to the post, but at the same time as the US opens up a new front with the threat of a 100% tariff on non-US produced films, though details are very sketchy.