Macroeconomics: The Day Ahead for 22 May

Seesawing US debt ceiling negotiations will continue to dominate proceedings, on what will be a busy day for central banks, but a thin one for economic data. There are the much weaker than expected Japan Machinery Orders, South Korea May 1-20 Exports, unchanged China LPR rates and UK Rightmove House Prices, and the stronger than expected win (but without achieving a majority) for the ruling New Democracy party in Greece to digest, while ahead lie only Eurozone Construction Output and advance Consumer Confidence. The EU publishes its EU MARS Crop Bulletin, while the Middle East Petroleum & Gas Conference gets underway. There are Biden’s comments suggesting a thawing in US China relations digest, even as the weekend G7 meeting opts for a rather rhetorical shift from ‘decoupling’ from China to ‘de-risking’ supply chains. While markets are naturally fixated on the US debt ceiling theatrics, the more pertinent question is perhaps what moves to centre stage following any resolution, given that the world economy remains in flux and transition, geopolitical tension are all too evident. While interest rates have risen sharply, and may be nearing a peak, excess central bank liquidity from the prior decade and above all the pandemic response remains very high and continues to underpin risk appetite to a not insignificant extent, even if underlying market liquidity conditions continue to deteriorate.

RECAP: The Week Ahead – Preview:  

The new 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 & Tokyo CPI and Australian Retail Sales, and CPI in Brazil, Mexico & South Africa CPI, while the OECD updates its economic outlook. The Fed publishes its May FOMC minutes, while central banks in Indonesia, South Korea and Turkey are expected to leave rates unchanged, and China’s LPR rates are also seen unchanged, while a 25 bps rate hike to 5.50% is seen in New Zealand and 50 bps hike to 8.25% is expected in South Africa. As markets ponder the non-committal ‘pause’ signal at May’s FOMC meeting, the minutes of that meeting to be published on Wednesday may offer some insight into whether a pause may be more a case of skipping a rate hike in June rather than signalling a potential peak, which again questions the wisdom of markets discounting multiple rate cuts by year end, despite some unwind in the past fortnight. Central bank speakers will again be very plentiful. Politically the week is bookended by the general election in Greece and next Sunday’s presidential election run-off in Turkey, but all eyes will remain on US debt ceiling negotiations, with developments on Friday and over the weekend pushing back heavily on the optimism that had emerged in the run-up to the weekend, and likely to continue to fuel market volatility. Govt bond supply is plentiful, with $120 Bln of 2, 5 & 7-yr in the US, UK 10 & I-L 29-yr, EU 5 & 11-yr, German longs, Italian 5 & 10-yr and Dutch 5-yr to be auctioned. Canadian banks and a few more US retailers feature on the corporate earnings schedule.

It will be another busy week for conferences in the commodity and energy space, with the Middle East Petroleum and Gas conference in Dubai getting top billing, though the Hart Energy Super DUG, TradeWinds Shipowner’s Forum and, from a rather more political aspect the Russia-China Business Forum. As with much of the incoming economic data, the demand picture for petroleum products is quite dissonant and divergent, with gasoline and jet fuel demand seeing some strength in contrast to weak diesel demand, and the sharp fall-off in US oil and gas drilling activity (as per the Baker Hughes weekly report) may start to ring some alarm bells on the supply side of the equation. The EU MARS Crop Bulletin is also scheduled for release.

G7 flash PMIs are expected to show Manufacturing contracting in the Eurozone and UK, and flatlining in the US, while Services should continue to expand at a reasonable pace, but slowing vs April; Germany’s Ifo survey is seen edging down after a run of six consecutive gains since the September 2022 low.

UK CPI is seen posting an uncomfortably strong m/m rise of 0.7%, but thanks to base effects see headline slow to 8.2% y/y from 10.1%, however core CPI is seen unchanged at a very lofty 6.2% y/y; PPI on the other hand is seen subdued at 0.2% m/m, and thus slowing sharply in y/y terms, underlining ebbing pipeline pressures. Retail Sales are forecast to rebound modestly (0.3% m/m) after a sharp 0.9% m/m drop in March.

Over in the US, the focus will inevitably be on the week ending PCE Deflators, which are both seen up 0.3% m/m, thus edging headline up to 4.3% y/y and leaving core unchanged at a still rather high 4.6%. Q1 GDP is expected to be unrevised at 1.1% q/q SAAR, while the ever volatile Durable Goods Orders are forecast to drop 1.0% m/m after an aircraft led surge of 3.2% m/m, but the core Non-defence Capital Goods ex-Aircraft is seen eking out a modest 0.2% m/m rise after dropping -0.6% m/m in March. New Home Sales are forecast to drop 2.0% m/m after surging 9.6% m/m in March, and by contrast Pending Home Sales are seen up 1.0% m/m vs. prior -5.2%.

Last not least, Japan’s Tokyo CPI is forecast to present a mixed picture for the BoJ, with headline and ex-Fresh Food CPI seen edging down 0.1 ppt to 3.4%, but ‘core core’ edging up 0.1 ppt to afresh 41-yr high of 3.9%.