Macroeconomics: The Day Ahead for 11 June

A rather uneventful day awaits in terms of both data and events, though judging by the marginal reaction to another set of higher than expected US CPI readings yesterday, markets appear to be in the mood for a freewheeling and laidback summer season, which only an unexpected shift from the Fed or an outlier Retail Sales next week might jar. Statistically the run of UK GDP and April activity readings takes centre stage, accompanied by Japan’s Q2 BSI survey, Indian Industrial Production and preliminary US Michigan Sentiment. The last of this week’s commodity S&D reports sees the publication of the IEA’s monthly oil market report, with Russia’s Bank Rossi policy meeting and a speech by BoE’s Bailey the only highlights in central bank terms, as G7 leaders gather for a face to face meeting this weekend. Next week sees a busy run of data from the US, China and the UK, with US Retail Sales, Industrial Production, NY & Philly Fed surveys, NAHB Housing Market Index and Housing Starts; China Retail Sales, Industrial Production, FAI and Unemployment; UK CPI, RPI, PPI, labour data and Retail Sales. Elsewhere there are also Japan Trade and Machinery Orders, Canadian CPI and Australian labour data. In central bank terms the FOMC and BoJ meetings are not expected to see any departure from their current ultra-accommodative narratives, and thus continuing to appease ‘animal spirits’ in financial markets, who clearly have no desire to ‘front run’ any potential central bank policy shifts; the SNB and Norges Bank also hold policy meetings.

Yesterday’s US CPI was again primarily about re-opening pressures, with used autos, hotels,  airfares, restaurants and car rentals accounting for just over half of the increase, with OER (housing) at 0.3% m/m (vs. April 0.2%) accounting for much of the rest. While this does fit with the Fed’s ‘transitory rise’ narrative, a cursory look at yet another surge in Fed Reverse Repo operation volumes (see chart) which hit another record underlines that a collateral shortage, primarily driven by the low effective Funds Rate and Repo rates is probably more of a driver of the down move in Treasury yields, and while clearly not disruptive at the current juncture, the Fed will need to address this, more than likely at next week’s FOMC meeting with some adjustments either to IOER and/or reverse repo rates.

U.K. – April GDP, Index of Services, Industrial Production

GDP was very modestly better than forecast at 2.3% m/m, thanks to an unsurprisingly better than expected Index of Services (3.4% m/m vs. f’cast 2.8%) as the UK economy re-opened. But Industrial Production, Manufacturing Output and Construction Output all posted unexpected falls, and as with much data across the Eurozone underline the point yet again that in the face of supply chain disruptions and with some evidence of skills shortages, buoyant survey readings are not being mirrored by hard data. To be sure all of the latter make up a much smaller contribution to overall GDP, and the recovery in Services should serve to keep GDP buoyant during Q2, but if sustained the loss of momentum in the industrial sector may well rein in the recovery, above all if fiscal support measures (above all furlough scheme and stamp duty cut) start to be withdrawn.

Russia – Bank Rossi rate decision 

The consensus now looks for a 50 bps rate hike to 5.50% after this week’s May headline and core CPI jumped yet again to a higher than expected 6.0% y/y from 5.50%, way above the target rate of 4.0% y/y, prior to that the majority had expected a more gentle 25 bps. While CPI may be getting close to a peak, if a slight ebbing in consumer inflation expectations (but still just under 8.0%) is any guide, the message on the policy outlook from Nabiullina is likely to be resolutely hawkish, given that Bank Rossi’s assumed neutral policy range is 5.0%-6.0%, suggesting at least another 50 bps of policy tightening even after today’s hike, which along with the firm tone to oil price continues to underpin the rebound in the RUB.