Macroeconomics: The Week Ahead: 11 April to 15 April

The Week Ahead – Preview: 

The Easter holiday shortened week will remain blighted by the spectre of the ever deepening and intensifying war in Ukraine, which is now in its seventh week, with seemingly no prospect of an end to the death and destruction, or of the genocide that is being committed by Russia’s military. China’s battle to contain the current Covid-19 outbreak still shows no signs of turning a corner, even if financial markets are increasingly focussed on what ‘stimulus’ will be put into place to prop up its economy, rather containment measures and inevitable disruption to the domestic and global economy, and perhaps most significantly given China’s social contract, increasing unrest due to lack of access to food, basic household goods and medicine. Throw into this mix a now very tight French presidential election, and a growing tide of public and political opinion (even outrage) against Germany’s political leadership, above all due to its ostensible prioritization of its own economy over measures to help Ukraine and punish Russia. This comes on top of a wave of instability and inflation protests in numerous countries, from Sri Lanka, where the government and economy is close to collapse, through such countries as Iraq, Albania, Sudan, Ghana and Peru, and piling on even more pressure in Lebanon, Syria and Yemen; suffice it to say: the “age of plenty” is no more.

The week’s schedule of data and events has plenty packed into it, be that key monetary policy meetings in Canada, Eurozone and New Zealand, and plenty of Fed speakers; a rash of inflation and other major data in US, China and UK; the start of the US Q1 earnings season and a busy week for earnings in Asia, along with the full gamut of monthly Oil Market Reports from EIA, IEA and OPEC, as oil markets continue to struggle with how to balance conflicting signals on supply and demand. It should also be noted that crude and oil product markets are mirroring gas and coal, and indeed some agricultural markets, in seeing two-tier markets emerge, largely but not exclusively due to the war in Ukraine and associated sanctions and embargoes on Russia.

A close eye also needs to be kept on the transport and logistics sector, obviously because of disruptions to global trade due to China lockdowns, but also due to signs of demand destruction in the US (and likely elsewhere). Notably the latest US Logistics Managers Index for March saw the headline index reach a new all-time high, but at the same time sent some more ominous signals in the detail. As per the report (https://nam02.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.the-lmi.com%2Fmarch-2022-logistics-managers-index-report.html&data=04%7C01%7CSimrat.Sounthe%40admisi.com%7Cbd10121938924976ccbc08da1b10616c%7C2f55bf3242d444b3a8c2930ac8b182b2%7C0%7C0%7C637852054428609191%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000&sdata=z53DJ8Sz7aw6MbxeVeWjpG9CAJWeUgbs3GPslrImDx0%3D&reserved=0 ): “The first three months of 2022 have been marked by high levels of inventory, and insufficient capacity to deal with it. …. downstream retailers, who saw inventories up by 4.5% in December, handily outgaining manufacturers and wholesalers (U.S. Census Bureau, 2022). This influx, combined with a cool-down in consumer demand due to the move away from goods and back towards services with easing COVID restrictions, as well as price pressure due to burgeoning inflation, has left firms with more inventory than they know what to do with. Because of this, both Inventory Costs (91.0) and Warehousing Prices (90.5) reached all-time high levels in March. Warehousing Capacity also hit a record in March, reaching an all-time nadir of 36.1 this month. Transportation Prices remain high and Transportation Capacity is still contracting this month. However, it is important to note that in the Upstream portion of our respondent base we saw some loosening in the transportation market, with readings taken after March 15th averaging out to a 55.0 – indicating expansion for the first time in 18 months. … it could portend a coming shift in transportation as the impact of record diesel prices is more keenly felt throughout the supply chain. A contraction in the transportation market does not necessarily mean a freight recession is imminent – although that is a possibility.”

– The packed US data schedule has CPI, Retail Sales, PPI, Import Prices, Industrial Production, NFIB, NY Fed surveys and preliminary Michigan Sentiment. CPI is expected to post a 1.2% m/m rise to take the y/yy rate up to 8.4%, the highest January 1982, with energy prices (above all gasoline, up some 19.0% m/m) expected to be the biggest contributor, though food and housing (OER) will also be significant. The latter will be the element pushing up core CPI up 0.5% m/m, to take the y/y rate to 6.6%; PPI is also seen rising m/m by similar amounts. This should be the peak month for CPI, as the drop back in energy prices and above all base effects kick in from April. Retail Sales will have to be seen through the lens of the CPI data, given that this is a value not a volume data series, thus the anticipated headline rise of 0.6% m/m and ex-Autos 1.0% m/m will attest to the spiralling gasoline price, and drop in Auto Sales, and will be negative in real terms, with core spending measures seen flat or -0.1% m/m, and again much weaker in real terms. These inflation pressures are expected to push Michigan Sentiment to a fresh cyclical low of 59.0, edging ever closer to the June 2008 GFC low of 56.4. Industrial Production and Manufacturing Output are seen up 0.4% m/m, mirroring the 0.3% rise in Manufacturing Hours, and an expectation of a slight pick-up in Auto output, while the NY Fed Manufacturing index is expected to see a mean reversion back to 1.0, after sliding to -11.8 in March from +3.1.

  China, in contrast to much of the rest of the world, does not have an inflation problem, primarily due to persistent frequent intervention and its large stockpiles of food, energy and raw materials, as well as weak demand due to the array of headwinds facing its economy, and near term also capitalizing to some extent on deeply discounted prices for Russian energy and raw materials. CPI is expected to recover modestly to 1.3% y/y from 0.9%, primarily due to food (above all pork) price base effects unwinding, while non-food price pressures remain modest. PPI is seen falling in y/y terms to 8.1% from 8.8%, with very sharp and benign base effects (PPI rose from 1.7% to 4.4% y//y in March 2021) set to exercise downward pressure through much of the rest of the year (PPI peaked at 13.5% in October 2021); it will however still rise in m/m terms due to energy prices. China’s Trade data are a lottery at the best of times, but with the added element of port and transport logistics disruption due to lockdowns, the scope for readings to be very wide of the consensus 12.9% y/y for Exports and 8.6% y/y for Imports is large. Credit data are also due with a typical seasonal rebound following the Lunar New Year holidays expected to pace an overall CNY 3.55 Trln rise in Aggregate Social Financing and CNY 2.74 Trln increase in New Yuan Loans. But markets will be far more focussed on the PBOC’s monthly 1-yr MTLF (Medium-term Lending Facility) operation, with a 10 bps cut to 2.75% expected, and many also expecting a 50 bps cut in RRR (reserve requirement ratio).

  The U.K. has the full gamut of inflation indicators and labour data, with monthly GDP and associated activity data getting the week underway, ahead of Tuesday’s BRC Retail Sales. Monthly GDP is expected to slow to 0.2% m/m rebounding 0.8% m/m in January from a modest Omicron related dip in December, though the risk given less spending on Health services as Covid-19 restrictions were lifted looks to be to the downside for both GDP and a similar forecast for the Index of Services, with Manufacturing (0.3% m/m) and Construction (0.5%) seen expanding at a slower, but still healthy clip. Labour data are projected to see Payrolls rise at a slower 125K pace after surging 275K in February, with skills shortages continuing to restrain employment growth, despite record levels of Vacancies (last 1.318 Mln). In turn this is putting upward pressure on Average Weekly Earnings, forecast at 5.4% y/y vs. prior 4.8%, though the picture on basic pay is expected to be more modest at 4.0% y/y, vs. prior 3.8%. But the primary focus will be on CPI with petrol and food prices likely to pace an expected 0.8% m/m 6.7% y/y (vs. Feb 6.2%) rise, though clothing and leisure services will also exercise some upward pressure, and all of this comes ahead of the April data that will see the sharp rises (ca. 30-50%) in gas and electricity prices drive CPI towards 9.0-10.0%. The BoE also publishes its Bank Liabilities and Credit Conditions surveys on Thursday, which will bear some scrutiny given the prospect of a further rise in Base Rate, and the latest RICS House Price Balance is also due.

  Elsewhere, there are Germany’s ZEW and Bank of France Industry Sentiment surveys, Japan’s Private Machinery Orders and PPI, Australian labour data and India looks to CPI and Industrial Production, while Singapore publishes provisional Q1 GDP.

– On the central bank front, the ECB is expected to hold rates, but there is clearly going to have to be an admission that inflation is going to be much higher than they forecast even as recently as March, the question is whether there is as much emphasis on downside risks to growth and labour demand. It is likely that it will stress that it is sticking to the accelerated timetable for its rundown of its QE (APP) programme, and that a rate hike will not occur before this has been completed; the question is whether the statement reverts to signalling that rates will rise ‘soon after’ QE ends, as against the March wording of ‘some time after’, the hawks (as per recent comments from Nagel, Schnabel and Wunsch) will certainly be pressing for this, which has already been priced into markets.

  As markets continue to discount a more aggressive Fed rate trajectory, it will be the Bank of Canada which gets the first bite of this particular cherry in North America, with last Friday’s strong labour report, which saw a record low Unemployment Rate, cementing expectations of a 50 bps rate hike to 1.0% and the start of passive quantitative tightening (QT) from May, though the BoC will likely be at some pains to stress that 50 bps hike should not be seen as a ‘new normal’. The rate decision is accompanied by the latest MPR (Monetary Policy Report), which will likely see its CPI forecast raised to 4.0% from 3.0%, while maintaining GDP forecasts of 4.0% y/y for 2022 and 3.5% for 2023.

  New Zealand’s RBNZ is expected to raise its Official Cash Rate (OCR) by 25 bps to 1.25%, as inflation pressures continue to rise, the question is whether it again raise its rate trajectory, which as recently as August 2021 anticipated rates peaking at 2.25%, but by February looked for 3.25%, well above its neutral OCR indicator just below 2.0%.

Elsewhere, Singapore’s MAS is also expected to tighten policy, raising the mid-point of its currency band to current SGD trading levels (close to the top of the previous band set in January), and also to steepen the upward slope of the currency band. The Bank of Korea is seen holding rates at 1.25% but continue to signal further tightening. Turkey’s TCMB is expected to hold rates at 14.0%, depsite headline CPI rocketing up  to 61.1% y/y in March with core CPI at 48.4%, and the Bank of Israel is seen initiating a rate hike cycle with a 15 bps hike to 0.25%.

– As noted large ‘money centre’ banks get the US Q1 earnings season under way, with adverse base effects expected to see net income fall by around 35% y/y, with a fall in deal related fees above all thanks to the war in Ukraine weighing heavily. The question is whether they follow suit with the likes of PNC Financial Services, revising down H1 estimates, but raising H2 revenue forecasts, with particular focus on improving prospects for net interest income, but also on rising expenses (above all wages), and the risk of greater loan loss provisions as rates rise. Bloomberg News highlight the following companies around the world as likely to be among the headline makers: BlackRock, Citigroup, Delta Air Lines, Fast Retailing, Goldman Sachs, Infosys, Morgan Stanley, PNC, Progressive, Qatar National Bank, TSMC, Tata Consultancy, Ericsson, Tesco, UnitedHealth, Wells Fargo, Zijin Mining.

– Despite it being a holiday shortened week, it will be a fairly busy week for government bond supply, as fixed income markets contemplate the end of a near 40-yr downtrend in the US 10-yr yield (see chart). The US has $100 Bln of 3, 10 & 30-yr, Germany has EUR 9.5 Bln of 2 & 10-yr, Italy EUR 8.0 Bln 3, 7, 10, 20 & 30-yr, Netherlands EUR 2.5 Bln 10-yr, UK GBP 2.5 Bln 10-yr, and Japan JPY 3.7 Trln 5 & 20-yr.