Macroeconomics: The Day Ahead for 11 May

The BoE MPC meeting and Q2 Monetary Policy Report, the overnight China CPI and PPI (weaker than expected and per underlining domestic demand concerns), and US PPI and weekly jobless claims top an otherwise rather modest run of data and events, which has a good number of ECB and Fed speakers, along with day 1/3 of the G7 Finance Ministers meeting. Another busy for European corporate earnings is likely to see the following among the headline makers: Bayer, Hapag-Lloyd, ING, Pirelli, RWE, Vebio, Verbund and Wienerberger, while across the bond Tapestry, IamGold and SunLife Financial feature. Govt debt auctions take the form of Italian 3, 7 & 20-yr, as the US rounds off this week’s refinancing with 30-yr. Outside of that the US debt ceiling impasse looms ever larger in the spotlight, with timelines additionally constrained by next week’s G7 meeting which President Biden is due to attend. A default remains highly improbable as was the case in July 2011, but if this does again run down to the June 1 deadline, the damage to international views on the US government will be substantial, and unlike 2011, there is none of the spirit of international co-operation that existed during and after the GFC, indeed quite the opposite. It is worth recalling that the 2011 debacle prompted a 19% slide in the S&P500, with the VIX index soaring to 45%, and in both cases the recovery from that slide took many months to repair, with the VIX taking nearly 3 months to drop back below 30, and the damage to the US Dollar would likely rather be more substantial, and by extension inflationary.

** U.K. – BoE rate decision **

The BoE is expected to deliver a 25 bps rate hike to 4.50%, with both Tenreyro and Dhingra seen reprising their dissenting votes for no change in rates, and will likely stick with the quasi guidance in March, which said: “The MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.” It already signalled in March that it would revise away its ‘recession’ forecasts, anticipating Q2 growth of 0.4%, as well as revising its expectations real household disposable from “falling significantly” to being “broadly flat”. It will also provide a full assessment of the impact of the fiscal support measures in the budget, as well as some thoughts on the latest Bank Liabilities and Credit Conditions survey evidence that credit availability continues to deteriorate. With markets continuing to price a Base Rate peak of 4.85%, the 2-yr CPI inflation forecast should still anticipate a drop below 2.0%, though increasingly the MPC has put greater store by its ‘risk adjusted (mean) CPI forecast’, which will likely underline that the balance of risks on inflation are skewed to the upside. While March CPI was nearly a full percentage point higher than the BoE had expected in March, the MPC may well focus on the fact that core services CPI was a touch lower than it had anticipated (though still unacceptably high), though it will be concerned that Average Weekly Earnings show little sign of decelerating. But as with the Fed, the run of better data that in principle forces its hand to hike rates at this meeting does not preclude a stronger signal that it will be focussing on assessing the cumulative impact of its 12 rate hikes (assuming it hikes today), and open the door to a pause a little wider.

** U.S.A. – April PPI **

Today’s PPI follows on from the essentially as expected CPI, which most notably saw the so-called ‘super core Services CPI’ post a rise of just 0.1% m/m, offering the Fed some comfort, though there will be another CPI report before the next meeting. PI is forecast to rise 0.3% m/m headline and ex-Food, Energy & Trade, which would see y/y rates marginally lower at 2.5% and 3.5% respectively, and underlining modest and moderating pipeline pressures.