Macroeconomics: The Day Ahead for 27 May

Trade tensions and global sovereign debt woes remain the key overarching themes for market sentiment, which relegates the more mundane economic data and central bank speakers to an occasional walk on role, as and when thematic news is sparse. There is some irony that what has been hiding in plain sight for three decades, i.e. Japan’s unsustainable debt metrics, and which spawned the mantra that shorting JGBs was always a ‘hospital pass’ trade, has suddenly become the short position of choice. Many had anticipated that this would be the inevitable consequence of the BoJ ending its Yield Curve Control (YCC) policy and starting to raise rates (even modestly), but it has taken almost 18 months for markets to really get on board with that assessment. The MoF is now effectively being strong armed into rebalancing its issuance away from ultra-longs, and boosting shorter dated sales, which will reduce its debt servicing costs (the UK Treasury should take note, and action), above all given a spectacularly steep yield curve (in comparison to its G7 peers), but this is no more than papering over the cracks. Japan’s rapidly ageing demographics that underpin the weakness in domestic demand make this a Herculean task to rectify, and it will need to formulate some form of grand bargain, most likely with the US, to leverage its huge pool of external assets to rectify this. This will have a very profound impact on markets for many a year to come. But with all other G7 countries ex-Germany finding themselves in a similar position (even if not as acute), and with the spirit of co-operation between major economies notable by its absence, the risk of dislocations cannot be underestimated. Blaming the new US administration for triggering this tidal wave would be myopic, all it has really done is dot i’s and cross t’s on the long-standing and pressing need to address the issue, which successive generations of political leaders have tried to sweep under the carpet, because resolution would and will entail many unpopular and often deeply jarring consequences. It is a reminder of the adage ‘a stitch in time saves nine’. Sadly the long standing political resistance to enacting reform for fear of popular resistance means that this particular chicken is now coming home to roost.

In terms of the traditional macro elements on today’s agenda, the overnight UK BRC Shop Price Index (unchanged at -0.1% y/y) suggests that pass through (or ‘pipeline’)pressures from tax hikes and administered price increases are not (as yet) creating second round inflation effects. The downside miss on French HICP (-0.7% y/y), which may well be echoed in Friday’s German, Italian & Spanish HICP prints pushes the door open to a further 25 bps ECB rate cut in June, and will embolden the increasingly dovish rhetorical tilt from many ECB speakers (see comments from Wunsch, Simkus and Villeroy over the past week). EC monthly Confidence surveys due later are expected to edge higher, with the exception of a modest dip in Services, but overall remain very weak, with Export Orders Sentiment in focus given trade tensions (though the survey will not capture reaction to the back and forth on US/EU tariffs over the weekend). The focus then turns to the US, with core Durable Goods Orders seen barely changed, unsurprising given the level of policy uncertainty is antithetical to major investments; House Prices are also due, but this is data for March, which will not reflect the rise in bond yields and mortgage rates following ‘Liberation Day’. However the focus will be on Consumer Confidence, which has collapsed from November’s recent peak of 112.8 to April’s 86.0, and is forecast to edge up marginally to 87.1, predicated on the trade tariff truce with China. One might add that the lack of any immediate major tariff pass through in prices to consumers, as well as subdued gasoline prices going into the US ‘driving season’ should also help, particularly as the Labour differential (last 17.9 vs. prior 17.6) has only eased modestly from January’s recent peak of 22.2, and assuming that the latter is broadly stable, this should help to signal a short-term trough. Otherwise, oil markets will be watching out for officials comments ahead of tomorrow’s OPEC/OPEC+ JMMC meetings in respect of an expected further increase in production.

– RCEAP: The Week Ahead – Preview: 

  The new week is relatively light in statistical terms with national Eurozone CPI readings for May, US Personal Income/PCE, Durable Goods Orders and Consumer Confidence, Japan’s Tokyo CPI and Canada and India Q1 GDP as highlights. Per se, and as has been the case since the new US administration took office in January, national and geopolitics will continue to provide the primary ‘mood music’ for market sentiment, with the focus on the latest back and forth on US tariffs on the EU, as well as the US response to Russia’s intensification of its attacks on Ukraine. Even though the run higher in risk assets over recent weeks serves as a reminder that the FOMO and ‘Buy the dip’ conditioning of the past decade refuses to exit stage left, in no small part due to the near $20 Trillion of G4 central bank that continues to wash around markets (see chart of aggregated G4 central banks’ balance sheets attached). Otherwise, the events schedule has the latest FOMC minutes, expected 25 bps rate cuts in New Zealand, South Africa and South Korea, the ASEAN summit, OPEC+ meetings, Nvidia’s corporate earnings, a further slew of central bank speakers, the Middle East Petroleum & Gas Conference and Singapore International Ferrous Week. Monday’s holidays in the UK and USA are followed by the Ascension Day holiday on Thursday, as well as month end on Friday, and likely to disrupt market trading volumes and liquidity.

– U.S.A.: Markets will remain very much focussed on how the US administration’s policy implementation will impact the US economy, and how the Fed will likely respond, with the hope for further significant rate cuts assumed, but plenty of divergent views in terms of actual implementation. The latter is made all the complicate4d and ambiguous given erratic execution, which in most cases relies on a perceived transactional financial value (benefit for the USA), which in reality will be very different from whichever model outcome underpins the stated value. The Federal Reserve will certainly take nothing as being either a fair valuation of the transaction’s likely forward value, and the more ambiguous and complex that any transaction is, the more the Fed will state that more time is needed to analyse the actual outcomes. That is sensible as a strategy, but if the set of complex reactions prompts sharp shifts in consumer and/or business behaviour, it will be vulnerable to highly pejorative assessments of its reaction function. The Fed is de facto stuck between a rock and a hard place, though the latest Supreme Court ruling at least ensures most of the key elements of its independent status. But while constitutional protection preserves its modus operandi, it does not insure against policy errors, even if the Fed could (easily) attribute fault for most such errors to the political fraternity. Judgement in this socially mediated age is harsh, very emotional and instantaneous, the post hoc revisions to any instant assessment generally attract little attention, other than in long-term historical accounts. To put this simply, think of ‘shutting the stable door after the horse has bolted’ and then ask if, on the follow, anyone cares about whether and how quickly (if at all) the horse was brought back to the stable.

  Be that as it may, the focus statistically this week will on Consumer Confidence, revised Q1 GDP and monthly PCE deflators. After a nosedive from November’s recent peak of 112.8 November to April’s 86.0, Consumer Confidence is forecast to edge up marginally to 87.1, predicated on the trade tariff truce with China. One might add that the lack of any immediate major pass through in prices to consumers, as well as subdued gasoline prices going into the US ‘driving season’ should also help, particularly as the Labour differential (last 17.9 vs. prior 17.6) has only eased modestly from January’s recent peak of 22.2, and assuming that the latter is broadly stable should help to signal a short-term trough. Durable Goods are seen down -7.8% m/m after surging 7.5% m/m in March, thanks to ever choppy aircraft orders (the Qatar Airways orders will impact going forward), but core measures are forecast to be little changed, after a small dip in March. Thursday’s Q1 GDP is not expected to be revised om the advance -0.3% q/q SAAR estimate, with an upward revision to Inventories and seen offsetting downward revisions to Retail Sales and Construction Spending. Friday’s Personal Income and PCE are forecast to rise 0.4% and 0.2% m/m respectively echoing Retail Sales and Average Hourly Earnings, but all eyes will be on the PCE deflators, with both seen up a modest 0.1% m/m to bring headline y/y down 0.2 ppt to 2.1%, and core -0.1 ppt to 2.5%. That will be of some comfort, but as Fed speakers have noted retailer capacity to absorb the impact of higher tariffs thus far may have already run its course, i.e. the Fed is focussed on May and June, and above all on what happens with tariffs once deferrals are lifted (or not as the case may be). Wednesday’s FOMC minutes will be combed for clues on the extent of staff forecast revisions higher for inflation and unemployment, and lower for growth, and the discussion on when and what would prompt the Fed to start taking action on rates. As for Nvidia results, the focus will be on the extent of the beat on its Q1 earnings, but rather more on its outlook, which will be positive, but given that its share price has done a lot of the ‘heavy lifting’ for the US equity market rally since the 90 dya moratorium on reciprocal tariffs, both will need to be impressive to give the rally an additional boost.

– Eurozone: Tuesday’s EC Confidence surveys will above all be eyed for the Export Orders index, which while weak in any historical context (April -25.7) has not shown any material impact from US trade tariff fears. France gets the run of national May provisional inflation readings under way on Tuesday, with a modest 0.1% m/m rise expected for HICP to leave the y/y rate unchanged at 0.9% y/y, and a similar type of picture expected to emerge in Spain (Flat m/m, 2.0% y/y from 2.2%), Italy (0.1% m/m 2.0% from 2.1%) and Germany (0.1% m/m, 2.0% y/y from 2.2%), which barring any surprises will have little market or rate expectations impact. German Unemployment is seen up a further modest 12K to leave the Rate unchanged at 6.3%, while the very unreliable and often heavily revised Retail Sales are forecast to post another modest gain of 0.2%. This would add to the impression that while Germany’s economy is not firing on all cylinders, above all due to domestic structural headwinds, it does appear to be crawling out from the ditch which it has been in for some time.

– U.K. This week’s run of second division data (BRC Shop Prices, Lloyds Business Barometer, CBI Retailing and Services surveys) are neither going to shift the dial on the prospects for UK rates, nor take the focus away from the Labour government’s internal battles over a ‘winter fuel payments’ policy ‘U-turn’ or social benefits reforms.

– Japan: There is the usual end of month rush of data, with Tokyo CPI expected to see modest but continued upward pressure on core CPI (3.5% from 3.4% y/y) and ex-Fresh Food & Energy to (3.2% from 3.1% y/y), per se reinforcing the BoJ’s tightening bias. Activity data is expected to remain muted with Industrial Production expected to drop -1.4% m/m, above all due to lower auto output due to US tariffs, while Retail Sales are seen rebounding 0.5% m/m, likely helped by tourism rather than a pick-up in Household Spending. But with the Ministry of Finance attempting to cap the relentless rise in ultra-long JGB yields with a buyback programme, the focus will be on how weak demand if at this week’s 40-yr JGB auction.

– India: Q1 GDP is expected to accelerate to 6.8% from Q4’s 6.2%, though the more representative GVA measure is seen edging up to 6.4% y/y from 5.2%, which would translate to FY 2025 growth of just 6.3%, a very far cry from the 9.2% recorded in FY 2024, and way below the 7.5% that many had expected at the start of the fiscal year. The consensus looks for little improvement in the current fiscal year, in no small part to due to global trade tensions, and despite the likelihood of further rate cuts in response to modestly below target inflation.

– OPEC and OPEC+ Joint Ministerial Monitoring Committee meetings take place on Wednesday, while the full ministerial meeting takes place on May 31. The consensus looks for another increase in targeted production of around 411K, in principle based on the assumption that despite a weak demand outlook, trade tariff impact concerns and continued production quota busting by the likes of Kazakhstan and Iraq, OPEC will not want to signal an about turn at the current juncture.

– There are 13 S&P 500 companies reporting this week, with worldwide corporate earnings highlights as compiled by Bloomberg News likely to include: Agilent Technologies, AutoZone, Bajaj Auto, Bank of Montreal, Bank of Nova Scotia, CIBC, Costco Wholesale, Dell Technologies, Heico, HP, Kuaishou Technology, Li Auto, Life Insurance Corp of India, Malayan Banking, Marvell Technology, Meituan, National Bank of Canada, NTPC, Nvidia, PDD Holdings, Royal Bank of Canada, Salesforce, Synopsys, Veeva Systems, Xiaomi, Zscaler.