Macroeconomics: The Day Ahead for 14 June

As markets continue to work themselves into a frenzy of ever more extreme central bank rate expectations, it is appropriate that inflation data dominates today’s relatively modest schedule, via way of US PPI, Swedish CPI, German and Indian WPI, with UK labour data to digest, while ahead are the German ZEW and US NFIB surveys along with Canadian Manufacturing Sales. On the events side of the equation, all eyes will be on ECB’s Schnabel as she speaks on ‘Euro area bond market fragmentation’, and charged with trying to repair the damage from the vague and ambiguous comments on how the ECB plans to deal with this issue at last week’s press conference, with peripheral spreads spiking wider, with underlying liquidity conditions heavily impaired. Elsewhere OPEC publishes its monthly Oil Market Report, and while OPEC+ production increase credibility is being stretched, it remains a fact that crude output is not the real issue of the moment, oil product output is, above all diesel/distillates. Nevertheless it will be interesting to see whether there are any revisions to US crude output estimates, given that high prices have not seen the jump in shale output that many had been assuming. While often largely ignored by markets, the other highlight of the day will be the Business Roundtable Q2 CEO economic outlook survey, given that the US economy is very much at a critical juncture, results will be published here: brt.org/resources/ceo-survey. Otherwise a busy day for Eurozone govt bond issuance has German 2-yr, Dutch 20-yr and Italy’s mid-month auction of 3s, 7s and longs.

Markets are in quasi capitulation mode, as the sharp shifts in market rate expectations more than amply demonstrate (above all Euro$ and Euribor curve shifts – see attached tables), and effectively confirm that central banks have lost control of the policy and economic narrative, and are being bear bated by markets. Financial conditions are now tightening very rapidly (see chart), credit spreads are ballooning and note that while spreads are lower than levels seen in February, absolute yields on credit are much higher given the sharp upward shift in underlying govt yields (see chart). The question now is: at what point does this prompt position liquidation to cover losses in the riskiest of assets – i.e. what is the extent of the pain trade, and how will margin call ripple effects play out?

** U.K. – April/May labour data **

– A very solid set of labour data, that was on balance slightly better than expected, but basically confirms that the labour market remains very tight, even if the rise in the Feb-Apr ILO Unemployment Rate (3.8% vs. 3.75) suggests that some are returning to the labour force, but with vacancies at a fersh record 1.3 Mln, this will only alleviate the market modestly. Average Weekly Earnings saw headline slip back to 6.8% y/y, but remain high (though negative in real terms) with bonuses still the key driver, with the ex-Bonus reading edging up to 4.2%. But in terms of the MPC’s dilemma on rates, growth and inflation, this really is a secondary consideration at the current juncture.

** Germany – June ZEW survey **

– The predictive value of this survey has always been dubious, and this month’s headline expectations will be almost certainly be very deceptive due to data collection timing effects, given that most of the responses will have come before the latest equity market meltdown. Thus the consensus looks a modest rebound in Expectations to a still dire -26.8 vs. May -34.3, reflecting the rebound in the Dax up until the middle of last week relative to early May levels. The rationale for an expected rebound in Current Situation to -31.0 from May’s low of -36.5 to -31.0 looks to be rather more dubious, given that this places a lot of weight on last month’s Ifo rebound, ignores weak official activity data and the latest CPI jump. Be that as it all may be, the fact is that if the survey had been conducted yesterday, it would be dire.

** U.S.A. – May PPI / NFIB Small Business Optimism **

– Headline PPI is expected to echo CPI, picking up to 0.8% m/m from April’s 0.5% thanks to energy prices, though this implies a 0.2 ppt fall in the y/y rate to 10.8%, with ex-Food & Energy pressures expected to remain elevated at 0.6% m/m 8.6% y/y. NFIB Small Business Optimism is expected to remain weak and dip to a fresh low 93.0 vs. prior 93.2, and the Business Outlook sub-index has indeed echoed the pessimism seen in Michigan Sentiment (see attached chart), which suggests some downside risks for the headline if this correlation holds.