Macroeconomics: The Day Ahead for 21 May

Statistically, the schedule is again light, though overnight UK CPI and Japanese Trade will garner attention, while South Africa also has CPI (though secondary to President Ramaphosa’s meeting with Trump given very strained relations), and Poland has labour indicators and Industrial Production. Central bank speakers are again plentiful, and follow an expected 25 bps rate cut in Indonesia, but the continued Congressional efforts to pass the US tax and spending bill, which remains at an impasse over rising state and local tax (SALT) deductions, as well as developments in the Ukraine and Gaza conflict will be of greater significance, if there are any material developments. Corporate earnings will focus on retail, with Marks & Spencer on tap ahead of Lowe’s, Target and TJX in the US, while the tech sector looks to China’s Baidu and Weibo ahead of Zoom. A busier day for govt bond supply sees auctions of UK 6-yr, German 10-yr and US 20-yr. Overall market risk appetite remains positive, but understandably very fragile, with so many leftfield items acting as potential disruptors, and the steepening yield curves in G7 countries underlining that financing conditions are tightening, adding to the list of factors likely to weigh on corporate profits, as well as growth.

** U.K.  – April CPI **

The anticipated surge in CPI was more than expected at 3.5% y/y vs. expected 3.3% and March’s 2.6%, but this was primarily down to a 0.98 ppt contribution to the y/y rate from Household Utilities and 0.45 ppt from Transport (rail fares), both of which are administered prices, and both of which also fed into the jump in Services CPI to 5.4% y/y and core CPI 3.8% y/y. There was some additional pressure from Food & Alcohol 0.38 ppt and Recreation 0.45 ppt, but the latter was almost certainly largely a function of Easter timing effects. The BoE faces a dilemma, it cannot ignore the potential for second-round effects, but it will take a while (a few months) to make a judgement call on this, though it is likely that these will be modest. Indeed, the latest Brightmine pay settlements survey published today, shows wage settlements unchanged at a modest 3.0%, though the report notes that the most recent settlements have typically been lower, and point to weaker outturns in coming months, as employers remain very cautious on pay, given rising costs (NI contributions, minimum wages) and rising uncertainty. Ultimately it will need to monitor weakening employment trends and watch how much of a slowdown in Q2 signals on economic activity, a further rate cut in Q3 is likely, but in the very short term that probability needs to be reduced somewhat.