Macroeconomics: The Day Ahead for 17 May

A very busy start to the week statistically with the run of mixed Chinese activity data, better than expected Thai GDP, and weaker than forecast Singapore Exports to digest of Indian WPI and the US NY Fed Manufacturing and NAHB Housing surveys. There is another long list of G7 central bank speakers, with Fed’s Clarida topping the bill, while Eurozone Finance Ministers hold the first of two meetings this week. Pandemic news remains bifurcated between the improvement in the US and Europe and accompanying re-opening moves, and deterioration in East Asia, and the situation in India remaining tragically acute, despite a dip in infection rates. This leaves markets being buffeted by divergent news on pandemic developments implication for the global economic outlook, as well as being torn between central bank ‘guidance’ that policy support will be sustained for a protracted period, and market concern that with inflation rising and a recovery of some description gaining traction, central banks will have to move sooner rather than later, and force some deleveraging. All in all this looks to be a recipe for heightened volatility, given that even if central banks are forced into a partial volte face, this will only ease financial repression relatively modestly.

** China – Retail Sales, Industrial Production & Property Investment **

– The Retail Sales slowdown was disappointing at 17.7% vs. a forecast of 25.0%, and despite strength in Auto Sales, underlining the point that private consumption remains restrained, and to some degree likely due to elevated Unemployment, with the rate dipping to 5.1% from 5.2% still well above 4.3-4.5% pre-pandemic levels. Industrial Production and FAI at 20.3% and 19.9% y/y were broadly in line with forecasts, but the stats bureau noted that supply bottlenecks and rising commodity prices are hitting output especially at smaller downstream manufacturers. However the irony is that Steel and Aluminium output were at record levels, despite official guidance to rein in output due to pollution. Continued strength in Property Investment and House Prices was evident despite regional curbs.

** U.S.A. – March NY Fed and NAHB surveys **

– As the first of the May business surveys, the NY Fed Manufacturing will be watched closely, with a modest setback to 24.0 expected after jumping to a 42-mth high of 26.3 in April. While there are upside risks, the question is for what reason? If the drivers are supply chain disruptions pushing prices paid higher and lengthening supplier deliveries and increasing unfilled orders, and particularly if this weighs on outlook metrics, then this would be a negative. The US Housing sector remains in good health, but would appear to be past its peak as a growth contributor, with it increasingly facing headwinds from rising raw materials and labour costs, and low inventories, and affordability issues due to rising prices. The NAHB Housing Index is still expected to remain very high by historical standards at an unchanged 83.

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RECAP: The Week Ahead – Preview: 

  This week’s schedule has a busy run of key data from China (Retail Sales, Industrial Production & FAI) and the U.K. (Unemployment, CPI, PPI, Retail Sales, House Prices), while the US has surveys (NY, Philly Fed & NAHB) and Housing statistics, Japan looks to Q1 GDP, Australia awaits Unemployment and Canada CPI, with the G7 flash PMIs rounding off the week. G7 central bank speakers will be more than plentiful again, doubtless banging the drum of looking through a ‘transitory’ spike in inflation, underlining labour market slack, while and extolling the ‘virtues’ of patient and reactive policy settings, with Fed and RBA policy meeting minutes, and the ECB and Bank of Canada publishing financial stability reviews. It will be another busy week for EM central bank policy meetings (SARB and Bank of Thailand perhaps of most interest) though none are expected to alter policy rates.

  Govt bond supply is plentiful: US (20 yr & TIPS 10-yr), UK (2, 14 & 20-yr), Japan (5 & 20-yr, I-L 10-yr), Germany (2 & 10-yr), France (3, 6 & 7-yr and I-L) and Spain (3, 7 & 10-yr). Retailers and Deere & Co top the run of US corporate earnings, with Baidu, JD.Com and Tencent in focus in China, above all given regulatory tightening risks. Many of the tech giants’ leaders will be attending the US Commerce Secretary’s Semiconductor Summit to address the global chip shortage. Elsewhere on the political front the week is bookended by Eurozone Finance Ministers’ meeting, there is a televised election debate between the three main German party leaders on EU policy, and the US and Russian foreign ministers will meet on the sidelines of this week’s Arctic Council meeting.

  In the commodity space, the focus will be on China’s commodity import data, Brazil’s sugar output data (both Tuesday) and an array of conferences including the NY ISO Sugar Conference, BAML’s Metals Mining & Steel, BMO’s Farm to Market and US Energy Infrastructure Council Investor Conference, while UK Carbon Futures trading starts on Wednesday. Last week’s correction in many commodity prices puts an even bigger focus on Chinese demand, and above all the increasing risk of official interventions above all in sectors such as iron ore and steel, with Chinese order flows in the agricultural and energy sectors likely to be even more sensitive than has already been witnessed.

  In terms of the statistical run, there will continue to be colossal distortions due to base effects, which render any deeper analysis largely redundant, as well as making large ‘beats’ and ‘misses’ more likely, as well as rather meaningless.

  – China’s activity data should see Retail Sales benefitting from the Golden Week holidays, and implying that private consumption may take some slack from a slowing pace of industrial production, though the latter should see strength in Steel and Aluminium output. Property Investment data will also be watched closely as authorities try to rein in the housing sector, as will the surveyed Unemployment Rate, which is seen unchanged at 5.2%, still well above the 4.3%-4.5% range during 2019, and implicitly restraining a further recovery in private consumption.

  – UK labour data has overall been better than expected in recent months, but remains heavily distorted by the furlough programme, though Employment is again expected to fall, but this is Jan-March data, and the key point of interest is how much of a boost there will be from re-opening. In terms of the inflation data, base effects will boost headline CPI and RPI in y/y, though core CPI is forecast to be little changed at just 1.2%. PPI bears some scrutiny with Input price pressures seen easing, while Output Prices see only modest pass through from prior Input increases.

  – G7 PMIs are forecast to show Manufacturing readings at very robust levels, though the details on Prices, Supplier deliveries and inventories will be closely scrutinized, with Output sub-indices perhaps restrained by the array of well documented supply chain disruptions; employment indices also require scrutiny, above all in the US. The other risk as with all diffusion indices is that there is some mean revision as companies report output as unchanged from high prior month’s levels; this also applies to the NY and Philly Fed indices. Services PMIs are forecast to remain robust in the UK and US as reopening gets further traction, while Eurozone readings should pick up quite significantly as restrictions start to unwind, though June readings will likely see a bigger boost, supply chain bottlenecks will also need to be monitored closely. Eminently strong surveys may not necessarily result in strong official data, even if the increasing or solid outlook optimism that they reflect is of course to be welcomed.

  – US Housing data are expected to remain robust, but are increasingly facing headwinds from raw materials and labour costs and low inventories, and affordability issues due to rising prices.

   – Japan’s Q1 GDP is seen posting a relatively sharp contraction of 1.2% q/q (following Q4’s 2.8% surge), led lower by a 2.0% q/q fall Private Consumption due to activity restrictions, with small negative contribution from external demand of 0.2 ppt, but offset by a solid 1.2% q/q rise in CapEx.

  In pandemic terms, easing activity restrictions, solid vaccination rates and falling infection rates in Europe and North America offer plenty of grounds for optimism, but the picture in India remains tragically dire, and current trends in East Asia, above all Japan, are clearly not encouraging.

  As noted it will be another relatively busy week for corporate earnings, with Bloomberg News highlighting the following companies: Applied Materials, Analog Devices, Baidu, Bridgestone, Cisco, Deere & Co., EasyJet, Experian, Foot Locker, Home Depot, Hormel Foods, Imperial Brands, Kohl’s, L Brands, Lowe’s, Mitsubishi UFJ Financial Group, Macy’s, National Grid, Petco, Porsche, Recruit, Rede D’Or Sao Luiz, Royal Mail, Ryanair, Singapore Airlines, Synopsys, Tencent, Tata Motors, Target, Trip.com, Vodafone, Webjet and Walmart.