Macroeconomics: The Day Ahead for 12 May

The UK’s array of monthly and quarterly activity statistics and RICS House Price survey tops the run of data, with Japan’s Current Account and Economy Watchers (services) survey and Swedish CPI to digest, ahead of India’s CPI and Industrial Production and US PPI and weekly jobless claims. As the war in Ukraine continues to rage with no prospect of any form of cessation, the G7 and NATO foreign ministers meeting will be closely watched, with a further rash of central bank speakers on hand. Oil markets will be looking to the monthly Oil Market Reports from the IEA and OPEC, while agricultural commodities have an even bigger day than energy and will hone in on the USDA World Agricultural Supply/Demand report (WASDE), China’s CASDE and Brazil CONAB report on Corn & Soybean planting and production. The US rounds off its quarterly refunding with USD 22 Bln of 30-yr, with Italy auctioning EUR 6.75 Bln of 3, 7 & 23-yr BTPs and Ireland sells 10 & 23-yr. Tapestry and US Foods top a modest run of US corporate earnings. Yesterday’s Treasury market reaction to the CPI data was instructive in so far as it did not upend the curve flattening trend that started on Monday, but the discussion point in markets will be the seemingly relentless slide in equities, with the S&P 50 down >18% year to date, rapidly approaching the 20% “bear market” marker, and helping to push the GS US Financial Conditions Index quite rapidly towards levels that are generally seen as restrictive. As previously noted, the Fed will not be unhappy about the actual level, though the pace at which conditions are tightening may raise some alarm bells. For all that the downmove in equities has been fairly relentless in recent weeks, it is very debatable whether it has reached the sort of capitulation point, which might herald a near term floor, and credit spreads while wider are not as yet signalling much in the way of distress, above all when seen from a long-term perspective. Last but least and as concerning were overnight comments from a senior CCP official that China ‘will step up policy adjustments, we will take actions when necessary’; for most observers of China’s economy at the current juncture, the comment would be that it should be blindingly obviously by now that ‘when necessary’ is clearly the point at which China’s economy is already at, and all the more so given the dogged adherence to its zero Covid policies (Han added that must control COVID in a “scientific, precise and effective” way, to create a vital pre-condition for normal economic operations).

** U.K. – Q1/March GDP  **

– March GDP was weaker than expected at -0.1% m/m, with February revised down to flat m/m, and underlining that if it had not been for the burst of activity in January as the Omicron fall-out was unwound, then Q1 GDP would have been even softer than the 0.8% q/q recorded, and underlining the rapid loss of momentum over the quarter. It is as such little wonder that the BoE is so openly fretting about recession. The details make for worse reading, even if they are as ever subject to often quite large revisions: Govt Spending fell 1.7% q/q vs. an expected rise of 0.5%, Personal Consumption rose just 0.6% q/q vs. f’cast 0.9% and clearly weighing on the Q1 Index of Services that came in at just 0.4% vs. forecast 0.9%. While there was always going to be a mean reversion for Trade after the strong positive contribution to Q4 GDP, the Q1 data were very poor with Exports sliding -4.9% q/q vs. a forecast of flat, while Imports jumped 9.3% q/q again. The solitary positive was the continued strength in Construction Output, posting a robust gain of 1.7% m/m in March, after gains of 0.2% and 2.1% m/m in prior months.

** U.S.A. – April PPI **

– Following on from the upside surprise on core CPI, today’s PPI will probably have to spring a big surprise to have more than a passing impact. The consensus expects some moderation in m/m terms with headline seen at 0.5% and core at 0.6%, with continued strength in food prices (very evident in CPI) largely offsetting a drag from energy prices, while items such as transportation services that pressured CPI also likely to impact core PPI. Yr/yr rates are expected to moderate due to base effects, but with headline seen at 10.7% from 11.2%, and core at 8.9% from 9.2%, after the larger than expected jump in March, the pace of moderation in price pressures will hardly take pressure off the Fed. As for Initial Claims, a few people were keen to jump all over last week’s 200K print as signalling that the US labour market may be on the turn, to which the response should be: how far away from the all-time low are we? Are we still below the pre-pandemic lows, and by the way did you notice that there school ‘spring break’ holidays in that reporting week? The consensus looks for a modest dip back to 190K.