Macroeconomics: The Day Ahead for 10 May

For all that the schedule of data and events appears quite busy today, there is really nothing more than the overnight Australia Retail Sales and Norwegian CPI for markets to digest, with only the Eurozone Sentix survey ahead. The events schedule is no better with the April Riksbank minutes and Fed speak from Evans, while Duke Energy, Novavax, Occidental Petroleum and Tyson Foods will be among the highlights of the US earnings run. In the UK, the focus will be on what is likely to be a bruising, but not immediate constitutional showdown over a second Scottish independence referendum, as well as the very performance of the Labour party in Thursday’s elections.

RECAP: The Week Ahead – Preview

The week is replete with major data: US CPI, PPI, Retail Sales, Industrial Production and Michigan Sentiment; China CPI, PPI and Credit Aggregates; UK Q1 prov. GDP, Industrial Production, Index of Services, Trade, BRC Sales, RICS House Prices, with the ZEW survey also due. There are also OPEC and WASDE monthly reports, the Queen’s Speech in the UK, Australia’s Budget, European Commission economic forecast update and plenty more corporate earnings around the world, while the US heads the run of govt debt auctions with $126 Bln of 3,10 & 30-yr. Holidays in Europe (Ascension) and Islamic countries (Eid-Al-Fitr, end of Ramadan) will also thin trading volumes. While the easing of activity restrictions and vaccination roll-outs are the focus in Western economies, India and Brazil’s woes are a reminder that the path out of the pandemic in terms of the global economy will be long and arduous, and certainly not linear.

Poignantly Friday’s much weaker than expected US labour data were a reminder that there are an array of issues which underline that the path back to whatever the ‘new normal’ is, will likely be anything but smooth, and that is leaving aside the array of supply chain issues evident in so many sectors (see charts for Container Boards & Polyethylene as further examples). Via way of an analogy, the pandemic has blown down the global economy’s house of cards, and rebuilding it will take time, care and a lot of patience. What appears to be being overlooked by many is an array of logistical issues (sequencing and supply), as well as shifts in preferences, perhaps most notably impediments to returning to work due to access to schools or availability of day care facilities and personnel. All of this will also exacerbate the ostensible paradox of employers identifying skills shortages as being a critical headwind to meeting improving demand, and/or returning to normal. The fact that employment protection schemes also remain in place acts as a deterrent for many employers (above all in leisure, entertainment as well as work/office related retail services) to face up to the challenges of restructuring for a still nebulous level of demand, and the likely emergence of a dependency and/or entitlement culture in the labour force, let alone a reduced willingness for some to return to the grind of commuting, and perceptions about personal and family health security.  There is no magic wand that can be waved, and it remains to be seen how deep the psychological, as well as economic scars prove to be, but profound they will be. In terms of central bank policy, even at those without the Fed’s employment mandate, this will reinforce the emphasis on looking through the current rise in inflation rise, and stress labour demand as being critical to the policy outlook, in turn tipping markets back to expecting lower for longer and further financial repression, but also perhaps at stagflation scenarios.

Be that as it may in terms of the run of data:

US / China CPI & PPI – base effects and rising commodity prices will account for the expected jumps in y/y rates (US headline CPI 3.6% from 2.6%, core 2.3% from 1.6%, China CPI 1.0% from 0.4%, PPI 6.5% from 4.4%). Any analysis of these data points will need to be quite forensic, distinguishing energy and supply chain disruption issues from demand and pass through pressures, the latter having been clearly flagged in numerous corporate earnings reports.

– US Retail Sales are expected to revert to more normal profile after the stimulus cheque and weather effects of recent months, with the surge in Auto Sales, a pick-up in gasoline sales (price and demand driven) pacing an expected 1.0% m/m headline rise, with ex-Autos & Gas seen up a modest 0.3%. Much may depends on how restaurant sales offset a likely setback (mean reversion) in clothing and electronics.

– US Industrial Production forecasts have been pared sharply to 1.0% m/m, with Manufacturing seen up just 0.3% m/m, on the back of the drop in Manufacturing hours and payrolls, with supply chain disruptions, above all in the auto sector, starting to weigh heavily in the equation, despite buoyant PMIs and other surveys.

– The risks on both US Retail Sales and Production look to be to the downside, and thus swing markets’ perception pendulum from positive to negative economic surprises for the US, while swinging in the opposite direction for the Eurozone and UK. Both the German ZEW and Eurozone Sentix surveys are expected to improve, even if neither have any predictive value in terms of the economic outlook, with the ZEW Current Situation seen posting a sharper rebound to -41.6, though the gap to Expectations (72.0) is expected to remain colossal.

– The focus in terms of the UK data will be on the recovery in March data rather than the contraction in Q1 metrics, with monthly GDP seen at 1.5% m/m in contrast to a Q1 contraction of 1.6%. However all of this raft of data points has long been discounted, and strength in the more timely BRC Retail Sales and RICS House Price survey will also hardly be surprising. Tuesday’s Queen’s Speech (the first for 16 months) is expected to focus on major legislative changes to planning laws and social care, and there remain a number of bills promised in the last one on Worker’s Rights, Environment and Renter’s rights which will doubtless be recycled into this one.

On the central bank front, there will again be a plethora of G7 central bankers, above all Fed, plus the ‘summary of opinions’ from the BoJ’s April 26/27 meeting. A busy week for EM policy meetings (Philippines, Chile, Mexico, Peru, Belarus & Serbia) with all expected to hold policy rates, but Banco de Mexico is expected to hint strongly at a rate hike given CPI is well above target at 6.1%, and plenty of questions about how long Peru’s central bank can hold rates at 0.25% with the Sol having made fresh record lows on the back of political concerns (leftist Castillo is ahead in presidential election opinion polls).

In the commodity space, monthly Oil Market Reports from OPEC, EIA and IEA will have particular prominence as oil prices threaten a break out of the top of ranges that have been in place since March. BP’s AGM will also be in focus from the aspect of shareholder pressures on major oil producers to provide greater detail on how they are planning to meet prior commitments to ‘net zero’ by 2050. Copper will be watching Chile’s Senate debate on the copper sales tax bill that has already been passed by the lower house, and which has been termed to be ‘expropriation’ by sector industry leaders. It should be added that given the devastating budgetary cost of the pandemic in many EM commodity producers, such moves are likely to be seen in a number of other countries, above all given the rise in commodity prices. In the agricultural space, the US WASDE, China CASDE and French Agriculture Ministry monthly reports on crop outlooks, and Malaysia’s Palm Oil Board’s output, exports and inventories report will be the focal points, along with weather developments in the US, South America and Europe, as well as the potential further disruptions to Colombian Coffee exports due to political protests.

While the US earnings season is largely complete, with just eighteen S&P 500 report this week, it will still be a busy week for reports elsewhere, above all Japan, where major automakers and financials dominate the schedule. Bloomberg News suggest that the following are likely to be among the headline makers: ABN Amro Bank, Airbnb, Alibaba, Allianz, Bayer, Bilibili, Brookfield Asset Management, Burberry Group, Coinbase Global, Commerzbank, Compass Group, Daikin Industries, Deutsche Telekom, DoorDash, Duke Energy, Electronic Arts,Fortum, Fujifilm, Hapag-Lloyd, Honda Motor, Iberdrola, International Flavors & Fragrances, Japan Post, Marriott, Merck, Mizuho Financial Group, Nexon, Nippon Telegraph & Telephone, Nissan Motor, Palantir Technologies, Panasonic, Petrobras, Shiseido, Simon Property Group, SoftBank, Sumitomo Mitsui Financial Group, Telefonica, Toshiba, Toyota Motor, Trade Desk, Tyson Foods and Walt Disney.