Macroeconomics: The Day Ahead for 19 May

In all likelihood, today’s run of data may well be overrun by central bank news, with the “account” of the ECB’s April policy meeting getting top billing, though an array of EM central bank policy meetings will bear considerable scrutiny. Amongst these Sri Lanka’s CBSL opted to hold rates against expectations of a further likely futile 125 bps hike, given that its imminent debt default is the much bigger talking point; Philippines’ BSP hiked rates by 25 bps to 2.25% as expected, while South Africa’s SARB is expected to raise rates 50 bps to 4.75%, and Egypt’s CBE a further 100 bps to 14.25%, as food and energy inflation and USD strength wreak ever more damage in the EM space. Statistically there are Japan’s better than expected Machinery Orders and mixed Trade and Australia’s relatively solid labour market data to digest, while ahead lie the UK CBI Industrial Trends survey along with US weekly jobless claims, Philly Fed Manufacturing survey and Existing Home Sales. A modest corporate earnings schedule has Xiaomi, Generali and PhosAgro amongst the likely headline makers, while there are govt bond auctions in France, Spain and the USA. The G7 Finance Ministers & central bankers’ meeting continues, as market rate expectations remain extraordinarily volatile on a day to day basis, along with Commodity and Energy prices. The ECB minutes are likely to highlight the divisions between the doves, who remain cautious about rate hikes but on board with ending QE, and the hawks who are clearly itching to get rates out of negative territory as quickly as possible, as per Knot’s suggestion of a 50 bps rate hike earlier in the week. But this hardly constitutes anything in the way of fresh insights, given the barrage of speeches since the April policy meeting, and for choice markets discounting 200 bps of rate hikes by the end of 2023 look to be more than fully priced for what will likely emerge, even if this reflects hedging pressures in Euribor futures rather than a genuine rate view.

The latter rates volatility is now feeding out less along yield curves, but more significantly over into credit (see attached charts), which as previously noted has been a shoe that would need to drop both to unseat the ‘buy the dip’ mantra in equities, and as better proof that risk appetite is being impaired on a more durable basis. The rush of corporate credit issuance in recent weeks (above all in USD), as and when there has been less volatility in rates and bonds has flagged a build-up of those who ‘need’ to refinance debt. It was highlighted yesterday by Carnival’s HY issuance, which offered a colossal 237 bps premium over similarly ‘B’ rated debt at a yield of 10.5%, and broke the drought in USD HY issuance in the past couple of weeks. Just for comparison, the same issuer sold debt at a yield of just 6.0% as recently as October. While the equity market sell-off was attributed to the poor results from retailer Target, the increasingly adverse credit environment and rates volatility is clearly forcing some deleveraging, and de-risking of portfolios, much of which may be involuntary; Tesla being dumped from the S&P 500 ESG index clearly did not help either, particularly given the concentration risk that has long been evident in both tech and ESG stocks.

** U.S.A. – May Philly Fed Manufacturing **

– Following on from the sharp drop in the headline NY Fed Manufacturing survey (though 6-months outlooks remained solid), the focus turns to the Philly Fed survey today, with a further modest slip to 15.0 from 17.6 expected. The April survey was notable for seeing a drop in Orders and above all Unfilled Orders and Delivery Times, but both Prices Paid and Received and Employment remaining high or very high, while the 6-month Outlook dropped sharply to 8.2, its lowest level since 2011. It is those outlook metrics which will be the focal point in today’s report. Weekly Jobless Claims are expected to be little changed at a very low 200K vs. prior 203K.

** U.S.A. – April Existing Home Sales **

– While the NAHB Index fall was clearly a sign of things to come for the US housing sector, there was a considerable volume of hyperbole surrounding yesterday’s Starts and Permits, particularly the 3.2% m/m fall in Permits being touted as a harbinger of doom for the sector. The fact is Permits frequently post swings of +/-10% month to month, and a cursory look at any long term chart of SAAR Permits underlines that they remain at a very high level by any historical standard. As for Existing Home Sales, these are seen down 2.1% m/m to a still robust 5.65 Mln pace, but more poignantly in trend terms, this would be the fourth drop in the past 5 months, and perhaps the key element will be the level of inventories, which remain very low at 2.0 months’ worth of supply, but another jump after rising from 1.7 to 2.0 in March would signal that the relentless rise in mortgage rates is starting to take its toll.