Macroeconomics: The Day Ahead for 28 April

EVENTS PREVIEW

The Ukraine war, with the latest twist of Russia blocking gas exports to Poland and Bulgaria, and China’s failing efforts to control the ongoing Covid-19 outbreak via lockdowns remain front and centre, though the day’s statistical run will try and muscle in on proceedings. German and Spanish CPI and the US advance Q1 GDP reading top the bill, with Japanese Industrial Production and Retail Sales and Swedish Q1 GDP to digest ahead of Italian confidence surveys, Canada’s CFIB Business Barometer and US weekly jobless claims. In event terms, there is the very unsurprising no change policy decision from the BoJ to digest, which also doubled down on its commitment to the 10-yr JGB yield target. The consensus looked for a no change rate decision from Sweden’s Riksbank, though the delivered 25 bps rate hike always looked to be a strong possibility given a rather sharp hawkish shift in policymakers’ comments in recent weeks, particularly after the higher than expected March CPI data. It is nevertheless significant given that the Riksbank has been for many years far more dovish than the ECB, and always very reactive. There are also a number of ECB and BoE speakers, as well as govt bond auctions in the US (7-yr) and Canada (30-yr). In terms of US corporate earnings, the tech sector via way of reports from Amazon, Intel and takeover target Twitter will grab the headlines, but there are also plenty of other bellwethers reporting including: Caterpillar, Carlyle, Comcast, Domino’s Pizza, Eli Lilly, Hershey, McDonald’s, Mastercard, Northrop Gruman and Southwest Airlines.

The scale of moves being seen in major currencies is only going to add to the underlying volatility in all asset classes, above all the weakness of EUR, JPY and CNY, where by the weakness of the CNY is primarily a function of the weakness in EUR and JPY. For all that USD/CNY is always in focus, China’s FX sensitivities have long been focussed on its competitiveness within Asia (above all JPY and KRW), and to the EUR due to the colossal volume of bilateral trade. It is worth noting that the JPY reaction to the BoJ decision has taken the USD to a 20-yr high vs. the JPY, and how EUR and CNY are back in lockstep – see attached charts. Perhaps more importantly, it is worth reiterating that the persistently high level of volatility means that the cost of hedging, not only for fund managers, but above all for commercial players in commodity and energy markets is becoming pernicious, and presents an even bigger threat that the trend to hoarding of raw materials and semi-finished (intermediate) products, triggered by all the supply disruptions due to the pandemic raises the prospect of an inventory recession even higher, and all the more so given the demand destruction that is increasingly evidently due to high inflation.

** Germany – April HICP **

– Whether the Eurozone, US or UK, the focus in terms of monthly inflation is primarily on m/m, rather than on heavily base affected y/y rates, which will be favourable in Q2, though not as favourable as many central banks had expected (let’s call that hoped, Ed.) given Ukraine war effects on energy and food prices. That said April CPI data will benefit from the setback in many energy prices (even if this is going to continue to be choppy from month to month) after the March surge, and thus above all be beneficial in y/y terms. Expectations are for a sharp drop in m/m terms from March to 0.4% vs. March 2.5%, which would see HICP in y/y terms unchanged at 7.6%, with the first reading from North-Rhine Westphalia at 0.6% m/m suggesting some upside risks. This is in contrast to the large downside miss on Spanish HICP -0.2% m/m vs. expected +0.4% m/m, with the y/y rate falling to 8.3% from 9.8%. The latter underlines a fairly simple point that in Spain, which also reported a big jump in Q1 Unemployment to 13.65% from 13.0%, there is rather less pricing power, i.e. ability to pass through sharp rise in Input costs, than in Germany, in no small part due to the big hit Spain has taken from the drop in tourism due to the pandemic. Be that as it may, inflation remains high in both countries, and the evidence of demand destruction is likely to become ever more visible in coming months.

** U.S.A. – Q1 advance GDP **

– The headline reading for GDP is expected to slow very sharply to just 1.1% SAAR, in part a mean reversion after a strong 6.9% Q4 print, with the impact of the Omicron variant clearly weighing heavily in the equation. However the biggest drags on the headline are likely to come from Trade and Inventories, which are each likely to deduct between 1.0 and 1.5 ppts from headline GDP, while the ex-Trade & Inventories reading should recover quite sharply to 3.5%/4.0% SAAR after a soft 1.7% reading in Q4, though Personal Consumption is expected to pick up more modestly from 2.5% to 3.5%. But it has to be added that whatever the outcome, this is unlikely to weigh much in the Fed’s policy decision next week, which will be primarily motivated by being way behind the curve on inflation and a very tight labour market, with today’s Initial Claims seen holding close to more than 50-yr lows at 180K.

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Risk Warning: Investments in Equities, Contracts for Difference (CFDs) in any instrument, Futures, Options, Derivatives and Foreign Exchange can fluctuate in value. Investors should therefore be aware that they may not realise the initial amount invested and may incur additional liabilities. These investments may be subject to above average financial risk of loss. Investors should consider their financial circumstances, investment experience and if it is appropriate to invest. If necessary, seek independent financial advice.

ADM Investor Services International Limited, registered in England No. 2547805, is authorised and regulated by the Financial Conduct Authority [FRN 148474] and is a member of the London Stock Exchange. Registered office: 3rd Floor, The Minster Building, 21 Mincing Lane, London EC3R 7AG.                  

A subsidiary of Archer Daniels Midland Company.

© 2021 ADM Investor Services International Limited.

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