Macroeconomics: The Day Ahead for 12 May

Another busy day for data and events awaits, with UK Q1 GDP and the usual raft of monthly activity data, Norwegian Q1 GDP and Swedish CPI accompanying India’s CPI and Industrial Production, and of course US CPI. The events side of the equation has a raft of key monthly agricultural reports: China’s CASDE, US WASDE and France’s Agrimer report, with the IEA rounding off this week’s run of monthly Oil Market Reports. Central bank speakers will again be plentiful, with the focus on BoE’s Bailey and Fed’s Clarida, while President Biden holds his first meeting with Congressional leaders with the focus obviously on what emerges with regards to the two infrastructure spending bill proposals. There are govt bond auctions in Portugal, Canada and the US, while another batch of European banks, energy providers (EDF, Iberdola) and the likes of Bayer, JBS, Pirelli and Wienerberger will likely feature in headline about today’s run of corporate earnings. But with equity markets having an attack of vertigo, and Taiwan taking a colossal tumble overnight (worst fall since 1994) as the govt warned that it may raise its COVID-19 alert level in the “coming days”, the underlying lack of liquidity in these central bank ‘largesse to excess’ induced frothy markets is being exposed once again. With prime brokers tightening up their risk management, the key risk is that the lopsided skew in positioning in many asset classes prompts forces some liquidations, and as much as the media and commentary narrative will retro-fit this to economy and pandemic related news, it is primarily about a financial system that was unstable before the pandemic, and the instability being exacerbated by the deluge of central bank liquidity. The initial temptation for many will be to ‘buy the dip’ on the assumption that this is another bout of volatility that will pass, but this is far from assured, if the volatility proves to be more enduring and forces a cull of some leverage.

The initial blush look at the run of UK data will have most focussing on the better than expected March GDP and array of monthly activity indicators. However the breakdown of Q1 GDP highlights a much worse than expected underlying picture, with only a larger than expected increase in govt spending (2.6% q/q vs f’cast 0.1%) and a big contribution from Net Exports (effectively unwinding imports front loading effects in Q4) preventing an even worse outcome. Private Consumption fell 3.9% q/q vs. expected 1.8%, Business Investment was down 11.9% q/q vs. forecast -2.5% q/q and Gross Fixed Capital Formation -2.3% q/q vs. forecast -0.5% – these are obviously subject to revisions. But the imbalances in the UK economy are all too clear to be seen, and only exacerbated by the current govt induced housing bubble.

** U.S.A. – April CPI **

While the expected m/m gains of 0.3% m/m headline and a very average 0.2% on core will be unremarkable if correct, base effects will drive y/y rates sharply higher headline 3.6% from 2.6%, core 2.3% from 1.6%. Food prices will put some upward pressure on headline, but gasoline prices should have a minimal impact this month, though auto prices (above all second hand) will continue to exercise upward pressure, while the drag on core from OER looks to be dissipating. Otherwise it will the areas benefitting from re-opening – airfares, car rentals, hotels and restaurants – and those areas where there are supply disruptions and bottlenecks, which could quite easily result in a sharper than expected rise in core CPI. Eminently the Fed will continue to look through this, and stress patience and emphasize its focus on the labour markets, a narrative which markets will tolerate in the short-term, but still not be insensitive to evidence of pass through pressures, which have been clearly flagged in numerous corporate earnings reports. Also in passing, yesterday’s NFIB Small Business Optimism at 99.8 missed forecasts of a rise to 101.0, and yet again the Economy Expectations were the swing factor, taking a renewed tumble to -15 (see table), having been as high as +8 back in November. To be sure, the proposed corporate tax hikes will have sat badly with business owners, but the pessimism that is on display raises plenty of questions about the recovery.