Macroeconomics: The Week Ahead: 3 – 7 June

The Week Ahead – Preview: 

The new week’s schedule is packed with political events and the usual start of month run of data, with PMIs/ISMs, US labour data (Payrolls, JOLTS, Challenger & ADP), Auto Sales & Construction Spending; China Trade; German Orders, Production & Trade; Japan Q1 CapEx, Labour Cash Earnings & Household Spending; Australia Q1 GDP & Current Account and Canada labour data. But it will be the anticipated initial rate cuts from the ECB and ahead of it the Bank of Canada, which are likely to capture most attention, above all in terms of implied rate trajectories thereafter, and by extension rate differentials. It’s a busy 7 days for elections, with the results of the South African and Mexican elections to digest, India’s election results due on Tuesday and the EU parliament elections taking place Thursday through Sunday, all of which when combined covers just over 2.0 Bln people, i.e. a quarter of the planet’s population. The UK election campaign rumbles on, and debate will continue about the impact of Trump’s conviction on the US election, while a close eye will kept on the latest attempt to negotiate a ceasefire in Gaza. The OPEC+ H2 production decision headlines a busy week for commodity markets, with the G20 AMIS and Australian ABARES agriculture reports also on tap, and a busy week for conferences featuring amongst others: US Harbour Aluminium, Indonesia Mining, Japan Energy Summit, Chongqing Petroleum & Gas Exchange Forum, Baku Energy Forum and Posidonia Shipping in Athens. The latter conference may be of particular interest given a further 12.6% rise in container spot rates from China last week, which brings the aggregate rise over the past 6 weeks to a whopping 72%, as port congestion continues to deteriorate. While there is no Treasury coupon issuance this week in the US, Europe will see auctions in UK, Germany, France (following its S&P downgrade to AA– last Friday), Spain and Austria, while Japan offers 10 & 30-yr. Corporate earnings slow to a trickle with the following likely to be among the highlights according to Bloomberg News: Crowdstrike, Dollar Tree, Ferguson, Industria de Diseno Textil, Lululemon Athletica and Meituan.

> U.S.A. – The initial question for the week, as the Fed goes into purdah ahead of its June 11/12 GOMC meeting, is how the ISM surveys shape up vs. the better than expected PMIs, with forecasters looking for a marginal uptick to 49.6 from 49.2 and an unrevised final PMI of 50.9 for Manufacturing, while the Services ISM is seen bouncing to 51.0 from 49.4, and a much stronger and an unrevised final Services PMI at 54.8, with the focus in detail terms on Orders & Prices Paid sub-indices. Auto Sales are seen eking out a tiny gain to 15.80 Mln (vs. 15.74 Mln), i.e. at the top of the post-pandemic range, but still well short of the 5-yr pre-pandemic average of 17.22 Mln. Attention then turns to the array of labour market indicators, kicking off with JOLTS Job Openings, that are forecast to drop again to 8.36 Mln, after sliding from 8.813 Mln to 8.488 Mln in March, and per se echoing the softer Payrolls in April – in both cases revisions will of course be key, though upward revisions have been much less frequent than in 2023. The ADP Employment estimate, while unreliable as a predictor of Payrolls, though generally quite in tune with Household survey indicators, is seen slipping to 175K from 192K, and Friday’s Payrolls are seen ticking up to 190K from 175K, though Private Payrolls are expected to be little changed at 170K (+3k m/m), with many commentators suggesting that the birth/death rate adjustment factor continues to inflate Payrolls relative to the less timely QCEW survey, and indeed the Household survey, where the risk points to a further slight uptick in the Unemployment Rate as against a consensus estimate of an unchanged 3.9%. Of equal importance will be Average Hourly Earnings, which over the preceding 3 months slowed to a 3-mth annualized rate of just 2.4%, though if a forecast of a 0.3% m/m rise are correct, this would rise to 3.2% (subject to revisions), still indicative of ebbing wage pressures relative to H2 2023, but only modestly, and by extension still likely to exercise some upward pressure on core Services CPI. Outturns net of revisions would have to be a lot weaker than forecast to put weaker labour demand in play as a counterfactual to elevated CPI & PCE and thus allow the Fed to tone down its rate caution. Trade data also require attention, as last week’s sharp widening in the Goods deficit (paced by a m/m jump in Capital Goods Imports, even though Consumer Goods imports slipped, while Export growth was tepid) suggests a substantial drag on Q2 GDP, in turn imparting greater focus on Final Domestic Demand. Construction Spending and Consumer Credit are also on tap.

> Eurozone/EU: All eyes will be on the ECB meeting, which is expected to see an initial rate cut of 25 bps to 3.75% Depo and 4.25% Refi as has been heavily flagged by all ECB speakers. The updated staff forecasts are generally expected to show CPI estimates unchanged vs March (2.3%, 2.0% & 1.9% for 2024 through 2026), but GDP forecasts shaded higher, in both cases the balance of risks will likely be left unchanged, and described as two sided, but noting that the recovery is expected to gain momentum in H2 2024, above all due to stronger real household income growth. But it will be the degree of emphasis that is placed on needing more data on wages and perhaps profit margins (i.e. contained in Q2 GDP details, which will become available in late August / September) which may offer the strongest hint that a follow-up cut in July is unlikely, but still probable in September, while maintaining the rhetoric of being ‘data dependent’. It will be interesting to note whether there is any echo of Panetta’s comments last Friday that even with a few cuts, rates will still be restrictive. PMIs are expected to be unrevised from flash estimates showing a stronger than expected recovery in Manufacturing (47.4 vs. Apr 45.7), but Services unchanged (53.3), thanks mostly to the unexpected slip in France. German Orders are expected to post a rebound of 0.7% m/m, with Production up 0.2% m/m, in both cases following a fall of -0.4% m/m in March, underlining that the recovery is still tentative, with Unemployment is seen edging up 8K, and Exports and Imports gathering a little momentum from March, with gains of 2.0% and 1.0% m/m. The EU parliament elections are likely to be the most significant for many decades. The question is how sharp a shift to the right will they take. The centre right EPP group has held the largest number of seats since 1999, when it surpassed the centre-left S&F that had been the largest group up until then, and these two in a loose alliance with the smaller Liberal grouping have held sway over EU level politics for a long time, even if relations have been often strained and indeed constrained by national tensions. But the right wing ECR (effectively led by Italian PM Meloni) and the far right ID (effectively led by France’s Le Pen) are together predicted to make substantial gains and win as many as 140 seats in this election, snapping at the heels of the EPP, seen winning around 165 sears, and S&D, predicted to win 143 seats, and per se signalling a more pronounced lurch to the right. Both ID, which recently kicked out Germany’s AfD from its grouping, and ECR, which has resisted attempts by Hungarian PM Orban to join it, have been working hard to polish their images, and appeal to a broader base of voters. More importantly, it would signal that the loose centrist coalition that has ruled the EU parliamentary roost could in theory be unseated, or at a minimum blocked in passing legislation related to any of the many hot issues that the EU faces, be that climate change, migration and border controls, defence spending, and indeed the ‘rule of law’. That said, the far right pro-Kremlin groups will not be able to undermine EU support for the Ukraine, though equally the expected strong showing for Le Pen’s RN will leave Macron under a great deal of pressure to shift his ground, and there is a good deal of speculation that EC President von der Leyen and a great many of the current Commission will be given their marching orders. Throw in the fact that Belgium will hold general and local elections at the same time, which in the Flemish north are expected to see the nationalist Vlaams Belang emerge as the strongest party, and once again threaten the existence of Belgium as one country, and the auspices for these elections look very challenging. Sadly this comes at a time when the EU so desperately needs some deep reforms, which the result of these elections will likely make a lot more difficult to achieve.

> UK: the early part of the general election campaign has seen little or no shift in opinion polls that suggest a very large majority for the opposition Labour party and a total drubbing for the ruling Conservatives, even if what has been offered at the hustings has been stultifying, mindless waffle and empty promises, which can only serve to dishearten an already disillusioned voting public even more about the dismal state of UK politics. There is only a smattering of very second tier data on offer this week. Final PMIs are expected to confirm the jump in Manufacturing (51.3 vs. 49.1) and the pronounced setback in Services (52.9 vs. 55.0). The more significant point of interest will be whether Retail BRC Sales rebound as strongly as expected to 1.2% y/y from April’s -4.4%, in no small part paced by an unwind of Easter timing effects, and base effects from May 2023’s Coronation.

> China: In contrast to last week’s official NBS PMIS, the Caixin Manufacturing PMI is seen improving modestly to 51.6 from 51.4, boosted above all by exports, which have continued to surge according to high frequency data, while the Caixin Services PMI is expected to be unchanged at 52.5. The week ends with May Trade data, where the consensus estimate of 5.1% y/y (vs. April 1.5%) looks to be under clubbed, even if port congestion may dampen gains; Imports are seen easing to 4.5% y/y from April’s 8.4%, though base effects and seasonal patterns suggests risks are to the upside. Otherwise, the focus will remain on the property sector, private New Home Sales published by CREI (China Real Estate Information) at the weekend suggest some beneficial impact from the latest government measures, with the sales decline easing to -33.6% y/y vs. April’s -45.0%. The immediate focus will be on whether the negotiations for a loan of CNY 50 Bln for developer China Vanke are completed, in what could be something of a game changer in sentiment terms.

> Japan: Q1 Capital Spending is expected to slow to 11.0% y/y from Q4’s 16.4%, with Company Profits seen easing to 8.4% y/y from 11.7%, with forecasts predicated on the provisional Q1 Business Spending data showing a drop of -0.8% q/q; the outturn will as ever determine the size of any revisions to Q1 GDP (weaker than expected at -0.5% q/q). But it will be Labour Cash Earnings, forecast to rise to 1.8% y/y from 1.0% in nominal terms, and to -1.0% from -2.1%  in real terms, along with Household Spending, that is expected to break a run of 13 consecutive declines by rising 0.6% y/y which will be most material to the BoJ policy outlook.

> India: Exit polls suggest a landslide victory for PM Modi’s BJP led NDA coalition, estimating that it will win anything between 360 and 390 seats in the 543 seat lower house of parliament, thus removing the rather idle speculative concerns that had been circulating during the very long election period. This follows on from a much stronger than expected 7.8% y/y Q1 GDP on Friday, though GVA turned out somewhat weaker than expected at 6.3% y/y, and comes ahead of this week’s RBI rate decision, which is expected to see rates left unchanged again. The RBI looks at GDP rather than GVA when formulating policy, and per se this along with its record dividend payment to the govt, which will bolster govt spending on infrastructure and manufacturing subsidies, is only going to reinforce the RBI’s resistance to cutting rates, despite inflation having returned to target, and likely to remain relatively benign for the time being.

> Canada: The majority of forecasters anticipate that the Bank of Canada will make an initial rate cut of 25 bps to 4.75% at this week’s policy meeting, given the clear downtrend in inflation (headline now 2.7% y/y, core measures at 2.6% and 2.9%). But with the Fed pushing back on its rate cut timeline, and the details of last Friday’s weaker than expected GDP (1.7% SAAR due to a hefty 1.5 ppt drag from inventories, and  Q4 revised down to 0.1%) proving to be very robust with Personal Consumption barely changed from Q4 at a solid 3.0% SAAR, and Business CapEx rebounding 3.1% SAAR, while Govt Spending added 0.5 ppt, the case for the BoC erring on the side of caution, and waiting until the July meeting to cut, is quite strong. The BoC should also have sight of Friday’s labour data at the meeting, which are expected to see the Unemployment Rate edge up 0.1 ppt to 6.2%, and Employment growth to slow to a still solid 22.5K, after making average monthly gains of 41.6K since January, while Hourly Wage growth is expected to remain high at 4.7% y/y, which overall implies that labour demand may have slowed, but is still solid, and along with the GDP suggests the BoC can afford to take its time on rates.

> Australia: While the uptick in inflation (MI Inflation Gauge due on Monday) has clearly raised concerns at the RBA, this week’s Q4 GDP data are likely to highlight that growth dynamics remain sluggish. Q1 GDP is seen unchanged at just 0.2% q/q, bringing the y/y rate down marginally to 1.2%, with weak consumer spending and broad weakness in commercial and residential spending the key drags, offset somewhat by govt spending. Of particular note given currently rapid population growth will be GDP per Capita, which is still below Q1 2022 levels and may decline a little further, in very sharp contrast to headline GDP.

> Elsewhere: a close eye needs to be kept on the array of East Asia (South Korea, Indonesia, Philippines & Thailand) and Turkey’s inflation indicators, which will be material to rate outlooks, thanks in East Asia to currency weakness (or rather the combined drag of JPY & CNY weakness and USD strength) that has pushed back on rate cut timelines, or in Indonesia’s case forced a rate hike. Turkey’s TCMB has suggested that the expected jump in headline May CPI to 74.8% (vs. Apr 69.8%), with core CPI expected to ease 74.5% y/y (from 75.8%) will be the peak for the current cycle, but it has under clubbed its forecasts for much of the year, so the jury will remain out until June and July inflation readings are available. It will also be a busy week for major Brazilian data, with GDP expected to rebound 0.7% q/q, paced by Services and Private CapEx, with Agriculture and Net Exports providing an offsetting drag; Industrial Production and the broader FGV Inflation IGP-DI are also due.