Macroeconomics: The Day Ahead for 4 May

Given that China and Japan remain on holiday, market volumes are likely to remain subdued, with a relatively busy run of data perhaps a little on short genuine market movers, with the remaining Manufacturing PMIs accompanied by the overnight Australia and upcoming US and Canada Trade data, UK monetary and credit aggregates and US Factory Orders unlikely to offer any meaningful fresh insights into the global economic outlook. Unsurprisingly the RBA kept its Cash and 3-yr Yield target rates unchanged, and stuck to its QE volumes; while Russia’s Bank Rossi’s Q2 monetary policy report is likely to emphasize that it will continue to hike rates given current inflationary pressures, with a few Fed and ECB speakers also scheduled. Austria sells 10 & 26-yr while Germany auctions a modest volume of inflation-linked Bunds. Oil companies dominate the earnings schedule with Aramco accompanied by ConocoPhillips and Marathon Petroleum, while other highlights are likely to include Adecco, CVS Health, Infineon, Lattice Semiconductor and Pfizer. Markets would appear to be doing little more than going through the motions, with Treasury yields still range bound and equities chopping around in a range at their highs, but with little sign of any conviction near term in either direction, while commodities consolidate, seemingly waiting on oil to break out of the range that has been in place since March.

Yesterday’s US Manufacturing ISM was above all instructive in terms of the array of indicators confirming continued supply chain pressures as the two attached charts attest: a) Prices Paid close to breaching the 2008 high, and b) Order backlogs at an all-time high, while supplier delivery times lengthen and customer inventories plumbing new depths. Last but not least, US Auto Sales soared in April to a record 18.51 Mln SAAR rate, but with inventories sliding and second car and truck prices soaring, it remains to be seen how long this can be sustained.

RECAP – The Week Ahead – Preview: 

A new month begins with holidays in UK Monday, and China and Japan Monday through Wednesday set to dampen trading volumes. The statistical schedule has a very familiar start of month look to it with PMIs and US Auto Sales dominating the start of the week, while the latter half of the week has US labour and Chinese Trade data as its highlights, with German Orders, Trade and Industrial Production, Japanese wages, Turkish CPI and the UN FAO World Food Price Index also due. The RBA and BoE meetings top the run of central bank meetings, though a further aggressive rate hike is seen in Brazil, while Turkey’s TCMB is expected to hold; Fed, ECB and BoE speakers are again very numerous. In the commodity space, weather reports will continue to be closely monitored  in what is proving to be an acute La Nina disrupted year for grains, while Friday’s Chinese Imports data will be scoured for clues for the gamut of commodity and energy markets, along with the CNGOIC monthly report on Chinese Grains & Oilseeds. Another bumper week for corporate earnings in the US and around the world, with pharmaceuticals, oil and steel producers, and three major auto makers (BMW, GM and VW) perhaps attracting most attention along with another raft of financials. As Covid-19 vaccination rates pick up in Europe, the focus will increasingly turn to the timetables for easing activity restrictions, above all in Europe, but with India’s infection rate likely to remain tragically high, and the vaccination roll-out in many parts of the world still slow, the risk of more infectious mutation remain very high. Supply chain disruption reports continue to escalate, and are clearly putting pressure on prices, but also likely to blight output in a number of sectors in Q2 and more than likely Q3, that has been a clear message from producers and end users in corporate earnings.

In bullet points in data and central bank terms:

• PMI reporting will be a little haphazard due to holiday schedules, forecasts assume continued strength in Manufacturing, with divergent Services performance very much a function of looser or tighter activity restrictions. Input Prices and Supplier deliveries along with Employment are perhaps of greater importance than orders and output, and going forward supply bottlenecks may result in reduced output, even if this should ultimately prove to be transitory.
• Echoing the trend seen in weekly jobless claims and aided by easing leisure and entertainment restrictions, US Payrolls are expected to post another strong increase of up to 1.0 Mln, but an improvement in the U-6 Underemployment Rate and Labour Force Participation rates would carry much greater weight with the Fed. As lower paid services jobs increase, this will bear down on average hourly earnings, with base effects adding to the downward pressure
• The Bank of England will hold rates at 0.1%, as will the RBA, but the BoE is expected to taper the pace of its Gilt purchases, the question is what it offers as guidance on further reductions. But the RBA will doubtless point to the record low Q1 core CPI rate as underlining the need for it to continue its QE at the current pace. It should be remembered that the Australian govt has already withdrawn a considerable volume of fiscal support, in contrast to the UK. That said, the RBA is also much more concerned about the level of the AUD.
• Chinese Trade data will continue to be noisy in headline terms, but the commodity imports data – above all grains, soybeans, oil and copper – will be highly sensitive. German trade data will be closely watched for the strength of demand from China and the US. Korea’s Trade data (1st May) is also expected to be robust, above all thanks to semiconductor, auto and pharmaceutical demand
• Commodity prices, above all oil and copper which both faded at the end of the week, will likely be a key factor in terms of any re-emergent pressure on long-term yields.
• As a broader point, dismissing such pressures as being ‘just’ supply chain issues that will be resolved and throwing around glib statements about technology reasserting its downward pressure may prove to be a major error. When supply disruption meets spikes in demand in a world where many businesses (and people) are desperate to ‘get up and running at full capacity’ above all to make a dent in the debt mountain that has been accumulated in the past year could prompt a step shift in prices, even if this is overcome in 1-2 years.