Macroeconomics: The Day Ahead for 17 April

A very heavily frontloaded statistical schedule accompanies the Fed’s Beige Book and another deluge of central bank speakers, again mostly within the context of the Spring IMF/World Bank meetings, while ASML, Alcoa and Abbott Laboratories are likely to be among the headline makers in the run of corporate earnings. There are Japan and Singapore Trade, UK CPI and PPI to digest, while ahead lie final Eurozone CPI, South African CPI and Brazil’s monthly GDP. A somewhat busier day for govt bond auctions sees auctions of UK 7-yr, German 26 & 30-yr and US 20-yr. Volatility remains elevated (but not high) as markets push back ever harder on the prospects for Fed rate cuts, with only one cut now fully priced in by year end (see attached graphic), but yield curves remain inverted, even if much less than at the turn of the year, and credit spreads remain very tight even if off their lows (see chart). Per se whatever risk aversion there is, it remains overall rather muted, above all given the array of geopolitical risks. One might also ask the question: are higher rates actually proving to be a boon for an ageing demographic population? Though this would in turn highlight inequality, not only between income groups, but also intergenerational, as well as asking whether a rethink of how interest rates impact economies, above all those running large fiscal deficits such a the US, and with the still huge volume of central bank QE.

** U.K. – March CPI, PPI **

– After a run of better than expected CPI readings, there was always likely to be one or other month that put a spoke in the wheels, though in contrast to the US, inflation remains on a very clear downward path. Transport or rather petrol prices was the most significant contribution to the upside miss relative to expectations, along with Communication and Housing/Household Services. But as the attached graphic highlights, the broader disinflationary trend remains in place, with core CPI now down to 4.2% y/y from February’s 4.5%, even if rising energy costs clearly pose a threat not only in the UK, but also elsewhere. Services CPI at 6.0% y/y against expectations of 5.8% will continue to be the primary point of concern for the BoE’s MPC, and could delay an initial rate cut beyond June, especially if energy price pressures persist, with markets now just about fully discounting an initial cut in August, and only an 80% chance of a second 25 bps cut by year end. The pushback on market rate expectations for the UK looks to be more a case of contagion from US rate expectations than incoming domestic data, and barring an unlikely stronger upturn in activity, at least two if not three rate cuts by year end still seems to be more likely outcome. PPI continues to suggest a very distinct lack of pipeline inflation pressures.