Macroeconomics: The Day Ahead for 6 May

A tumultuous week in financial markets ends with the US labour data for April as its centre piece, but with volatility finding a new crescendo, and price action in equities bearing many of the hallmarks of capitulation (the scale of rally and reversal in the US over the past two days only having been seen twice before in 1929 and 2008), the concern is increasingly about capital destruction. Central banks are faced with a thankless task, though one that serves a reminder that the calm imposed for much of the past 12 years by their prior ‘largesse to excess’ monetary policy has probably been consigned to the history books, and markets reaction function will need to find a new ‘modus operandi’ in these stormy times. While the war in Ukraine continues to rage and India’s scorching heatwave remain critical overarching factors, the focus remains on China, with its move to quell mounting domestic criticism of its Zero Covid policy, and the accompanying news on it banning the use of foreign PCs in govt depts and at SOEs underlining the extent of the economic headwinds facing what is one of the engines of global growth, as well as further shockwaves for already heavily strained supply chains globally. Following on from the Fed and BoE meetings, markets are clearly back in the place that I described in this Ghost in The Machine article ‘From Stockholm to Stockholm to Helsinki Syndrrome’, whereby markets swing from spinning every central bank positively to questioning and criticizing their every move https://nam02.safelinks.protection.outlook.com/?url=https%3A%2F%2Fcontent.yudu.com%2Fweb%2F400wi%2F0A400wk%2FQ12021%2Fhtml%2Findex.html%3Fpage%3D6%26origin%3Dreader&data=05%7C01%7CSimrat.Sounthe%40admisi.com%7C4e92538b948f495dd36b08da2f35b766%7C2f55bf3242d444b3a8c2930ac8b182b2%7C0%7C0%7C637874205021875625%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=Vtod7mMU6uvKcgGA86wxETRI6yI5wveLwlVB7NGjWek%3D&reserved=0

In this fraught environment, the run of statistics outside of the US labour report are unlikely to have any material impact on price action, which looks far more likely to be dictated by the fall-out from the immense volatility, via way of margin calls and liquidations to cover / cut losses. There are Japan’s higher than expected Tokyo CPI, German Industrial Production and French Q1 Payrolls to digest, with the UK Construction PMI, Canadian labour data and US Consumer Credit ahead. There will also be a busy run of central bank speakers (ECB, BoE and Fed), while a more modest run of corporate earnings featuring Intesa SanPaolo, Rheinmetall, Cigna, Liberty Media and Canadian Natural Resources amongst others. The UK council election results will be rolling through the day, with the ruling Conservatives suffering substantial losses, but perhaps not as bad as many had predicted, though a leadership challenge remains a clear possibility.

** U.S.A. – Apr Labour market report **

– Payrolls are forecast to post another robust 380K rise (March 431K), with the Unemployment Rate seen dipping 0.1 ppt to 3.5%, and probably more importantly show a slight pick-up in the Participation Rate to 62.5%, but still 1.0 ppt lower than pre-pandemic, by contrast the key Underemployment Rate (last 6.9%) may drop to a fresh multi-decade low. But after the much bigger than expected surge Q1 Unit Labour Costs (11.6% y/y), which underlined the scale of second round effects due to broad inflation pressures as well as a very tight labour market, it will be Average Hourly Earnings that will be the focal point, with a further 0.4% m/m rise expected, which would see the y/y rate ease 0.1 ppt to 5.5%. While Wednesday’s ADP was below forecasts (+247k), it was the detail on who is hiring that was eye catching, with Large company employment (+321K) very robust, in contrast to a 46K gain in Medium and a drop of -120K in Small. While month to month data are volatile, underlying trends suggest that large companies with stronger spending power and the potential to offer a wider array of benefits, are starting to squeeze out smaller companies in a very competitive labour market. As has been well documented, US employment growth has typically seen smaller companies account for 60-65% of annual job creation, thus the current trend implies a substantial headwind to what are generally the more agile, creative and innovative companies that occupy the small company space, and per se presents another headwind to growth. But that is a longer-term perspective which is unlikely to have any impact on price action today, which as noted above will be primarily dictated by the fall-out from current volatility.