Written Commentary
Markets increasingly cautious and somewhat sceptical about positive Iran/USA negotiations signals; digesting Japan Q1 GDP and UK labour data, awaiting Canada CPI and US Pending Home Sales, busy run of central bank speakers; Home Depot kicks off run of US retailer earnings.
- U.K.: HMRC Payrolls slide very likely overstated, but still points to renewed downturn in labour demand, core wages continue to ease; likely to steel MPC doves’ resistance to rate hike calls
- Japan: broad strength in Q1 GDP underlines BoJ behind the curve, but June rate hike would still be reactive, while talk about easing pace of balance sheet taper smacks of unhelpful political interference
EVENTS PREVIEW
Markets remain hostage to Persian Gulf conflict related news, and will also wait the outcome of the G7 Finance Ministers & Central Banks meeting. The statistical schedule has Japan’s provisional Q1 GDP and UK labour market reports to digest, though both will be subordinate to political developments – i.e. Japan’s supplementary budget and the ruling UK Labour Party’s leadership contest. Ahead lie Canadian CPI and US Pending Home Sales, along with the first of this week’s US retailer corporate earnings via way of Home Depot, and a goodly volume of ECB and Fed speakers. Interestingly markets are taking a more sanguine view of the ‘positive’ developments in the USA/Iran negotiations, with equities barely moving (perhaps also a reflection of the latest BofA fund manager survey showing overweight equity positions surged from 13% in April to 50% in May), and oil prices dropping modestly by comparison to recent moves, and long-term bond yields barely moving, perhaps due to a gnawing realization that oil, gas and product flows look likely to be disrupted for most of this year regardless of whether an agreement is reached.
** U.K. – March/April Labour data **
- In headline terms this was a bad labour report, but with revisions increasingly large, the actual labour market situation may well not be as bad as it appears. The 100K drop in April HMRC Payrolls was the worst since the start of the pandemic. But the ONS has already flagged a revision (to a smaller drop), and March was revised to -11K from -28K. Meanwhile, the 26.5K rise in the Claimant Count has to be seen in the context of another improved revision for March to 4.9K from 26.8K. Headline Average Weekly Earnings at 4.1% y/y were higher than the expected 3.8%, but clearly boosted by seasonal bonus payments, with Private Sector Earnings slipping to just 3.0% from 3.1%. At the margin, it will bolster MPC doves in resisting moves to raise rates in the short-term, as flagged by BoE deputy governor Breeden, and suggests that the tentative signs of an improvement in labour demand at the back end of 2025 has come to an end.
** Japan – Q1 GDP **
- At 2.1% q/q SAAR GDP was notably better than the anticipated 1.6%, with solid 0.3% q/q readings for Private Consumption, Business CapEx and a 0.3 ppt contribution from Net Exports, and only a small 0.1 ppt drag from Inventories. While rising energy prices and supply chain disruptions will be headwinds going forward, it reinforces the view that the BoJ is well behind the curve on rates, and makes a June rate hike a a very high probability, though still leaving real interest rates in negative territory. Sadly, the noises from the BoJ around the upcoming taper timetable decision point to a reversion to BoJ policy being dictated increasingly by timid political expediency, with a slower balance sheet taper being mooted. For the JPY, this points to further depreciation, and a vicious circle for the BoJ and MoF of FX intervention and belated rate hikes. Given Finance Minister Katayama’s many years of experience in the inner circles of the MoF, she should know better than to pursue this policy path, even if resistance would put her on a path to a clash with PM Takaichi.
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