Macroeconomics: The Day Ahead for 24 May

While there will be no escaping the ongoing US debt ceiling drama, the schedule of data and events has rather more to it today. As expected the RBNZ hiked rates 25 bps to 5.50% overnight and signalled a peak, but leaving NZ with the highest rates in the G10. There are plenty more central banks speakers on tap, as well as the May FOMC minutes ahead. The UK CPI, PPI and RPI data overnight warm the plate for inflation data in South Africa and Mexico, ahead of which we get Germany’s Ifo Business Climate. A busier day for corporate earnings has Lenovo, Xiaomi and Xpeng in China; Marks & Spencer and SSE in the UK, and the first of this week’s Canadian banks via way of Bank of Montreal and Bank of Nova Scotia. Govt bond supply takes the form of UK ‘green Gilt’ 10-yr, German 15 & 17-yr and US 2-yr FRN and 5-yr. As oil product demand (gasoline, jet fuel) improves as supply concerns re-emerge, the EIA weekly inventories will attract a good deal of attention, particularly following the warning to short sellers from the Saudi Energy Minister yesterday (“I keep advising them that they will be ouching — they did ouch in April” ). The US debt ceiling drama is sadly starting to reflect the deep divisions in US politics and more broadly, and a level of idealistic intransigence, which like pride all too often presages a fall. Even if a last gasp deal is reached, the damage to perceptions about the US body politic will likely be profound.

** U.K. – April CPI, RPI & PPI **

While energy price base effects accounted for the sharp fall in the y/y rate to 8.7% vs. expected 8.2%, the jump in the core rate (6.8% y/y vs. forecast 6.2%)t and the monthly data underlined just how bad the continued ‘second round’ effects, which governor Bailey cited at the BoE’s press conference, are turning out to be. Eminently budget tax measures did not help, nor the deferral of some annual price hikes from January to April, but the 1.2% m/m rise was way higher than the 0.7% m/m consensus. Food (1.4% m/m), Alcohol & Tobacco (3.7%), Communication (8.0%), Transport (1.8%) and Recreation (1.4%) were the big contributors, and barring an unlikely reversal in May’s readings, this leaves the BoE with no other choice than to hike rates again in June. The one crumb of comfort for the BoE were the lower than expected PPI readings (Output flat m/m, Input -0.3% m/m) which confirm pipeline pressures have eased sharply, but this does change the fact that the cumulative increase in inflation has left businesses with little or no choice in passing those on, or face going out of business.

** Germany – May Ifo Business Climate **

As was the case in April, yesterday’s PMIs offered very mixed signals on the German economy, with a greater bifurcation between a very weak manufacturing sector, and robust Services PMI, which also highlighted continued price pressures. Today’s Ifo survey is seen edging down to 9.31 from April’s 93.6, thus breaking a run of six consecutive gains since the September 2022 low. But as Ifo chief Fuest noted on April’s Ifo report: “We will continue to see this economy which is neither collapsing nor growing dynamically. It’s a stagnating economy and the question is what could take the economy out of stagnation.” What is becoming self-evident is that the manufacturing sector is gradually running down the very large backlog of orders, and the pipeline of new orders is drying up. Of particular note will be the sub-index on Construction, which is starting to feel the pressure from higher rates, despite the easing of supply chain bottlenecks.

** U.S.A. – May FOMC minutes **

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 still discounting multiple rate cuts by year end, despite the unwind witnessed in the past fortnight.