Macroeconomics: The Day Ahead for 11 June

While the data and events schedule is rather meagre today, and the overarching themes of trade tensions, US policy implementation and sovereign debt risks remain the focal points, US CPI and the UK govt Spending Review will offer some significant distractions. Reaction to the framework trade agreement between the US and China, which has still to be approved by Trump and Xi was understandably mutual, with few details on offer, other than China enabling some exports of rate earths and the US some tech export licenses, hardly a cause for any euphoria, but at least the dialogue continues. It was always the case that the sheer complexity of reaching a more comprehensive agreement would require months if not years of negotiations. There are also Japan’s PPI to digest (which at the margin eases the pressure on the BoJ to continue hiking rates), while ECB and BoE speakers are quite plentiful, while the Fed remains in purdah ahead of next week’s FOMC meeting. A busier day for government debt auctions has the UK, Germany and the US all selling 10-yr paper, while Canada sells 2-yr. These follow Japan’s MoF largely dismissing the idea of long-dated JGB buybacks and announcing further consultations on altering the volumes of long-dated JGB issuance, which could prove disappointing to market participants who have been hoping for a relatively substantial reduction in long-dated supply.

** U.K. – Govt Spending Review **

– Chancellor Reeves has a very challenging task in this Spending Review, one which may ultimately decide her future in her current position. She is constrained by commitments to make major increases to spending on Defence and Healthcare, which will hamper any measures to prove that the Labour government is really committed to boosting growth. It is likely to mean that real capital spending in other government departments (such as transport, the Home Office or Department of Justice) will be at best flat, with some perhaps cut. The overall spending levels were already set out in the Spring Budget, and given markets’ now high sensitivity to increased borrowing, she is unlikely to announce any new increases, let alone broach the idea of a further increase in taxes to fund increased capital spending. It is the details on the government’s capital (rather then day to day, or Current) spending plans, which are projected to rise 2.2% on average over the next 5 years that will be in focus. The big risk is that the analytical fraternity will judge that there will be no more than a small boost to growth, and next to no boost to the UK’s productive capacity. Meanwhile public reaction may well be that it offers little in the way of immediate or indeed future tangible benefits.

** U.S.A. – May CPI **

– The consensus looks for headline CPI to rise a very ‘average’ 0.2% m/m, but core CPI to accelerate modestly to 0.3%, which would see y/y rates rise to 2.5% and 2.9% respectively from 2.3% and 2.8%. Underpinning those forecasts is the assumption that tariff passthroughs will exercise upward pressures on autos and parts, clothing and furniture (all hit hard by the ‘Liberation Day’ tariffs), but that there will be some offset from falling services prices, above all airfares and hotels, as consumers cut back on discretionary spending. The risks are that passthrough effects may prove to be somewhat weaker (but likely to increase in coming months), and the drop in services prices more substantial. Regardless of the outcome, inflation will remain modestly above target, and given still relatively healthy labour demand, the FOMC will feel more than justified in digging in deeper on its ‘wait and see’ stance next week.