Macroeconomics: The Week Ahead: 12-16 May 2025

The Week Ahead – Preview:  

  A major week for economic data (above all in the US and UK) awaits, as market optimism about US trade deals easing ‘tariff wars’ concerns contributed to a much calmer week for risk assets, above all equities, with the VIX volatility index closing the week at 21.9%, the lowest since the end of March. Yet last week saw the normally rather sleepy Taiwan Dollar surge as a combination of local insurance companies being forced to rehedge their very extensive USD exposures meeting speculation about an imminent trade deal with the US, a move which only finds precedent in the GFC and the 1985 Plaza Accord. In Germany, Merz was only confirmed by the Bundestag as the Chancellor, after an unprecedented (in the history of the Federal Republic) second vote, perhaps not that surprising given that even before taking office his public disapproval rating stood at 56%, quite remarkable for a leader that markets think will turn Germany’s long ailing economy around. Long standing tensions over the disputed Jammu and Kashmir border regions between India and Pakistan flared to the point of a full blown war, in the worst crisis since 1971, but will hopefully ease after US efforts mediated a ceasefire agreement this weekend. Yet the US and UK ‘trade deal’, which in truth and as UK ambassador to the US Mandelson said is little more than a framework agreement for future negotiations, was probably the biggest headline grabber for market sentiment.

  In calmer times there might have been more reaction to the Fed and BoE meeting outcomes, with the 3 way vote split on the BoE decision highlighting how difficult monetary policy formation has become as prior economic models are simply no longer relevant or deployable, though overall still pointing in the same policy direction of gradual rate cuts (but sadly not addressing the main elephant in the room, i.e. the need to discontinue active Gilt sales, and thereby facilitating the UK Treasury in conjunction with the DMO to embark on a much need ‘Twist’ operation involving a major swap of long for short dated Gilts). By contrast, the Fed dug in more deeply to its resolute position of not taking any form of pre-emptive policy action without a clearer picture on how the US administration’s policy decisions and execution will play out in terms of inflation, employment and by extension growth. But it should not be forgotten that there is an element of paralysis (‘rabbits in the headlights’) that is reinforcing the FOMC’s policy stance via way of the two major errors of judgement that it has made in the past four years, firstly ‘team transitory’ on the 2021/22 run up in inflation, and secondly the misreading of the US labour market last summer, i.e. cutting rates initially by 50 bps in the face of what were only very tentative signs of labour demand loosening. Even though markets have largely ignored the latter, largely on the basis of a self-serving justification of ‘what’s not good about rate cuts?’ (a very classic example of ‘wishful seeing and wilful blindness’).

   Be that as it all may, inflation readings from US, China and India, along with activity data in the US, UK and Japan and labour market signals in UK and Australia, along with China’s credit aggregates will be the focal points statistically. But these will remain to a large extent subordinated to geopolitics, with US China trade negotiations, another round of nuclear talk between the US and Iran, President Trump’s four day visit to Qatar, Saudi Arabia and UAE as the US administration looks to drum up investment into the US from the GCC sovereign wealth funds and energy behemoths. The commodity space has IEA and OPEC monthly oil market reports, as oil markets continue to debate the wisdom of the OPEC production increases in the face a weak and uncertain demand environment, while the agricultural sector looks to key monthly S&D reports, via way of USDA WASDE, China CASDE and Brazil’s CONAB (corn & soybeans) and Unica (sugar), while China hosts the annual Cobalt Congress, and Grain.com takes place in Geneva. The corporate earnings focus shifts away from a light week in the US (Deere & co and Walmart) to Europe (major insurers, Bayer, Daimler & Siemens), China (Alibaba, JD.com, Tencent), Japan (Japan Post, major banks, Softbank) and India (Bharti Airtel, Tata Motors), with Petrobras and Saudi Aramco headlining a further stream of energy sector earnings. Govt bond supply is plentiful in Europe (UK, Germany, Italy, Netherlands, Portugal) and Japan (5 & 30 yr), but there is a rare blank week for coupon sales in the US.

– China: CPI (unchanged at -0.1% y/y) and PPI (-2.7% y.y vs. expected -2.8%, prior -2.5%) were broadly in line with forecasts, with most components also little changed on the month, above all core and Services CPI (both 0.5% y/y). It underlines both the motivation for last week’s long awaited PBoC policy easing, and housing sector measures, and the point that all the non-monetary stimulus measures have so far done little to stimulate demand. One might note that there are echoes of what happened in the Eurozone under the negative rates regime, where instead of the highly debatable textbook expectation that low rates prompt more consumer spending, consumers are prone to save more, and all the more so in Asia, where there is a strong savings culture (above all relative to the Anglo-Saxon world), with China’s very thin and underdeveloped social security framework only exacerbating this. Weak labour demand and stagnant wages, the long-standing property sector woes eroding household savings quite dramatically (as roughly 65-70% of savings were allocated to property investment), and a protracted period of household debt accumulation are all conspiring to negate much of the impact of stimulus measures. Given the tariff wars with the US, which is already impacting the many export-oriented businesses in China, and the lack of any far reaching resolution of property woes, there seems little prospect of any significant turnaround in Private Consumption, whatever the outcome of this week’s Credit Aggregates. The latter are forecast to show a seasonally typical tepid CNY 700 Bln increase in New Yuan Loans (in line with seasonal pattern and last year’s rise), and a CNY 1.36 Trln rise in Aggregate Social Financing, slightly above seasonal trend, but way stronger than the very weak outturn in 2024).

– U.S.A.: The focus will primarily be on Tuesday’s CPI and Thursday’s Retail Sales, neither of which are likely to nudge Fed policymakers into action, given that the impact of tariff wars and other US administration measures will be anything but uniform in timing terms (per requiring more in depth and protracted trend analyses). CPI is forecast to rise 0.3% m/m on both headline and core, leaving y/y rates unchanged at 2.4% and 2.8% respectively. There will be particular focus on items most likely to be impacted by tariffs that have been in place since February, e.g. household furnishing, apparel and other recreational goods, which in March implied that retailers are absorbing rather than passing through price increases, with the surge in imports implying that pre-tariff inventories can temporarily obviate the need for steep price increases.  Thursday’s PPI will also see a rebound from March’s negative prints, the question is how much rebounds in pharmaceuticals and goods sensitive to tariffs are offset by a continued fall in airfares (both demand and energy driven) and portfolio management fees (paced by equity sell-off), with headline seen up 0.2% m/m and core 0.3% m/m, though y/y rates would dip 0.2 ppt to 2.5% and 3.1% respectively, if the consensus estimates are correct. Retail Sales are expected to moderate to 0.1% m/m headline and 0.3% m/m on all core metrics, following the auto led headline surge of 1.5% m/m and robust 0.6% m/m ex-Autos in March, with the fall in gasoline prices tempering gains, though anecdotal evidence suggests consumers continued to try and front-run tariff related price increases, above all for clothing and electronics, though any weakness in spending at restaurants and bars would imply that underlying household consumption is slowing quite sharply. Industrial Production (median 0.1% m/m) and Manufacturing Output (-0.4% m/m vs. prior +0.3%) are expected to be sluggish, while May sector surveys are expected to see the very erratic NY Fed measure little changed and the Philadelphia measure rebounding to -10.0 after crashing to -26.4 in April, with the NAHB Housing Market Index expected to be unchanged at 40.0. Fed speakers will be plentiful, with Powell set to talk about the Fed’s monetary policy review at the Thomas Laubach Research Conference on Thursday.

– UK: Following on from the BoE meeting and what was a likely very low impact (in growth terms) trade deal with the US, which does little or nothing to remove persistent uncertainty about the global economic outlook, particularly as roughly 45% of all UK exports to the US go via transit countries (EU, Canada, Mexico, even China), which may be subject to different regimes, the focus turns back to labour market and activity data. Monday sees the latest KPMG/REC Employment survey, with the focus on likely ebbing labour demand and increasingly subdued wage pressures, while Tuesday’s BRC Retail Sales will likely get a warm weather and Easter timing effect boost (consensus 2.3% y/y vs. March 0.9%). Official labour data are anticipated to see a more moderate -32K drop in HMRC Payrolls (March -78K, but watch out for often large revisions), and a likely further rise in the April Claimant Count and a drop in Vacancies, while the March Unemployment Rate is forecast to edge up 0.1 ppt to 4.5%. Stubbornly high Average Weekly Earnings are likely to have been a key element in BoE’s Pill’s vote for no change (fellow dissenter Mann’s credibility is now very dented, given that as recently as February she advocated for a 50 bps rate cut – such activism in the face of so much uncertainty lacks logic), and are expected to ease to 5.6% y/y headline and 5.7% ex-Bonus vs. 5.9% in February. However, the fairly consistent evidence from pay settlements surveys suggest wage growth is closer to a modest 3.0%. Thursday’s Q1 GDP is expected to show a solid 0.6% q/q gain, due to the manufacturing led gains in January and February, but March monthly GDP is forecast to show that the economy stalled, with a flat m/m reading, paced by a setback of -0.8% m/m in Manufacturing Output, with Services posting only a slight 0.1% m/m increase. A solid 0.5% q/q increase in Private Consumption, and a boost from trade (Exports 2.3% q/q, Imports -0.1% q/q), and a reasonably healthy 0.4% q/q rise in Business Investment are also contributing to the quarterly outturn. While the GBP and BoE market rate expectations will be sensitive to readings wide of expectations, these reports are unlikely to shift divided opinions on the MPC.

– Japan: Ahead of Friday’s Q1 provisional GDP, PPI is likely to highlight continued pipeline pressures, despite downward pressure from energy prices, with a rise of 0.3% m/m 4.0% y/y forecast. Q1 GDP is expected to fall -0.1% q/q or -0.3% SAAR, primarily due to a large -0.5 ppt drag from Net Exports offsetting a 0.5% increase in Business Investment and a very tepid 0.1% q/q increase in Private Consumption, and also helping to boost the Inventory contribution to +0.2 ppt. It will as such only cement expectations of a very cautious BoJ stance on further rate hikes, with many now not expecting any further rate hikes in 2025. The Economy Watchers (services) Survey also merits some attention, with a fifth consecutive m/m fall to 44.6 anticipated, which one can largely attribute to US tariff related concerns, but is also symptomatic of the rise in real wages failing to materially boost private consumption, in part due to rapidly aging demographics.

– India: This week’s CPI is seen easing slightly to 3.2% y/y from 3.3%, again primarily paced by falling food prices, and thus keeping inflation well below the RBI’s 4.0% target, and allowing the RBI to continue to ease policy further, though the current disinflationary period is likely to trough in coming months. But with India reaching a trade deal (after many years) with the UK last week, the focus will be on its near frantic efforts to press for a trade deal with the US.

– There are 11 S&P 500 companies reporting this week, with worldwide corporate earnings highlights as compiled by Bloomberg News likely to include: 3i Group, Alcon, Alibaba Group, Allianz, Applied Materials, Aristocrat Leisure, Banco BTG Pactual, Banco do Brasil, Bayer, Bharti Airtel, Bridgestone, CEZ, Compass Group, Constellation Software Canada, Dai-ichi Life, Daimler Truck, Deere & Co, Deutsche Telekom, Dubai Electricity & Water Authority, E.ON, Engie, Experian, Ferrovial, Hannover Re, Hapag-Lloyd, Hon Hai Precision Industry, Honda Motor, Imperial Brands, Japan Post, Japan Post Bank, JD.com, KBC Group, KDDI, KE Holdings, Merck, Mitsubishi UFJ Financial Group, Mizuho Financial, Munich Re, NetEase, Nu Holdings, PetroBras, PTT, Richemont, RWE, Saudi Arabian Oil (aka Aramco), Sea, Siemens, Simon Property Group, SoftBank, Sony, Sumitomo Mitsui Financial, Swiss Re, Take-Two Interactive Software, Talanx, Tata Motors, Telefonica, Tencent, Terumo, UniCredit, Verbund, Walmart.