Macroeconomics: The Day Ahead for 19 May

Today’s run of economic updates is very modest and will struggle to impinge on markets’ ‘animal spirits’, with UK GfK Consumer Confidence, Japan’s national CPI and German PPI to digest ahead of Canadian and Mexican Retail Sales. There is a reasonable volume of Fed, ECB and BoE speakers, as the G7 leaders meeting gets underway, with China and Russia casting a long shadow over the meeting, along with the ongoing US debt ceiling theatre. Deere & Co are the highlight of a modest run of corporate earnings. Next week sees a busy run of US (Personal Income/PCE, Durable Goods, New Home Sales & revised Q1 GDP) and UK (CPI, Retail Sales, PSNB, Rightmove House Prices) data, G7 flash PMIs, Germany’s Ifo and a further array of surveys, Japan Machinery Orders and Australian Retail Sales, and CPI in Brazil, Mexico & South Africa CPI, and the OECD updates its economic outlook. The Fed publishes its May FOMC minutes, while central banks in Indonesia, South Africa, South Korea and Turkey are expected to leave rates unchanged, and China’s LPR rates are also seen unchanged. In terms of a US debt ceiling resolution, it is worth noting that as and when this is resolved (other than in the case of a stop gap measure), the US Treasury account balance at the Fed (see chart), which has been run down to bare minimum levels, will have to be rebuilt (largely via T-Bill sales), and this will drain liquidity from the banking sector, and by extension markets, and per se a risk asset rally. It is also worth observing that Fed speakers are stepping up their pushback against market rate expectations, perhaps emboldened by debt ceiling and to a certain extent regional bank concerns easing, and forcing markets to peg back rate cut ‘bets’, and a widening of USD longer term yield premiums vs other G10 currencies.

In terms of the overnight run of data, Japan’s ‘core core’ CPI rose a little less than expected at 4.1% y/y, but still hit a 42 year high, but with BoJ effectively kicking a major policy review quite far down the road, this has had little impact, though a peak needs to come into view, if the BoJ is to avoid coming under renewed pressure to speed up that review. UK GfK Consumer Confidence improved as expected to -27 (vs. -30), with the major purchase climate to -24 from -28, and while the trend is encouraging, the levels on both remain historically very weak. Germany’s PPI was better than expected in y/y terms, but was much stronger than expected in m/m terms, with Capital Goods and Energy prices posting gains, and suggesting that second round effects remain all too evident, and not just in Services.