Macroeconomics: The Week Ahead: 23 May to 27 May

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

The Week Ahead – Preview: 

The new week being the last full working week of the month will bring the usual run of business surveys, including G7 flash PMIs, German Ifo and Eurozone EC Confidence, with a more modest run of official statistics dominated by the US with Durable Goods, Personal Income and Private Consumption (PCE) along with New and Pending Home Sales. Elsewhere the UK has PSNB, Japan Tokyo CPI mad Australia looks to Q1 Private CapEx and Construction Spending along with monthly Retail Sales. On the central bank front, the ECB will be out in force on the speaking circuit next week, the Fed publishes its May 4 minutes, while there are RBNZ and Bank of Korea policy meetings, and some rather tricky rate decisions in the EM space: Ghana, Indonesia, Nigeria and Pakistan, while the Bank of Israel is expected to raise rates a further 25 bps to 0.60%. There are the Australian election results to digest, which saw the opposition Labour score an unexpectedly emphatic win; there are also the Davos World Economic Forum, which will not offer anything other than pie in the sky ideas and ugly virtue signalling to deal with the myriad of profound challenges facing the global economy. However the Monday session on ‘Averting a Global Food Crisis’ will garner plenty of media and market attention.

Meanwhile the US House holds a potentially interesting hearing on “Digital Assets and the Future of Finance: Examining Benefits and Risks of a US CBDC”, which will inevitably feature questions about the current crypto currency woes. On the corporate earnings front there are Q1 reports from Chinese tech giants Alibaba and Baidu, as well as Pinduoduo, which feature alongside major Canadian banks, while JP Morgan holds its investor day. There will also be plenty of interest in a rash of key AGMs for Amazon, Chevron, Exxon Mobil, McDonald’s, Shell and Twitter. Govt bond supply is very plentiful with the US selling USD 137 Bln of 2, 5 & 7-yr, with auctions also scheduled in the UK, Germany, Italy, Belgium, Netherlands, Greece, EU, Canada and Australia, but the focus will remain very firmly on corporate credit spreads after last week’s jump wider. Month end influences will also come into play during the week, as thin underlying market liquidity conditions, complex portfolio rebalancings after the recent turmoil, and the long US Memorial Day weekend will doubtless prompt many to make related transactions as early as they are permitted. Reports out of China are also suggesting that many local hedge funds are at risk of dropping below a key threshold that would force them to liquidate some of their holdings, and these will surely be hoping that Friday’s 5-yr LPR cut euphoria gets further traction this week. Some thoughts on that LPR cut and markets in this interview with BNN Bloomberg from Friday: https://nam02.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.bnnbloomberg.ca%2Fvideo%2Fmarkets-have-yet-to-price-in-the-withdrawal-of-economic-liquidity-macro-strategist~2446976&data=05%7C01%7CSimrat.Sounthe%40admisi.com%7C94c470008fbd46c7964408da3c1df5f5%7C2f55bf3242d444b3a8c2930ac8b182b2%7C0%7C0%7C637888396667632076%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=IO5MGf5Wt80nXSOV0xifjbfvVDE9LoYubHZcDQd3dQ0%3D&reserved=0

The overarching themes of the Ukraine War, China’s Covid-19 battle and an array of extreme weather conditions or events (with the US NOAA publishing its initial 2022 Atlantic hurricane season outlook this week) remain key drivers, above all in terms of the fall-out on already very strained supply chains, and by extension the global economic outlook. While the Ukraine war remains entrenched in enormous loss of life and mass destruction, it is worth noting that there have been moves by the US and Italy in recent days in the direction of what can only be described as appeasement of Putin and Russia, for example the Italian foreign minister Di Maio’s proposal suggests occupied territories become autonomous, in principle still under Russia’s control, even if nominally under Ukreine sovereignty. This is basically a ‘frozen conflict’ proposal, i.e. it might stop the war temporarily, but it could easily be reignited at any moment. While Zelenskiy underlined that diplomacy was the only route to peace in his address Saturday, there was no sign that the Ukrainian government would willing in any shape or form to sacrifice its territorial integrity, as is to be expected. In terms of China’s Covid-19 battle, the stimulus measures announced thus far have underwhelmed, the more poignant question for markets is perhaps whether the gradual re-opening (assuming it is not derailed by another outbreak) prompts some re-stocking of an array of commodity and energy reserves, and obviously how much of this is diverted output from Russia, as well as whether this actually serves to impinge even further on already strained supply chains.

As noted, the data schedule is dominated by surveys, and while the run of PMIs are all expected to remain in expansion territory, they are also all expected to fall vs April, albeit modestly, as are Germany’s Ifo, and French, Italian and Belgian Business Confidence. Indeed the only survey expected to post a rise this week is the UK Retailing Sales metric, but if forecasts of -30 are correct, this will be of the ‘dead cat bounce’ variety, after collapsing to -35 in April from March’s +9. The PMIs details may well get more attention than the headline readings, above all prices, orders and supplier deliveries, as well as any anecdotal commentary about the relative impact on current outlooks from supply chain disruptions on the one hand, and potential demand destruction on the other.

In the US, the now rather historical Q1 GDP data are not expected to be revised from trade and inventories induced -1.3% SAAR, though they may be marginal tweak higher to the provisional estimate of a healthy +2.6% SAAR increase in Final Sales to Domestic Buyers. The more timely April Personal Income and PCE are forecast to post solid gains of 0.5% and 0.7% m/m, echoing Average Earnings and Retail Sales, but it is the PCE deflators which will be the discussion point, with anticipated gains 0.2% m/m headline and 0.3% m/m core implying a drop in y/y rates to still lofty 6.2% (vs. March 6.6%) and 4.9% (vs. 5.2%). While this would suggest that March was the likely peak, the real question is where will they be at year end, with the FOMC anticipating a very slow decline to 4.3% and 4.1% back in March, and likely higher than that now. Durable Goods Orders are expected to rise a healthy 0.5/0.6% on headline and core measures, with some upside risks to headline from transport, while rising Mortgage rates are unsurprisingly seen weighing on New (-1.7% m/m) and Pending Home Sales (-2.0%). But perhaps more attention will go to the frequently overlooked Wholesale and Retail Inventories data, after numerous disappointments in Retailer earnings, with further large gains of 2.0% and 1.9% m/m expected, which will heighten concern about demand weakness and an inventory led downturn in the sector – see chart. Even if this is in part a normalization effect as spending reverts to Services after a Goods spending boom during the peak period, the fact that Amazon has announced that it is looking to dispose of, or sublet a minimum of 10 Mln square feet space due to falling demand will only augment concerns about Private Consumption prospects

Elsewhere Tokyo CPI is expected to be little changed at 2.5% y/y headline and 2.0% core, which is unlikely to dissuade the BoJ from seeing this above target inflation as unlikely to be sustained. Australia’s Retail Sales are expected to post another healthy 0.9% m/m increase, while the initial components of next week’s Q1 GDP are anticipated to show a 1.0% q/q rebound in Construction Output, and another solid 1.5% q/q rise in Private CapEx

On the central bank front, the early May FOMC minutes will combed for clues on the rate trajectory, with a large majority likely to have backed the heavily flagged series of 50 bps hikes through to July. The question more poignantly is the discussion about how much above the neutral rate to 2.50% might need to go, and how many back the very hawkish Bullard view that the faster and higher they hike, the more they could cut rates in 2023, if the economy slows more than anticipated. The discussion on QT and the pace of the run-off will also be of interest, though primarily in terms of what size balance sheet they ultimately see as desirable, with opinions likely to diverge quite sharply. A further point of interest is what sort of degree of tightening financial conditions they would welcome, and at what point would the pace or extent of the tightening start to raise alarm bells – the discussion around this will perhaps be of greater interest in the June minutes, given the more persistent sell-off in equities and latterly credit in recent weeks

While the hawks are very much in the ascendancy at the ECB, this week’s busy run of ECB speakers will perhaps be most interesting for the speech by Panetta, particularly in the context of a seemingly concerted pushback on the doves against the suggestion of a 50 bps hike, which markets currently accord a 50% probability. But it is the rising levels of ECB speakers voicing concern about the weakness of the Euro, and whether he offers any thoughts on that which may be the most interesting aspect. New Zealand’s RBNZ is seen hiking rate another 50 bps to 2.0%, with the Q1 CPI data undershooting forecasts at 1.8% q/q, but at 6.8% y/y rising at the fastest pace in 32 years, and ‘core’ Non-tradeables CPI rising a very punchy 1.5% q/q, it is likely to continue to retain a very hawkish bias. The consensus looks for another 25 bps rate hike to 1.75%, but there is increasing talk about the possibility of a 50 bps hike, though this seems a bit more likely in July, with CPI seen headed above 5.0% y/y in May and still higher in June. To a certain degree, the BoK will also want to ensure that it stays ahead of the Fed.

In the EM space, Bank Indonesia is seen on hold once again at 3.50%, but with inflation accelerating, it is likely to signal that an initial rate hike is close at hand, and will be particularly mindful given the recent weakness in the IDR. Turkey’s TCMB is again expected to hold rates at 14.0%, despite April CPI hitting a whopping 70% y/y and another sharp drop in the TRY, with its hands continuing to be tied by political interference. West African currencies have been under the cosh, as inflation soars, with rate decisions due in Ghana and Nigeria, and while the Bank of Ghana is likely to hike rates by a further 200 bps to 19.0%, real rates will still be deeply negative after April CPI soared to 23.6% y/y. Nigeria’s CBN is expected to hold at 11.50%, being a lot more concerned by a very fragile recovery that has been undermined by the fall-out from the War in Ukraine (with Q1 GDP seen slowing to 3.1% this week), than a further jump in CPI to 16.8% y/y.

In the commodity and energy sector, volatility remains fairly extreme; with weather conditions and events adding to the supply disruptions due to the Ukraine war and the resultant array of major food security concerns for the Agricultural sector, and putting a lot of focus on Monday’s EU monthly MARS crop bulletin, especially given intensifying drought conditions in France. Last week’s US mid-West crop tour was hardly encouraging. In the energy sector, the World Gas Conference takes place in South Korea against the backdrop of rapidly shifting trade flows due to the war in Ukraine and a well-documented supply deficit, meanwhile low inventories and refining capacity constraints have thrust oil products into the spotlight, as US gasoline prices hit fresh highs just as the ‘driving season’ gets under way. Votes on Climate policy proposals at the Chevron, Exxon Mobil and Shell AGMs will also be closely watched, particularly in the context of some very hard choices that will have to be made about how to balance Climate related needs against the hydrocarbon supply crisis. Metals will likely continue to focus on China and its Covid-19 battle, attempting to weigh up how and when demand might pick-up as restrictions are lifted, and measures to bolster its ailing property sector get some traction.

Canadian banks top the run of corporate earnings, with Bloomberg News identifying the following companies as likely to be amongst those making headlines: Agilent, Alibaba, AutoZone, Baidu, Bank of Montreal, Bank of Nova Scotia, CIBC, Costco, Dell, Dollar General, Gap, Intuit, Kuaishou Technology, Macy’s, Medtronic, Nvidia, Pinduoduo, RBC, Singapore Telecom, Toronto-Dominion Bank, Ulta Beauty and Zoom Video Communications; Amazon.com, Chevron, Exxon Mobil, McDonald’s, Shell and Twitter hold AGMs.

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