Macroeconomics: The Day Ahead for 11 April

Today’s data run is a busy one, but it may well prove to be nothing more than a minor distraction from trade wars. There are the UK monthly GDP and activity indicators along with the latest REC/KPMG Employment survey to digest, while ahead lie Indian Industrial production, Brazil’s IBGE Inflation IPCA, US PPI and preliminary April Michigan Sentiment. There are ECB, Fed and BoE speakers, but it will be the first batch of US Q1 corporate earnings, as usual featuring the US money centre banks, which attract most attention, above all in terms of their outlooks (how many times will they mention ‘uncertainty’?), with equity options positioning looking for much higher than usual volatility around individual earnings reports (see chart).

In terms of where the world stands with US tariffs, the key points appear to be this: the 90 day pause on higher reciprocal tariffs still implies a year to date rise in US tariffs from 2% to around 24.5%, the latter only marginally lower than the 27% without the pause; b) around 70 countries are said to be in trade negotiations with the US, but we do not know exactly who, and what sort of concessions are involved, though if Japan, South Korea and the EU were all to agree buy more US oil and gas, there is going to be a big problem in terms of the US oil and gas industry delivering on this (see chart of Permian oil producer profitability relative to current oil prices), and all the more so if the US succeeds in onshoring more manufacturing, given this will increase domestic energy demand, leaving less available for export; c) for the shipping fraternity this is a nightmare, given that if they ship tariffed goods now and these are later reduced or removed, the shipper is lumbered with the higher tariffs, or alternatively they could wait only to find that tariffs are even higher; d) the threat of an additional $500K to $1.5 Mln in port fees for Chinese made ships remains very real (well informed sources suggest these may be announced on April 17); e) there is also a looming problem for US importers regarding the ‘customs surety bonds’, which enable the release of goods prior to the deposit of estimated import duties, fees, and taxes, as rising tariffs mean that they may not have sufficient bonds to meet these liabilities – for more detail see this article   f) as happened to the UK with Brexit, the US is increasingly being viewed as an unreliable partner by politicians and businesses alike; and g) with US China trade effectively shutdown given the current level of tariffs, we appear to be on course for pandemic era type disruption to supply chains.

** U.K. – February GDP & activity indicators **

The much stronger than expected 0.4% m/m jump in monthly GDP owed everything to the unexpected 2.2% m/m jump in Manufacturing Output, which looks very much related to building up inventories in sectors at risk from tariffs (e.g. autos, electrical, clothing & textiles, metals and machinery), per se this may well prove to be short-lived. That said the Index of Services also rose a healthy 0.3% m/m, and there was a 0.4% m/m rebound in Construction Output, after contracting -0.3% in January. While it has resulted in some pushback on UK rate expectations, it is more a case of this allowing the BoE to maintain a cautious ‘wait and see’ stance on rates, and it will doubtless be wary that there will be some payback in coming months in growth terms, and take note of the sharp jump in the availability of staff in the overnight KPMG/REC survey as likely signalling a loosening in labour market conditions, which will serve to dampen wage pressures.

** U.S.A. – March PPI, April Michigan Sentiment

While yesterday’s CPI was well below forecasts on both headline (-0.1% m/m 2.4% y/y) and core (0.1%/2,8%), paced above all by gasoline (-6.3% m/m) and used cars (-0.7% m/m), it was the weakness in clothing, furniture and leisure/recreation (airfares, hotels and car rentals) that was the most striking element, suggesting that consumer discretionary spending is being reined in. While there was no evidence in CPI of tariff related pass-through pressures, PPI is expected to tell a different story, with headline seen up 0.2% m/m 3.3% y/y and core up 0.3% m/m, pushing the y/y rate up 0.2 ppt to 3.6%. Upward pressure on energy prices (oil and gas), some metals prices (due to front-running of steel and aluminium tariffs), and perhaps pharmaceuticals are likely to be primary drivers, but the slide in equity prices should see a fairly sharp drag from Portfolio Management fees, which imparts some downside risks. But as with CPI, it is what happens in Q2 that will be key to the inflation outlook. Preliminary Michigan Sentiment is expected to post a further fall to 53.8 from March’s 57.0 and December’s recent peak of 74.0. While there is an element of media hysteria in this survey’s Inflation Expectations (above all relative to the more modest though significant rise in the NY Fed’s survey, due Monday), the anticipated 0.1 ppt rise in 1-yr to 5.1% y/y and above all the long-term measure to 4.3% y/y from 4.1% will certainly worry the FOMC (see chart). Per se while PPI may follow CPI with a better than expected outturn, the rise in inflation expectations will make the FOMC wary of taking much comfort, and steel its determination to ‘wait and see’.