Macroeconomics: The Week Ahead: 19-23 May 2025

The Week Ahead – Preview: 

The new week is light on US data (New & Existing Home Sales), while China kicks off the week with its monthly run of activity and property sector indicators, the UK awaits CPI, Retail Sales and Consumer Confidence, the Eurozone looks to the minutes of the last ECB meeting and German PPI, Japan has Trade, Machinery Orders and National CPI, and there are G7 flash PMIs and a number of national business and consumer surveys. Central bank speakers are very plentiful this week, the ECB will publish the minutes of its April meeting, while China’s Loan Prime Rates are expected to be cut by 10 bps to 3.0% 1-yr and 3.5% 5-yr at this week’s fixing, and the RBA to cut rates a further 25 bps to 3.85%. Poland holds the first round of presidential elections on Sunday, with Romania holding its second round. Trade developments will remain front and centre, and likely to feature as a source of tension at a two-day meeting of G7 finance ministers and central bankers in Canada, the first such meeting since the US administration took office in January, and following Moody’s US credit rating downgrade last Friday. Rather more constructive should be the UK EU summit in London, which aims to bring both sides closer together, with defence, security and energy agreements likely, though related industrial policies remain a potential stumbling block. With immigration still very high on the list of public concerns, a mooted agreement on youth mobility and the UK rejoining Erasmus+ student exchange programme is proving to be a much thornier sticking point, and long-standing issues such as fishing rights have also reared their ugly head again. Much attention will also be given to Trump’s talks with Putin about ending the war in Ukraine, with the initial low-level meeting between Russia and Ukraine offering nothing more than a prisoner swap agreement, and underlining that the two sides remain very far apart.  While Israel and Hamas have returned to mediated negotiations in Qatar, but Israel has made it clear that without an agreement on a hostage swap, it will escalate its military activities with the aim of overrunning the whole of Gaza (vs. the 30% that it currently controls). While there has been some progress in talks between the US and Iran on the latter’s nuclear programme, the hostile rhetoric from Ayatollah Khamenei and President Trump suggests a deal is not that imminent, but at least there is dialogue.

U.S.A.: This week’s housing data are seen diverging again in directional terms, in principle mean reversions of March moves, while the Manufacturing and Services PMIs are seen little changed at 49.9 and 51.0, perhaps not capturing reaction to the US-China tariff truce due to data collection timing. Though this may also echo Friday’s Michigan Consumer Sentiment message that the rollback does not remove uncertainty, nor allay inflation fears materially. Be that as it may, Friday’s credit rating downgrade will likely be the bigger talking point, with Moody’s only following where others have already gone, but very much re-opening the question of what is the risk-free interest rate, given that US Treasuries are eminently not risk-free? Some may argue that the rise in USTs’ risk premium has already ‘priced’ this in, but Moody’s projections that the US budget deficit will likely rise to almost 9% by 2035 (vs 6.4% in 2024), and the CBO’s estimate that the US debt to GDP ratio will surpass its 1946 high of 106.0% (current 98%) in 2029 are a sombre reminder that there are good reasons to question Treasuries safe haven status. Some may also question the timing of the downgrade, as the House continues to try and pass the large tax and spending bill which will only add to the US debt load (by around $3.8 Trln over the next 10 years, according to the Joint Committee on Taxation, other estimates are even higher). It is worth noting that the mandatory components of US federal expenditure (i.e. defence, social security, Medicaid and debt servicing costs) already exceed tax revenues, which are flatlining just below $5.0 Trln. It is also little wonder that FX reserve managers have not been adding to their holdings of US Treasuries for many a year, and instead made large additions to their gold holdings. It also serves as a reminder that tariff wars are not the only risk to the US and global economic outlook, even if markets may react positively to an extension of tax cuts if the current bill is ratified by Congress, and implicitly ignore the ballooning budget deficit. While market risk appetite has clearly rebounded, it is likely to remain fragile and fickle, and with the administration’s policy implementation remaining very unpredictable, rallies in the USD and US assets may well be utilized to rebalance and diversify portfolios.

China: the impact of the tariff wars with the US is expected to be seen most clearly in Monday’s Industrial Production that is projected to slow to 5.7% y/y from March’s 7.7%, but be less evident in a slight 0.1 ppt dip in Retail Sales to 5.8%, with Fixed Asset Investment seen unchanged at 4.2%. There will be particular interest in the sectoral details of Industrial Production to provide some ‘hard’ data on which sectors were hardest hit by the steep fall in exports to the US, though there should be a rebound in May and above all June, as exporters rush to capitalize on the 90-day tariff truce. The latter may offer some distraction from property sector data, which are likely to show that the decline in new and used home prices has slowed, they are yet to turn positive, while Property Investment is forecast to be little changed at a grim -10.0% y/y, marking the 34th consecutive month of declines. It will be interesting to note if Property Sales can finally register a positive outturn (last -0.4% y/y), which would largely be down to base effects, but at least offer a very small glimmer of hope. The fact remains that leaving aside the extensive damage from trade tensions with the US, more stimulus and fundamental reforms to still thin social security coverage will be required if domestic demand is to see a meaningful upturn.

U.K.: the sharp rise in household energy bills (compounded by last April’s cut), as well as other administered prices is expected to be the key driver of a 1.1% m/m increase in CPI, which would see the y/y rate jump to 3.3% y/y from 2.6%, and partially reverse the recent decline in Services CPI up to 4.9% y/y (from 4.7%). There will also likely be some upward pressure on core goods prices, though a drop in petrol prices should temper the headline gain. CPI is generally expected to hold above 3.0% until the end of Q3 and then decline back towards (possibly below) target by Q2 2026. Thursday’s flash PMIs are seen recovering modestly to 46.0 Manufacturing and 50.0 Services, though that appears to assume that there may be a recovery in Export Orders (which fell quite sharply in April) on the back of the US trade deal, which might take longer to materialize if Eurozone and other foreign orders remain weak due to trade tensions. Friday’s Retail Sales are forecast to hold steady at 0.4% m/m, with the warm weather and Easter timing effect seen in the already published BRC measure implying some upside risks to the outturn, though the rise in administered prices and local taxes at the start of April and the report fall in Consumer Confidence may temper that risk.

Eurozone: Flash PMIs, Germany’s Ifo and France’s Business Confidence surveys are all expected to register small month on month gains but remain at very subdued or contractionary levels. There will be some interest in the Export Orders PMI sub-index as a proxy for whether the 90-day moratorium on US reciprocal tariffs prompted any pick-up in orders to beat tariffs. However, that index has been in contraction territory for some 3 years, and per se any pick-up would need to be seen in that context. The April ECB minutes (‘account’) will be combed for clues on how much of a ‘dovish’ tilt there has been on ECB policy, given that the statement and press conference removed the prior observation that ‘domestic inflation remains high’ and noted that Services CPI had ‘eased markedly over recent months’, while also noting considerable downside risks to inflation and growth. More recent ECB messaging on the rate outlook has been mixed, with Lagarde sounding an upbeat note on the outlook in a weekend newspaper interview, Schnabel called for a ‘steady hand’ on rates, while the usually more hawkish leaning Wunsch suggested that rates may need to go below 2.0% in an interview with the FT.

Canada: CPI is expected to post a drop of -0.2% m/m, paced by food, energy and some recreational goods, which would thanks to base effects and the fall being atypical of the normal seasonal pattern see the y/y rate drop sharply to 1.6% from 2.3%, however, core CPI measures are seen unchanged at 2.8% and 2.9% y/y. Per se, this should offer some reassurance to the Bank of Canada, which has voiced some concerns about the impact of trade tensions with the US spilling over into inflation, though it may need more assurance to resume rate cuts.

There are 17 S&P 500 companies reporting this week, with worldwide corporate earnings highlights as compiled by Bloomberg News likely to include:  Analog Devices, Autodesk, Baidu, Bharat Electronics, Cathay Financial, Generali, Home Depot, Intuit, ITC, JSW Steel, Keysight Technologies, Lowe’s, Medtronic, MS&AD Insurance Group, Oil & Natural Gas, Palo Alto Networks, Ross Stores, Ryanair, Singapore Telecommunications, Snowflake, Sompo Holdings, Sun Pharmaceutical, Target, TJX, Tokio Marine, Toronto-Dominion Bank, Trip Group, Workday.