Written Commentary
USA/Iran negotiations outcome still ambiguous; busy run of data to end the week ahead of long weekend in many parts of the world; digesting UK Retail Sales & PSNB, German/UK Consumer Confidence, German Ifo & Q1 GDP details, Ifo Business Climate; awaiting Canada Retail Sales, US final Michigan Sentiment and Mexico CPI; Fed’s Waller tops run of central bank speakers.
- U.K.: demand destruction on full display as slide in road fuel sales drives Retail Sales lower, some drag likely on core from Easter timing effects
- Germany: rebound in business and consumer confidence still leaves both in recessionary territory; GDP details highlight reliance on exports, woeful Private CapEx
- Japan: larger than expected CPI fall wholly due to slide in education fees, underlying inflation still points to BoJ being behind the curve
- FX: increasing number of EM central banks being forced into rate hikes to combat energy related currency weakness
EVENTS PREVIEW
The final day of the week has a reasonably busy run of data and central bank speakers. But with a long weekend in many parts of the world given that Monday is variously Whit Monday, Spring Bank Holiday, Memorial Day, Buddha’s Birthday, Africa Day or Eid Al Adha (the latter running throughout the week in many Islamic countries), and the White House’s unspecified deadline for Iran to respond to the latest US proposals, trading may be choppy and focussed on taking risk off the table given that event risk. There are Japan’s National CPI, UK and German GfK Consumer Confidence, UK Retail Sales and PSNB, and French Business Confidence to digest, while ahead lie Germany’s Ifo Business Climate, Eurozone Q1 Negotiated Wages, Mexico’s mid-month CPI and US final Michigan Sentiment. Fed’s Waller speaks on the economic outlook, of particular interest to see if he sticks with his persistently dovish stance on rates, which now looks very out of step with incoming data, and the array of inflation pressures, and there are a number of ECB speakers. This week has also seen more evidence of EM central banks having to hike rates to support local currencies under pressure from energy prices, as per Indonesia with an outsized 50 bps rate hike, and 25 bps hikes from Iceland and Mauritius, the Philippines central bank governor today mooting another 25 bps unscheduled (i.e. not a regular policy meeting) hike, while Turkey’s TCMB may well be forced to raise rates back to 40% due to the latest political developments, while India’s RBI continues to resist the idea of rate hikes to defend the INR.
From the run of overnight news, the 1.3% m/m slide in UK Retail Sales was paced by a 10% fall in auto fuel sales in a classic example of demand destruction, and some contagion into non-energy areas with an ex-Auto Fuel all of -0.4% m/m, though that may owe more to Easter timing effects. The slight rise in Consumer Confidence to -23 still leaves the index at very weak levels historically, while a wider than expected £24.9 Bln PSNB budget deficit was driven by inflation-linked spending on welfare payments, and a sluggish increase in tax receipts, and will be adversely affected in coming months by the rise in gilt yields on the back of current political uncertainty. Both German Gfk Consumer Confidence and the Ifo Business Climate were better than forecast, but at -29.8 and 84.9 respectively are both at levels associated with the economy contracting. Also notable in the final detailed Q1 GDP was the stark contrast between a 1.1% q/q increase in Govt Spending failing to see any spillover into Business CapEx as evidenced by Capital Spending by -1.5% q/q. That should improve over coming quarters as defence and infrastructure related orders are converted into increased output, but the underlying profile of private sector CapEx looks rather woeful. The larger than expected fall in Japan’s headline and core CPI to 1.4% and 1.9% y/y would appear to offer the BoJ some wiggle room, but this was wholly driven by a sharp deceleration in Services CPI paced by a 10.6% drop in education fees, as subsidies helped to offset upward pressure on energy prices, without which core CPI would have remained above 2.0%. As previously noted even with a 25 bps hike in June, the BoJ will still be behind the curve in policy terms.
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