Macroeconomics: The Day Ahead for 23 May

  • Digesting UK election and FOMC minutes, focus on PMIs, G7 Finance Ministers meeting and Eurozone Q1 Wages; BoK rate hold, robust India PMIs to digest, US weekly jobless claims and Existing Home Sales; Turkey, Egypt & Chile rate decisions; US 10-yr TIPS sale; smattering of corporate earnings

  • PMIs: UK and Eurozone expected to see solid Services, better but still weak Manufacturing; US PMIs seen edging lower

  • Eurozone Q1 Wages: ECB speakers suggest some moderation vs. Q4, German data implies some upside risk; outcome material to post June rate trajectory

  • UK election: public disillusion all too palpable, main hope is for a period of great political stability and policy predictability, but little hope of much needed meaningful reforms

  • Turkey rates: on hold, tone likely hawkish, recent TRY stability a small boon for Karahan, expect further indirect policy tightening measures

EVENTS PREVIEW

G7 & India’s ‘flash’ PMIs and the ECB’s Q1 data on Eurozone Negotiated Wages will be the headline statistical items as G7 Finance Ministers and central bankers kick off a two-day, which looks to be focussed on discussions about leveraging seized Russian assets to rebuild Ukraine, and reining in China’s exports. The former of those two would not only be precedent setting, but may also backfire in the long run, while the latter will inevitably rely on tariffs that will be inflationary for Europe and North America. Be that as it may, there are also US weekly jobless claims and New Home Sales, and Mexico’s mid-month CPI and minutes from the recent Banxico policy meeting. As expected the Bank of Korea held rates at 3.50%, with rate decisions in Turkey, Egypt and Chile also due, as well as a further rash of central bank speakers. A busier day for corporate earnings in Asia and Europe features Lenovo, Netease, Weibo and Xiaomi, along with Tate & Lyle and the first Canadian bank earnings report from Toronto Dominion, while the US sells $16 Bln of 10-yr TIPS. There are also the better than expected Nvidia results, and the somewhat more hawkish than expected FOMC minutes to digest, even if they predate last week’s mixed inflation.

 

** G7 & India – May ‘flash’ PMIs **

– India continues to expand at a very robust pace, with exports pacing a recording high in the Services PMI, and the Manufacturing PMI remains robust, despite a further small setback; better news from Japan as the Manufacturing PMI finally moved back into expansion for the first time in a year, with the Services edging lower, but within its recent range and signalling a solid expansion. Elsewhere Flash PMIs are expected to see a further improvement in the Eurozone, whereby Manufacturing will still be contracting, above all in Germany and France, while Services expand at a healthy pace, with a similar picture in the UK, though the weak CBI Industrial Trends survey hints at Manufacturing turning lower, while both measures are seen easing somewhat in the US, echoing other surveys suggesting some loss of growth momentum. Given rises in a good many input prices, above all energy, there will be particular interest in sub-indices for prices paid and received. 

 

** Eurozone – Q1 Negotiated Wages **

– While a June ECB rate cut appears to be in the proverbial bag, what happens thereafter remains unclear, though markets have discounted a total of three 25 bps rate cuts by year end. Today’s Q1 Negotiated Wages data will certainly be a key element in the ECB’s deliberations, even if one would have to observe that historically wages tend to lag inflation by 3 to 6 months typically, with recent studies suggesting that this lag may be as long as 9 months now, per se making this a very rearview mirror indicator (and therefore running counter to Schnabel’s call for greater reliance on high frequency data in formulating policy). Surprisingly even neutrals (such as Rehn) and hawks (such as Knot) have referred to moderating wage trends as justifying a June rate cut, and yet yesterday’s data on German wage settlements published in the Bundesbank’s monthly report showed settlements (including one off payments) surging to 6.2% y/y, and while French, Italian and Spanish settlements have ranged much lower (3.5% to 4.0%), the German data suggest any moderation from Q4’s 4.5% y/y is likely to be very modest. 

 

** U.K. – General Election called for July 4 **

– The cat and mouse game over the election date is finally over, and the UK can look forward to a little over 40 days of empty promises that will not be delivered on, of many outright lies, and a racing certainty that whoever wins, the much-needed reforms both of a sclerotic political system, and indeed the economy will remain a distant unfulfilled prospect. Both party leaders are unpopular, and the public disillusion with the UK’s political fraternity will remain all too palpable. From an international perspective, there will be the comfort that the type of ‘off piste’ excursion of the short-lived Truss government is not an election risk, and with the UK having marginalized its influence on the international stage following the Brexit vote, the interest in the election will be largely academic. That said, it will be hoped that a new government will usher in a period of greater policy predictability, and less political and policy instability, which should be a good deal more conducive to long-term investments, but as Scope ratings highlight today, the challenge of trying to stimulate a weak economy with a large public debt burden will be inescapable. Suffice it to say, a BoE June rate cut is now off the table, given that the MPC meeting takes place just two weeks before voting.

 

** Turkey – TCMB rate decision **

– TCMB is again expected to hold rates at 50.0%. Governor Karahan will welcome the steady performance of the TRY since the 500 bps hike in March, but continue to stress that TCMB stands ready to hike again if inflation continues to rise, it is expecting that May CPI will rise to 75-76% y/y (from April’s 69.88%), but for that to be the cyclical peak, having raised its forecast for CPI to end 2024 around 38% vs. a prior expectation of 36%, and only sees rates dropping marginally by year end to 47.5%. It is however likely to continue to tighten financial conditions further, by adjusting reserve requirements, caps on credit growth, and shifting bank funding to its overnight facility and away from the repo window.

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