Macroeconomics: The Day Ahead for 12 May

A very busy day for statistics around the world to end the week, with UK March & Q1 GDP accompanied by monthly activity indicators, Norwegian & Malaysian Q1 GDP to digest, while ahead lie Brazil’s IBGE IPCA Inflation, Indian CPI & Industrial Production, US Import Prices and provisional Michigan Sentiment. The G7 Finance Ministers meeting continues as does the US Debt Ceiling impasse, and there are a number of BoE, Fed & ECB speakers, the Bank of Canada’s Senior Loan Officer survey, while Chile’s central bank seen holding rates at 11.25%. Agricultural commodity markets will hone in on the USDA’s monthly WASDE report, which follows from China’s Agriculture Ministry’s CASDE report. A hotch-potch of earnings reports will likely see NT&T, Resona and Tata Motors in Asia, and Allian, Richemont and Societe Generale among the headline makers.

The weekend brings the Turkish elections, which remain too close to call, but polls do suggest Erdogan’s two decades in power may be coming to an end, with opposition leader Kilicdaroglu seen falling short of 50% in opinion polls to avoid a run-off election, but Ince’s withdrawal yesterday may be just enough to get him over the line for an outright first round win. If Kilicdaroglu does win, Erdogan’s enigmatic economic policies will be ditched in favour of greater orthodoxy, but of most interest will be how the opposition CHP re-positions Turkey in terms of its relations with Russia, NATO and the Middle East, though voters will be pressing for CHP to focus on dealing with the economic crisis. It should be noted that polls suggest that Erdogan’s AKP party will ‘win’ the parliamentary elections, leading CHP by 44% to 39%, and thus leaving the Kurdish HDP party as the ‘kingmakers’ in terms of forming a parliamentary majority.

Next week is dominated by activity data (Retail Sales, Industrial Production and housing/property sector inter alia) from China and the US, the UK and Australia look to labour market readings, Japan has Q1 prov. GDP, National CPI and Trade, while Canada sees CPI and Retail Sales. There will be a goodly number of central bank speakers, with G7 leaders meeting at the end of the week in Japan, though Biden’s participation is not guaranteed if there is no debt ceiling agreement.

** U.K. – Q1 GDP & March activity indicators **

Following on from the BoE’s policy meeting, which in terms of the upward forecast revisions to growth, inflation and labour market indicators was largely as expected, and a case of the BoE acknowledging that it has been much too pessimistic. Nevertheless, while recession forecasts have been dumped, the outlook for the economy is hardly good, and as Bailey noted, while inflation will come down quite sharply in coming months, the second round inflation effects are likely to stick around for quite some time. Perhaps the only surprise was the dismissal of risks from tighter credit conditions (despite the signals from the latest BoE Credit Conditions survey), which in the second half of the year will likely be felt by many more households facing much higher mortgage payments after they refinance. Be that as it may, Q1 GDP was in line with expectations, but the details and the monthly data highlighted some quite contrasts, most notably the sharp drop in March Services Output (-0.5% m/m) paced the unexpected -0.3% for March GDP, in no small part due to the array of strikes. Per se, this underlines a sharp loss of momentum during the quarter and going into Q2, though offset by strength in Manufacturing (March 0.7% m/m) and Construction (March 0.2% m/m following February’s upwardly revised 2.6% m/m. In quarterly terms, some caution is needed in respect of the unexpected 1.3% q/q jump in Gross Fixed Capital Formation, as this was paced by an also unexpected rebound in Business Investment (0.7% q/q vs. f’cast -0.6%), and given that preliminary Q4 Business Investment also posted a solid gain, which was revised down to -0.2% q/q in the final reading. The fall in Government Spending (-2.5% q/q) was probably largely related to lower outlays for the various energy price cap measures. Overall it does strengthen the case for the MPC to pause its rate hiking, but by the time it meets towards the end of June, there should be a clearer picture on the Q2 growth picture.

** U.S.A. – Import Prices, Michigan Sentiment **

Yesterday’s slightly lower than expected PPI, paced primarily by the -0.5% m/m for food, and a sharp -1.7% m/m for Transport/Warehousing, the latter unsurprising for anyone that has been following the protracted downturn in logistics related prices, does impart some downside risks for today’s Import Prices, which are seen up 0.3% m/m in headline terms, but down 0.3% m/m ex-Petroleum. The latter would reinforce expectations of a June Fed rate pause, particularly if preliminary Michigan Sentiment shows the retreat in 1-yr Inflation Expectations anticipated by forecasters (4.4% vs. prior 4.6), even if this underlines that this gauge largely oscillates with Retail Gasoline prices. But given the FOMC meeting is in mid-June, today’s data run will likely be subordinated by news on the US debt ceiling impasse.