Written Commentary
US/Iran truce extension ‘in the bag’? Month end brings rush of statistics: Tokyo CPI, Japan and South Korea Production, Eurozone national CPI, US Goods Trade Balance, German Unemployment, Canada and Brazil Q1 GDP; numerous central bank speakers at Reykjavik Economic forum; EU-Russia tensions rising.
- Eurozone CPI: energy subsidies / tax cuts to contain headline CPI rise, but outcome unlikely to be a swing factor for June ECB rate decision more focused on the need to take out insurance against second round effects.
EVENTS PREVIEW
Another choppy month comes to an end as the tensions in the Persian Gulf move into their fourth month, with US and Iran negotiations ongoing but the gaping chasms in their positions on a multitude of key issues very evident, while the fragile ceasefire continues to look very strained. Tensions between EU/NATO and Russia ratcheted up again as a Russian drone hit a residential building in Romania, and this situation requires increasing attention, above all as Russia appears to be on the back foot in the Ukraine, despite its increasing bombardment, and just importantly the Russian economy is in a deep seated crisis due to the war in Ukraine, even if the rise in oil prices and temporary lifting of sanctions has given state finances a boost. A busy schedule of statistics has Japan and South Korea’s Industrial Production, Tokyo CPI, UK Lloyds Business Barometer to digest, with Eurozone national CPIs, German Unemployment, US Goods Trade Balance and Chicago PMI, along with Canadian and Brazilian Q1 GDP offering the remaining highlights.
A raft of major central bank speakers will be sharing their thoughts at the Reykjavik Economic Forum, while Asia’s premier defence summit the Shangri-La Dialogue gets underway. The run of data from Japan and South Korea overnight while somewhat wide of expectations only serves to confirm that AI investment related demand is helping to cushion the blow from high energy prices, which has heavily impacted oil imports and refining, while food and education subsidies have driven down Japan’s CPI, but the underlying trend rate is still well above the BoJ’s target. For the June round of major central bank meetings, it now looks almost certain that the ECB and BoJ hike by 25 bps, the Fed, BoE and BoC hold rates. The question for the latter three is the extent to which they warn that rates may have to rise, with the Fed messaging above all in focus as Warsh takes the helm of his first FOMC meeting. Typically, initial transition meetings try to avoid any sharp changes in messaging, but that may be difficult to avoid, with the dot plot an obvious focal point, though the more salient aspect may be a widening in the range of forecasts for growth, inflation and rates in the Summary of Economic Projections.
** Eurozone – May national prov. CPIs **
National HICP readings are going to largely be a function of measures to cap petrol pump and other energy prices, as per the Spanish measures to cut energy VAT to 10% from 21%, Italy’s temporary tax cut and Germany’s EUR 0.17 / litre cut to petrol taxes, which should see most headline rises limited to 0.2% m/m, while core measures are expected to show underlying price pressures seeing only limited pass through effects, as was evident in the preliminary Spanish core CPI edging up to 2.9% y/y from 2.8%. The broad based fall (generally -0.2%) in German state CPI data against a forecast of 0.1% m/m for CPI implies that Monday’s Eurozone CPI will come in below forecasts of 0.1%, but due to base effects headline will still rise to around 3.2% y/y from 3.0%, and core move up to 2.4% y/y from 2.2%. The data ultimately are of limited relevance to the ECB policy outlook, as was evident in yesterday’s April ECB minutes, which showed some members would have backed a rate hike at that meeting. The narrative from most ECB speakers over the past 10 days has effectively stressed that even if a deal is reached with Iran, energy price pressures will persist for much of this year, and it needs to take out some insurance against the increasing likelihood of second round effects, and rising consumer inflation expectations. That said, this morning’s ECB blog post noted that consumers have reacted much more swiftly to the current surge in energy prices than in 2022, reining in spending, and as such, demand destruction risks are that much higher, which underlines the dilemma that the ECB and other central banks face.
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