Macroeconomics: The Day Ahead for 20 May

Statistically, the day is pretty much a non-starter, with German PPI to digest ahead of the Philadelphia Fed Services and advance Eurozone Consumer Confidence. But the events schedule is very busy with China’s monthly Loan Prime Rate Fixing seeing both 1 & 5-yr rates cut by a further 10 bps as expected, while Australia’s RBA delivered a further 25 bps rate cut to 3.85%, but also said that a larger 50 bps cut was discussed, underlining its dovish shift. What will likely be a tense G7 Finance Ministers and Central Bank Governors meeting gets underway in Canada, with the hosts likely to need to deploy all their diplomatic skills to avoid tensions with the US breaking out into the open, and fashioning a joint statement may prove challenging. There are numerous central bank speakers to contend with. But none are really likely to offer any fresh signals on policy or indeed their respective economic outlooks given that uncertainty remains high, and how tariffs will land in terms of inflation and growth impacts still very unclear, with Fed’s Williams and Bostic hinting yesterday at September as being the earliest meeting for a rate move. Vodafone, Home Depot and housebuilder Toll Brothers feature in terms of corporate earnings, as the Qatar Economic Forum and London Platinum Week get underway. So the focus will remain on the passage of the US tax and spending cuts bill currently making its way through Congress, and continuing to highlight quite deep divisions within the Republican party. Yesterday’s initial upward pressure on longer dated US Treasury yields, and downturn in equity indices in the wake of the Moody’s downgrade proved to be very short lived. Of greater immediate concern is the relentless upward pressure on long and ultra-long JGB yields (see chart), exacerbated today by a poor reception for the 20-yr auction. While the pressure in JGBs is nearly always driven by domestic investors, given that international holders are and always have been few and far between, but with 30-yr JGB yields north of 3.0%, the carry attractions for Japanese investors of holding other G7 bonds are fading very rapidly.

Source: Bloomberg Finance L.P.

** Canada – April CPI **

CPI is expected to post a drop of -0.2% m/m, paced by food, energy and some recreational goods, which would thanks to base effects and the fall being atypical of the normal seasonal pattern see the y/y rate drop sharply to 1.6% from 2.3%, however core CPI measures are seen unchanged at 2.8% and 2.9% y/y. Per se, this should offer some reassurance to the Bank of Canada, which has voiced some concerns about the impact of trade tensions with the US spilling over into inflation, though it may need more assurance to resume rate cuts.