Macroeconomics: The Week Ahead: 2 May to 6 May

Written by Marc Ostwald, ADMISI’s Global Strategist & Chief Economist

The Week Ahead – Preview: 

A new month begins with the array of challenges facing the world economy and financial markets leaving the vast majority of people not knowing where to look: the war in Ukraine, China’s battle with Covid-19 and its escalating fall-out on its economy, seemingly endless supply chain disruptions, energy crises, raging inflation and accompanying interest rate hikes, leaving the soft underbelly of financial market liquidity increasingly and quite harshly exposed. An array of holidays (May Day, Eid-Al-Fitr, Japan’s Golden Week) will only serve to thin trading conditions and fuel further volatility.

 

Despite all the holidays, there will be a busy run of economic data and surveys, with US labour data, Manufacturing & Services PMIs, German Orders, Production and Trade and Tokyo CPI headlining. While all eyes will be on the Fed’s FOMC meeting, the RBA and BoE are also expected to hike rates, and 4 central banks in CEE (CNB & NBP) and Latin America (BCB & BCC) are seen raising rates by a further 50 to 100 bps. There is an OPEC+ meeting which is expected to stick to the current plan on production increased, and the UN publishes its World Food Price Index (see chart), which will hit a fresh all -time high, with the misery that this inflicts being felt very heavily in Africa, Asia and Latin America as well as developed countries. Meanwhile the UK’s ruling Conservative party are expected to lose around 800 seats in local council elections on Thursday, amidst a sea of sleaze, which is likely to prompt a leadership challenge to PM Johnson. It is also peak week for US corporate earnings with 160 S&P companies reporting, and following the worst year to end April performance for the S&P 500 since 1939. Govt bond supply will be relatively light with auctions in Germany, France, Spain, Australia & Canada.

 

PMI release timings will be disrupted by the various holidays, and while the headline readings for the G7/Eurozone are expected to be little changed from relatively resilient advanced levels, it is the details that will be important, above all within the US ISM reports. The focus with in Manufacturing will be on both Orders and Prices, but above all supplier deliveries vs. inventories, and on the contrast between levels of supply chain disruption, and on the other hand evidence of demand destruction due to inflation, and increasing caution over the economic outlook given the myriad of uncertainties and pressures. On Services, the resilience in the Eurozone despite the Ukraine War, and some loss of momentum in the UK (though still robust), is likely to contrast with anecdotal evidence suggesting a potentially sharper than expected pick-up in the US Services ISM, while China’s Caixin Services PMI is expected to slip deeper into contraction territory after sliding heavily in March, mirroring the already published official NBS PMIs.

 

In the US, Friday’s Payrolls are forecast to post another robust 390K 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. All of which underlines a very tight labour market, along with another super high level of JOLTS Job Openings and Jobless Claims close to all-time lows. Auto Sales are expected to bounce to 13.9 Mln after sliding from January’s 15.04 Mln to 13.33 Mln in March, though much of the increase will down to seasonal adjustment, with unadjusted sales basically flat, and still facing major headwinds from chip shortages. Construction Spending, Factory Orders, Consumer Credit, Non-farm Productivity are also due.

 

Elsewhere, the relatively resilient German PMIs are likely to contrast with official data that is expected a tepid 0.2% m/m rise in the always erratic and uninformative Retail Sales, while Orders are seen dropping a further 1.0% m/m (Feb -2.2%), Industrial Production to fall 1.2%, and Exports to see a -2.1% m/m correction after jumping 6.4% in February. For all that the BoJ doubled down on its dovish message, Tokyo CPI is expected to see a jump to 2.3% y/y from 1.3%, though core CPI is likely to remain super low, even with the anticipated rise from -0.4% y/y to +0.6%.

 

And so to what will be a busy week for central banks, with the Fed expected to hike the Fed Funds Rate 50 bps to 0.75%/1.0%, and kick off its balance sheet reduction (QT), with $35 Bln per month initially, starting in the middle of May, and move quickly up to a $95 Bln/month pace by July.  But with markets pricing a roughly 50/50 chance of a 75 bps move at this week’s meeting and no dot plot or summary of projections, there will be questions at the press conference about the possibility of a 75 bps move in June, given that many Fed speakers have signalled a desire to get to a neutral rate of 2.50% as quickly as possible. But it is the QT programme which will get most attention. Initially it should be remembered that the current volume of Fed Reverse Repo Operations stood at a record $1.907 Trln as of Friday, and that this will serve to provide a significant buffer against the impact of QT for a while, and obviously underlines that banks have been  drowning in an ocean of ‘excess reserves’, though they are already falling quite sharply above all in latter half of April, when UST yields spiked. One can add that the US Treasury, which has seen a very sharp rebound in its balance at the Fed ($954 Bln) is well prepared for QT, and will still be able to reduce auction sizes somewhat further, but this is probably rather moot given a) it still has a borrowing requirement of $2.6 Trln for the current fiscal year, and b) US Treasury yields have sky rocketed, with the 10-yr up from an end year level of 1.51 to 2.94 on Friday. Equally important is that we are in a collateralized lending environment, so reduced auction sizes and the Fed running down its balance sheet passively (i.e. as Notes and Bonds mature) reduces the pool of collateral. With volatility in all asset classes, above all commodities, and the volume of margin calls and failed trades on the rise as a result, collateral is much in demand, but availability is becoming increasingly scarce (doubtless also underpinning the USD, well beyond any consideration of forward rate differential between USD and any or all of CNY, EUR & JPY). Thus with the war in Ukraine becoming ever more entrenched, and per se raising the risk of a shock due to Russia taking precipitous action, the chances of a money market seizure are also on the rise. The latter is rather more significant than what Powell may say about inflation, the labour market or the economy, above all due to still high levels of leverage, which in turn means that as much as markets are discounting ever more in the way of Fed tightening, there is a risk that Financial Conditions, which remain no higher than the most accommodative levels seen pre-pandemic (see chart), may tighten much more quickly than the Fed would like, and force it into yet another volte face on rates and QT.

 

In Australia, the RBA gets the week’s run of policy meetings underway, with the much higher than expected Q1 CPI data and a hawkish shift in RBA rhetoric leading to expectation of an initial 15 bps hike to 0.25%, with a not inconsiderable risk of a more aggressive 40 bps to 0.50%. If the latter does occur, the RBA will likely be at pains to stress that it still intends to tighten rates at a ‘gradual pace’ and that this more aggressive move should be seen as par for the course going forward, thus leaning against market expectations that are discounting rates at 2.50% by year end.

 

By contrast the Bank of England is expected to opt for a 25 bps hike to 1.0%, with March CPI already at 6.2% y/y and more ominously core CPI at 5.7%, even before the sharp rise in utility prices and council tax hits in the April data, and leaving the MPC no wiggle room on rates, regardless of saying in March that further rate hikes ‘may be’ appropriate. The 1.0% Base Rate level has been previously identified by the MPC as the level at which it will consider active sales of Gilts to reduce the size of its balance sheet, and it is expected to outline its plans on that front, with the consensus suggesting it would start sales in Q4 at a pace of £5.0 Bln/mth. But it will be its updated forecasts that use market implied rates as its base assumption, with the CPI forecast in February already assuming inflation would undershoot on a 3-yr time horizon at 1.6%, but at the time markets assumed a peak in Base Rate of 1.5%, and are now discounting 2.75%, which suggests that the updated forecasts should be looking at an even bigger undershoot (say 1.0%?). February’s forecasts also assumed that growth would slow sharply to 1.8% in Q1 2023 and 1.1% in 2024 and 0.9% in 2025, these are likely to be revised lower, and Unemployment estimates revised higher. It will likely be even more cautious on the outlook for further rate hikes, particularly given an array of data pointing to heightened recession risks, perhaps above all the plunge in Consumer Confidence, the slide in CBI Business Optimism and a sharp rise in insolvencies.

 

Elsewhere Norges Bank is seen on hold at 0.75%, but sticking to its rate hike trajectory, with governor Wolden Bache last week noting the strength of economic activity, limited spare capacity and ‘prospects for rising wage growth”, but adding that wage growth would have to accelerate a lot faster to prompt a steeper rate trajectory. Poland’s NBP is now paying a high price for its unwillingness to counter obvious inflationary pressures in H1 2021, with Friday’s CPI data coming in even higher than expected at a whopping 12.3% y/y, and cementing expectations of a further very aggressive 100 bps hike to 5.5%, which would still leave well behind the curve. While the influx of nearly 3.0 Mln refugees from the Ukraine is clearly straining every capacity constraint in Poland, and adding to inflationary pressures, it is not the primary driver. The more worrying aspect is that with the Polish government adding to regulatory cost pressures for Polish banks via way of a ‘supplementary’ depository guarantee fund, on top of the already very burdensome existing fund, (currently 1.8% of guaranteed deposits vs. an EU requirement of 0.8%), the rapid rise in rates will likely result in a sharp rise in loan loss provisions, and a further hit to sector profits. While Czechia’s CNB has been somewhat more proactive in terms of hiking rates, the latest CPI data (12.7% y/y vs. Feb 11.1%) and a solid 0.7% q/q for Q1 GDP predicate expectations of another 50 bps hike 5.5%, despite some CNB board members favouring 25bps, and in one case no change, and it is unlikely that it will be in a position to signal a pause on rate.

 

In Latin America, Brazil’s BCB is expected to hike rates a further 100 bps, with the IPCA-15 inflation measure rising from 10.8% y/y to 12.0%, slightly below forecast, but offering little room for the BCB to opt for a less aggressive hike. Market expectations for inflation were revised sharply higher in the BCB’s April survey (2022 seen at 7.65% y/y vs. a March forecast of 6.86%), though reports suggest Campos Neto did sound a more dovish note in comments he made during the IMF/World Bank meetings, and the BCB may yet signal that it will pause to evaluate the impact of 1,000 bps of rate hikes since the current cycle started just over a year ago. Chile’s central bank is seen hiking rates a further 100 bps to 8.0%, slowing the pace of its tightening following two consecutive 150 bps hikes, but still double the 50 bps the BCC was expecting in March. But with March CPI jumping sharply to 9.4% y/y from February’s 7.8%, it will also likely signal further policy tightening, in contrast to March when it anticipated that one further 50 bps would be sufficient.

 

As noted, it will be a very busy week for corporate earnings, above all in the US, with Bloomberg News suggesting highlights are likely to include: Airbnb, Airbus, Ambev, AIG, AMD, Apollo Global, ArcelorMittal, ANZ Bank, Barrick Gold, BMW, Biogen, BNP Paribas, BP, Chunghwa Telecom, Cigna, ConocoPhillips, Credit Agricole, CVS Health, Deutsche Post, DoorDash, EBay, Electricite de France, Enel, Estee Lauder, Expedia, Hilton, ING Groep, Intercontinental Exchange, Intesa Sanpaolo, KKR, Kotak Mahindra Bank, Lyft, Macquarie Group, Marathon Petroleum, Marriott, MetLife, Mitsui, Moderna, Moody’s, National Australia Bank, Novo Nordisk, NXP, Petrobras, Pfizer, Prudential Financial, Restaurant Brands, Shell, Shopify, Starbucks, Swiss Re, Uber, Universal Music, Vestas, Volkswagen, Williams, Yum! Brands, Zoetis

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