Written Commentary
US airstrikes on Iran prompt another reality check for AI investment euphoria, keep focus on Persian Gulf; US Personal Income/PCE and ECB April minutes top events run, busy run of political and economic news to digest overnight.
- U.S.A.: housing price ‘quirk’ and energy prices to pace increases in PCE deflators, as many Fed speakers’ rhetoric shifts to hawkish stance
- Australia: strong Q1 CapEx all about AI related investment, highlight lopsided economy profile, provide boost to Q1 GDP, though offset by hefty reliance on imports
- U.K.: array of surveys and auto output underline increasing headwinds from domestic political crisis and energy/supply chain pressures
- Market price action to Persian Gulf news underlines skew in reaction Function
EVENTS PREVIEW
Reports of US air strikes near Bandar Abbas are a reminder (if any was needed) that the current ceasefire is very fragile, and that the US and Iran remain very far apart in reaching any sort of framework deal, let alone a long-term and sustainable peace agreement. Market reaction to the latest escalation has been instructive, with the rally in oil prices and equity markets setback rather modest by comparison to the risk rally, oil sell-off in the earlier part of the week – call it wilful blindness or wishful seeing, but it does underline where the balance of risks lie.
While the statistical focus will be on US Personal Income and PCE deflators, there is a broad spectrum of other items to consider. The Bank of Korea held rates as expected but signalled a hawkish shift that implies a rate hike in coming months, while revising its 2026 GDP forecast sharply lower, and CPI forecasts for 2026 and 2027 higher. China’s PBOC renewed its call for banks to increase lending, but as the run of credit aggregate data over the past 2 years attests, both consumer and business demand for credit remains very weak due to a very persistent lack of confidence. Any increase in June Loans will likely only follow typical quarterly seasonal patterns, which see a surge in the final month as banks window dress their loan books to ostensibly meet targets by utilising a variety of tricks. Australia’s Q1 CapEx was much stronger at 6.5% q/q than expected, wholly due to a further surge in Data Centre Buildings and Equipment investment, but offset by drops in residential and other commercial construction to leave Building CapEx overall down 3.8% q/q. It will help to boost next week’s Q1 GDP, though the fact that much of the data centre equipment is imported means there will be an offset from Net Exports. While the focus remains on the Persian Gulf, the EU faces increasing tensions with both China on trade (as per the latest tariff moves) and with Russia in miliary terms with a good deal of chatter in Central Europe and the Baltics about a potential invasion of Lithuania, as well as the comments overnight from Russia’s SVR foreign intelligence service chief accusing the EU of preparing for a large scale conflict in the East. Meanwhile in the UK, the headwinds for the economy from the domestic political crisis, energy price pressures and supply chain disruptions are becoming more evident, with reports overnight showing a drop in UK auto output and drops in Food makers and Services confidence.
** U.S.A. – Personal Income, PCE, Q1 revised GDP **
The initial revision to Q1 GDP is forecast to show an insignificant upward revision to 2.1% from 2.0%, on the back of stronger residential construction. But the focal point will be the PCE deflators as Warsh takes the helm of the Fed. As was evident in CPI, headline PCE will see pressure from gasoline and to a lesser extent food prices with a 0.5% m/m rise pushing up the y/y 0.3 ppts to 3.8%. Meanwhile, the core deflator will also see the same upward pressure from housing as the October government shutdown related anomaly is ironed out with a 0.3% m/m rise, edging up the y/y rate to 3.3%. But regardless of the outcome and any rationalizations to explain away the shift higher in the PCE deflators, the mood music on the FOMC about the Fed policy outlook continues to take a decisively shift hawkish, with vice Chair Jefferson joining the array of regional Fed presidents highlighting the potential need for a rate hike, Chicago Fed’s Goolsbee noting that services inflation has been a lot more persistent than he had anticipated.
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