Macroeconomics: The Day Ahead for 9 June

A relatively busy schedule of data is very heavily front-loaded, with China CPI and PPI, South Korea’s Unemployment and final Q1 GDP, German Trade and Norwegian monthly GDP to digest, while ahead lies Brazilian and Mexican inflation. The Bank of Canada policy meeting tops the events agenda with a few central bank speakers and Agrimer’s monthly French grains report also due, while another busy run of government bond auctions has sales in UK, Germany, Portugal and USA. German Trade data was modestly worse than expected (Exports rising 0.3% m/m vs. f’cast 0.5%, Imports falling -1.7% m/m vs. f’cast -1.1%), which was in truth to be anticipated given the sluggish Production data published yesterday. Markets remain becalmed, unsure of what to make of the dissonance evident in incoming US data, as exemplified by the dire Economic Expectations sub-index in yesterday’s NFIB Small Business Optimism (see chart) and yet another colossal surge in JOLTS Job Openings, with the focus very firmly on tomorrow’s CPI data, and next week’s FOMC meeting. But as noted last week, with the Fed sticking to its resolutely reactive dovish stance, markets remain unwilling to jump the gun, above all due to FOMO and TINA considerations, with rate lock hedging for corporate issuance and bank balance sheet appetite for Treasuries at elevated levels due to a sub-IOER effective Fed Funds and Reverse Repo Rates feeding the down move in long-term Treasury yields. It is however worth noting that options activity in Euro$ contracts, above all Dec 2023, points to some participants speculating that long-term yields may spike higher, with this activity mirroring what was seen in January.

** China – May CPI / PPI **

– Once again a benign CPI reading (-0.2% m/m 1.3% y/y) will be overlooked, with the focus falling on the larger than expected 9.0% y/y rise in PPI (vs. f’cast 8.5%, April 6.8%), the biggest jump since 2008. Very unsurprisingly the surge in PPI was mostly about energy and commodity prices pushing up prices for industrial goods and consumer durables as can be seen in the attached chart, with overall consumer good prices seeing little or no pressure. Given that May has the most adverse base effects (given a -3.7% y/y reading in May 2020), the spike higher should dissipate in coming months, though PPI will likely remain elevated. The key question is how much longer producers continue to absorb higher input prices, rather than pass these on to consumers. For the time being, the PBOC will focus on CPI, which remains well below the govt target of 3.0%, particularly as it would certainly not want to add to upward pressure on the CNY with a rate hike, above all given the determinedly dovish stance of the Fed and ECB.

 ** Canada – BoC policy meeting **

– No changes to rates or the BoC’s C$3 Bln/week QE purchases, after the BoC took a decidedly less accommodative turn at its April. As this is a statement only meeting, it will be little more than marking time. The statement will doubtless emphasize that further reductions in its QE pace are likely at coming meetings. It will probably suggest that growth is likely to pick up at a more rapid pace in coming quarters than its current projections, that the uptick in inflation will be transitory, and place particular emphasis on evidence of a broad based recovery above all in the labour market to full employment, within the context of its re-styled ‘flexible inflation targeting’ regime. (see Macklem speech here). As such, today’s meeting is unlikely to generate much in the way of market reaction.