Macroeconomics: The Week Ahead: 16 May to 20 May
Written by Marc Ostwald, ADMISI’s Global Strategist & Chief Economist
The Week Ahead – Preview:
The new week brings a raft of activity data from the US and China (Retail Sales, Industrial Production, Housing along with US Regional Fed Manufacturing surveys), UK Inflation, labour and Retail Sales data, Japanese Q1 GDP, Canada CPI. China sets its MTLF and LPR rates (only a 5 bps cut seen in 1-yr LPR). The ECB publishes the ‘account’ of its April, with Fed, ECB and BoE speakers again out in force, and there are policy meetings in Philippines and South Africa, the former seen holding rates, and the latter seen hiking rates by 50 bps for the first time since 2016. The Q1 earnings season is winding down in the US with only 16 companies reporting, and the focus on Deere & Co and store retailers (Walmart, Home Depot, Kohl’s, Lowe’s & TJX amongst others), though it will be a busy week for heavyweight earnings in Asia (Samsung, LG, JD.com, Tencent, Xiaomi, Mitsubishi UFJ, Bharti Airtel amongst others). The Eurozone tops the run of govt bond sales, with auctions in France, Germany, Spain, Finland, while the US sells 20-yr, UK 30-yr and Japan 5-yr. The fall-out for crypto markets from the Terra Luna collapse will also continue to be a focal point.
As noted on Friday, there has been a clear focal pivot in markets away from inflation to growth concerns, which is above all evident in market policy rate expectations. In part this reflects a recognition that developed and EM central banks are using the blunt instrument of interest rates to weaken demand to ease supply side driven inflation, with likely little success in taming goods and services inflation, but plenty of fall-out for growth as they overplay their interest and liquidity withdrawal hand. The irony of course is that they may well have plenty of success in reining in and deflating the asset price inflation (bubble) that their zero rates and QE has fostered since the GFC; masters of their universe they certainly are not, nor have they ever been. As previously observed the drop in equity indices year to date has been large, but thus far not (as yet) indicative of capitulation, which is at least in part due to the fact that as much as corporate issuance (IG and HY) has dropped due to volatility, the widening in credit spreads has been relatively well contained (see charts), though average USD HY spreads are threatening a break higher. On the other hand, while volatility in VIX terms is elevated but well contained, there is at some point going to be a reckoning due to USD strength and the high level of FX volatility (see chart).
The overarching themes of the Ukraine war, China’s Covid-19 battle or rather its dogged adherence to its “zero Covid” policy, and an array of political tensions continue to get ever more complex. If, as many reports are now suggesting, Putin is in very poor health does this raise the risk of precipitous action, above all a tactical nuclear strike, or does it raise the prospect of a change of leadership, and would this change the course of the war? The ‘weaponization’ of food and energy in the context of the Ukraine war was clearly the driver of the most recent surge in commodity prices in March, but now has the added elements of fresh bouts of extreme weather in India and the Americas thrown into the mix, along with the fuel refining capacity constraints, above all in the US. In the UK, the ruling Conservative party’s long established penchant for internecine warfare between its leaders (though it should be added the Labour party is clearly no better) is once again all too evident, with allies of Johnson, Sunak and Truss seemingly more interested in informing against each other, than dealing with an economy that has hit the buffers, with yet another bout of Northern Ireland Protocol sabre rattling with the EU thrown into the mix as a very ugly piece of political distraction. The EU’s struggle to reach an agreement on a phased embargo on Russian energy imports underlines that for all the largesse and ostensible unity demonstrated at the start of the Ukraine war, the divisions between members remain all too clear, and the German government’s struggle to escape the constraints of its clientelistic relationship with Deutschland AG is in fact not only damaging relations with the CEE and Baltic nations, but actually fostering distrust. As an aside, it is worth noting that both the Green party leaders Baerbock and Habeck’s approval ratings have been rising sharply, while Scholz’s have fallen sharply, due to their respective responses to the Ukraine war.
Be that as it may, China’s array of activity, property and labour data gets the week off to a busy start, with last Friday’s much sharper than expected slowdown in New Yuan Loans and Aggregate Social Financing already offering some insights into the impact of the extensive lockdowns. But while the resultant supply chain disruption and drop in Chinese demand has obvious ramifications for the global economy, the data will also reflect the continuing impact of the property sector’s deep seated woes, which are anything but resolved, above all evident in the weekend move to lower mortgage rates by 20 bps for first time buyers. Retail Sales are forecast to post a drop of -6.6% y/y (March -3.5%), within which auto sales (-46.1% y/y) will be a big drag, while Industrial Production is seen slowing to 0.5% y/y (March 5.0%), and while the weekend moves to start loosening movement restrictions in Shanghai suggest that the worst is past, it may take until July for a rebound to manifest itself in a robust manner. The credit aggregates suggest some downside risks to both Fixed Asset Investment, which is expected to slow sharply to 7.0% y.t.d. y/y from 9.3%, and Property Investment -1.5% y.t.d. y/y from 0.7%. Last but certainly not least, even if the data series is of very dubious quality, the Surveyed Unemployment Rate is seen rising yet again to 6.0% from 5.8%, i.e. within touching distance of the Covid-19 high of 6.2%, and presenting an increasing threat to the authority of the CCP, which above all hinges on ensuring that the populace at large is not brutally exposed to boom bust cycles in labour demand. Monday also sees the PBOC’s 1-yr MTLF operation, seen at an unchanged 2.85%, and a low but seasonally typical CNY 100 Bln total, though a larger injection seems very possible.
In the US, there will doubtless be some very binary interpretations of the week’s data, especially any misses relative to forecasts, but contextual perspective is required. Retail Sales are seen up 1.0% headline (vs March rev. 0.7%), while are the ex-Autos and Gas measure is expected to be steady at 0.7% m/m, but obviously much weaker once adjusted for the higher than expected CPI. However some of that weakness in real terms also reflects a continued swing back from Goods to Services spending as the economy to an extent reverts to more normal spending patterns, and the risks in terms of the nominal data looks to be to the downside of the consensus estimates, given the broad based pressure on goods prices. Industrial Production is seen up 0.5% m/m, with a boost likely to come from auto output as manufacturers continue to try to boost out and forecourt inventories despite continued supply chain headwinds, with favourable seasonal adjustment also providing a boost, while extractive (mining) industries are likely to continue to boost output given high prices, though utilities may drag given more normal seasonal weather patterns after a warm March. However the focus is likely to be on the forward looking metrics (above all orders and outlooks) within the May NY and Philly Fed Manufacturing surveys, and the extent to which supplier deliveries, inventories and prices signal any easing in both demand and supply chain disruptions. There is also an array of housing sector data – NAHB, Housing Starts, Building Permits and Existing Home Sales – which should offer some insights on the risk of increased supply as rising mortgage rates start to bite into demand.
In the UK, CPI will take centre stage as the 54% rise in the household energy price cap hits, which will account for around 1.7 ppts of the anticipate 2.6% m/m rise in CPI that would jump the y/y rate to 7.9% from March’s 6.2%, with core CPI seen moving up to 6.2% y/y from 5.7%, underlining the broader pressures on goods prices, with food prices also likely to pressure headline. RPI is expected to rise 3.4% m/m to take the y/y rate up to 11.)%, the highest level since 1981, while PPI Input and Output are both expected to moderate to a still very high 1.1% m/m after surging 5.2% and 2.0% respectively in March, and underlining ongoing pipeline pressures. Ahead of the inflation data come the labour data, with HMRC Payrolls for April seen picking up slightly to 51K from March’s 35K, but still pointing to weakening labour demand, even if Vacancies remain sky high. Average Weekly Earnings are seen unchanged in headline terms at 5.4% y/y, with the ex-Bonus reading at 4.1% y/y from 4.0%, underlining that employers continue to try and attract and retain staff with bonuses more than basic pay increases; the Unemployment Rate is seen unchanged at 3.8%. Friday brings Retail Sales, which are expected to drop for a third month in a row (and the 5th month in the past six), albeit at a more modest -0.2% m/m pace after falls of 1.4% m/m and -0.5% in preceding months, but still presenting clear evidence that the cost of living crisis is crimping spending. Ahead of that GfK Consumer Confidence is seen dipping 1 pt to -39, thereby matching its 2008 all-time low.
Elsewhere German PPI and WPI are likely to underline that pipeline inflation pressures in the Euro area are much higher than in the US,UK, Canada or Japan, with PPI seen at 31.3% y/y. Japan has prov. Q1 GDP, with a drop of 0.4% q/q (-1.8% SAAR) expected, pace by a drop in Private Consumption and a negative contribution from Exports, but offset by higher Business CapEx and a small contribution from Inventories. Private Machinery Orders are forecast to rebound 3.8% m/m after collapsing 9.8% in February, while Exports are expected to slow slightly to 13.9% y/y, but be totally overshadowed by an energy price driven 35.0% y/y jump in Imports. Australia has labour data, Canada looks to CPI. CEE Q1 GDP data are also due and the European Commission spring forecast update will be watched closely for further signals on the likely sharp impact on Eurozone and EU growth from the Ukraine war.
As noted there are numerous G7 central bank speakers, while outside of Philippines and South Africa, policy meetings in Egypt are anticipated to see a further 100 bps rate hike, and further 50 bps hikes likely in Paraguay and Uruguay.
In the commodity and energy space, there will be a busy run of major conferences – Australia APPEA Energy, Singapore International Ferrous Week, Cobalt Conference and Graincom in Switzerland; the International Grains Council monthly and World Platinum Council quarterly report, but apart from the run of USDA reports, perhaps most attention will to the four day annual US Wheat Quality Council’s annual Hard Winter Wheat (HWW) Tour, which concludes with results on Thursday. A close eye will need to be kept on the supply woes that have been driving US Diesel, Gasoline and NatGas prices higher, and it is also worth casting an eye over the attached array of charts on WCI Container Freight rates and the sector sub-indices of the GS Commodity Index.
As noted, Asia moves centre stage in terms of corporate earnings, with Bloomberg News suggesting the following will be among the headline makers globally: Analog Devices, Applied Materials, Assicurazioni Generali, Avenue Supermarts, Bharti Airtel, Cie Financiere Richemont, Cisco Systems, Deere, Engie, Experian, Home Depot, ITC, JD.com, Keysight Technologies, Lowe’s, Mitsubishi UFJ Financial Group, National Grid, Palo Alto Networks, Recruit, Ross Stores, Saudi Aramco, Sea, Synopsys, Tencent, TJX, Tokio Marine, Vodafone, Xiaomi.
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