Macroeconomics: The Day Ahead for 18 May

It will be another busy day for statistics with Japan’s Q1 GDP and UK labour data to digest ahead of a long list of Q1 advance GDP readings from Netherlands, CEE, Israel and Chile, with Eurozone Trade and US Housing Starts also due. In events terms, there are the unsurprising RBA minutes (despite the very tall order of wanting to see wage growth at 3.0% to achieve its inflation target) to accompany a more modest run of central bank speakers, with a number of this week’s slew of major commodities conferences getting under way including BAML’s Global Metals, Mining & Steel and ISO’s NY Sugar & Ethanol. Govt bond auctions see sales in UK 3 & 21-yr, Germany 2-yr and Canada 41-yr. A busier run of corporate earnings has the first bloc of US retailer results – Home Depot, Macy’s and WalMart – along with Baidu, Softbank, Tata Motors and Vodafone.

Today’s array of data is in truth rather uninspiring, with the run of GDP data putting numbers on what is well known about differentiated levels of disruptions across countries and regions, due to the pandemic and related activity restrictions. The real question of the moment is what is driving the disruptions? In immediate terms, a look at the latest Logistics Managers Index is certainly helpful, it highlights above all that in addition to transportation problems (above all shipping), there is a voracious appetite to rebuild inventories, above all of raw materials and intermediate goods, and there is also a shortage of warehousing. In the details, it is notable that decreased Transport and Warehousing capacity is expected to persist despite expectations of increased demand, with little relief seen before year end, and by extension sustaining upward pressure on prices. The broader perspective is that the pandemic has and is prompting a rethink of ‘just in time’ processes for many companies, prompting greater stockpiling, as well as rethinking supply sources – in part a reflection of the trend to reshoring and de-globalization, or rather shortening supply lines in geographic times, where possible, and above all reducing dependencies on supplies from China, which itself is aiming to reduce dependency on external supplies. Given the added problem of well documented semiconductor supply chain problems, these supply chain disruptions appear unlikely to resolve themselves for a very protracted period. It should be also borne in mind that aside from the increased cost of transport, the cost of maintaining higher levels of inventories will also weigh on corporate profits.  One further point is that given the uneven recovery, the repeated experience of stop/start

** Japan – Q1 GDP **

– The weaker than expected -1.3% q/q drop in GDP raises concerns about prospects for recovery, given that Q2 will likely see another drop due to the latest lockdown measures. The points of concern are above all the weakness in Business CapEx (-1.4% q/q vs. expected +0.8% q/q), which cannot just be explained away as a reactive correction to the 4.3% q/q surge in Q4, but rather signals underlying demand weakness, given the slightly higher than expected inventory contribution of 0.3 ppt. The fact that private consumption dropped -1.4% q/q vs. expected 1.9% was primarily due to a smaller drag from Services -0.8% q/q, above all when compared to the big drag seen in Q2 2020, by extension suggesting less scope for a rebound, as and when the economy re-opens, and above all worrying if the Olympics were to be cancelled.

** U.K. – March/April labour data **

– These were considerably better than expected with Employment rising 83K in Q1, and the flash estimate for April of +97K, suggesting there will be the expected big surge in Employment in Q2, as anecdotal reports have suggested. That said the real test of labour demand will come once the furlough scheme comes to an end, currently scheduled for the end of September. The latter renders the ostensibly modest 0.9% y/y fall in Employment meaningless, outside of underlining the scheme’s importance in preventing a sharp surge in Unemployment during the pandemic.