Written Commentary
Iran/USA negotiations still centre stage, but broader array of national and geopolitical tensions, AI related debt binge, supply chain disruptions make for complex mix of influences.
- Digesting UK CPI, German PPI, Samsung strike negotiations breakdown, larger than expected Indonesia rate hike, more details on China/US meeting; Nvidia results, central bank speakers, FOMC minutes ahead
- UK: larger than expected falls in headline, core and Services CPI buys time for MPC to consider impact of energy prices, weaker GBP; but opaque political outlook to continue to dominate sentiment
EVENTS PREVIEW
While the Persian Gulf conflict remains centre stage, today’s political news flow, events and statistics are a reminder of the complex interface that markets are facing. There are UK inflation data, German PPI, the US administration continuing to make ambivalent statement, some further details on what was agreed at the China/USA summit, a potentially imminent strike at Samsung Electronics, a larger than expected 50 bps rate hike in Indonesia to help prop up the Rupiah, and the US Senate move to curb Presidential powers to wage war with Iran (which faces steep hurdles to pass into legislation) to digest.
Ahead lie Nvidia’s much anticipated corporate earnings, Eurozone final CPI, various central bank speakers, the already rather historical April FOMC minutes, as well as further US retailer earnings from Lowe’s, Target and TJX. While the Nvidia results offers some context to AI euphoria, there is a gradual realization that the rise in bond yields due to energy price pressures and major supply chain disruptions will make the colossal debt binge by AI hyperscalers all the more challenging (given the risk of project cost blowouts), along with a more sanguine consideration of what the huge investments in AI will actually deliver in terms of ROI, cost savings, efficiencies and innovations.
** U.K. – April CPI **
The lowering of the household energy price cap accounted for the bulk of the larger than expected fall in April CPI to 2.8% from March’s 3.3%, with smaller contributions from Food (-0.08) and Recreation (-0.15), the latter in part due to Easter timing effects, with road fuel prices again the major, and indeed only major upward pressure point. In turn, this saw a dramatic fall in Services CPI to 3.2% y/y from 4.5%, and a more modest drop in core CPI 2.5% y/y from 3.1%. While the continued upward pressure from energy prices will exert upward pressure for the rest of the year, along with the political risk premium bearing down on the GBP, this still takes away a lot of the immediate pressure on the BoE to hike rates, though MPC hawks and doves are unlikely to shift their positions significantly. The Makerfield by-election will however, be the focal point in the near term, with the date still to be confirmed.
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