Macroeconomics: The Day Ahead for 10 June

RECAP: The Week Ahead – Preview: 

A bumper week for major data accompanies the FOMC and BoJ meetings, along with major monthly reports for energy and agricultural commodities (including the UN FAO biennial Food Outlook), as well as key metals sector conferences, as the EU parliament election results are digested, UK election campaign continues, and Italy hosts a G7 leaders’ summit from Thursday through Saturday. Corporate earnings are seasonally typically sparse, with highlights likely to include Adobe, Broadcom, Dollarama, Oracle, while Tesla holds its AGM, and Nvidia completes its 10 for 1 stock split. The US looks to CPI, PPI, NFIB Small Business, Michigan Sentiment and NY Fed Inflation Expectations surveys, China awaits CPI, PPI and credit aggregates, the UK has monthly GDP and activity indicators, labour and wages data, the Eurozone final national CPI and a raft of ECB speakers, India looks to CPI and Industrial Production, Australia has Unemployment, and Japan final GDP and Economy Watchers survey, and Latin America awaits inflation data in Argentina, Brazil and Colombia.

 ** U.S.A. – Friday’s labour data were a mixed bag, with the robust payrolls gain once again contradicted by a rise in the Household survey Unemployment measure, and perhaps most worryingly for the FOMC a drop in the labour force participation rate to 62.5%, and a rise in 3-mth annualized Average Hourly Earnings from 2.8% to 4.0%. Given the further deceleration in JOLTS Job Openings, labour demand continues to ease, but not at a pace which would steer the FOMC away from its focus on inflation. CPI is released a few hours ahead of the the FOMC meeting, with a drop in energy prices (above all gasoline) set to pace a muted 0.1% m/m rise in headline, leaving the y/y rate unchanged at 3.4%, while core is seen up 0.3% m/m for a second month, easing the y/y rate 0.1 ppt to 3.5%, but in 3-mth annualized terms still running at a relatively ‘hot’ 4.0%, though better than Q1’s 4.8%. Housing (OER, last 0.4% m/m) will continue to be a key upward pressure on core CPI, along with Medical Care, but to some extent mitigated by falling new and unchanged used auto prices. Thursday’s PPI is forecast to echo CPI in m/m terms, but base effects will push up headline and core y/y rates to 2.5%, and it is worth bearing in mind that adverse base effects will exercise upward pressure on core CPI in H2 2024. With the perhaps notable exception of the Services ISM and PMI, recent activity data suggests a clear loss of growth momentum, but again not sufficient to shift the Fed’s focus. The ‘dot plot’ is expected to show only two rate cuts in 2024, but given that it was a fine line between two and three rate cuts in March, and the push back by Fed speakers on the rate cut trajectory since the April meeting, this would be very unsurprising, particularly as markets now only have one rate cut priced in by year end. The rest of the SEP (summary of economic projections) is likely to see Unemployment forecasts shaded higher, core PCE Deflator pushed up perhaps 0.2 ppt from March’s 2024 year end projection of 2.6% given the run of higher actual PCE data, but the 2024 GDP forecast will likely be cut, given the soft Q1 GDP. A good deal of the FOMC discussion will likely focus on whether rates are ‘sufficiently restrictive’, but the long-term neutral rate is unlikely to shift from March’s 2.6%. Of particular note in the statement, will be any changes to either ‘Recent indicators suggest that economic activity has continued to expand at a solid pace’ or ‘Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective’, given the run of recent data. If asked, Powell will likely reiterate that the next move in rates is unlikely to be up. Monday’s NY Fed 1-yr Inflation Expectations (which jumped in April, though fell on longer time horizons, Tuesday’s NFIB Small Business Optimism (seen little changed, despite some improvement in the already published employment indices) and Friday’s June Michigan Sentiment (expected to rebound) will be further points of interest.

** U.K. – The REC/KPMG labour market report gets the week underway and will be of particular note after the April survey hinted at some improvement in labour demand, with permanent hiring falling by the smallest amount in 10 months, while billings for temporary staff dropped by the least since January. But the focus will be on Tuesday’s official labour data that are expected to see the Unemployment Rate holding at 4.3%, but more importantly Average Hourly Earnings unchanged at 5.7%  y/y headline, and edging up for the first time since June 2023 to 6.1% y/y ex-Bonus. The pace of declines in both HMRC Payrolls (median -10k) and the much-maligned LFS Employment (-95K) is also expected to ease. As with a good number of recent UK economic indicators, it suggests that even without the interference of the General Election, the MPC would probably have erred on the side of caution at this month’s meeting. Wednesday’s April GDP data are expected to show that the relatively robust 0.4% m/m in March was not a step change in growth momentum, and is forecast to be unchanged m/m, dragged lower by a drop of -0.1% m/m in both the Index of Services and Industrial Production, with Construction Output seen flat m/m. Per se, it will only add to the already immense pressure on hapless PM Sunak in the context of a general election campaign, which has been stultifying, and replete with mindless waffle and empty promises, with all parties expected to release their election manifestos this week.

** China – It’s debatable whether credit aggregates will be more than important this week’s inflation readings. But for what’s worth,  credit aggregates are expected to rebound after unexpectedly contracting in April, with Aggregate Social Financing and New Yuan Loans seen up CNY 2.3 Trln and 1.069 Trln respectively, in part due to typical seasonal factors, but specifically due to the issuance of the central govt special bonds, and a pickup in local govt issuance, but private lending data will likely underline continued weakness in consumer and business demand for credit. CPI is seen edging up to 0.4% y/y, though high frequency data on food and non-food prices suggest some risk of a slightly lower than expected outturn, while PPI deflation is forecast to ease to -1.5% from April’s -2.5% y/y, but almost entirely due to base effects as May 2023 PPI fell to -4.6% from 3.6%. The big question remains whether the most recent measures to bolster the very weak property sector are getting some traction, with high frequency data above all for home, autos and appliance sales suggesting a notable improvement in latter half of May, but it remains to be seen if this will be sustained.

** Japan – Final Q1 GDP is seen unrevised at -0.5% q/q or -2.0% SAAR, though last week’s weaker than expected Business CapEx imparts some downside risks, despite the much stronger than expected 15.1% rise in Company Profits, with Q1 Household Consumption seen unrevised at -0.7% q/q (marking four consecutive quarters of contraction). Ahead of Friday’s BoJ meeting, the Economy Watchers (services) survey is expected to improve to 48.5 from 47.4, but remaining well below 2023 levels. But the focus will be on Friday’s BoJ meeting, where the official call rate target is seen held at 0.0-0.1%, but a reduction in its JGB purchase volumes is expected, as it embarks on a likely slow pace of quantitative tightening (QT). But the primary focus is likely to be on Governor Ueda’s press conference, in which he is expected to express greater confidence that the sharp rise in wage settlements at large companies (which admittedly only constitute ca. 15% of employees) will help to ensure a ‘virtuous wage-price cycle that should see CPI around target, and per se open the door to a further 15 bps rate hike in July, and more than likely a further 25 bps in October. It will be interesting to see how much reference is made to the impact of the weak JPY, even if hefty intervention has managed to arrest the fall for the time being.

– India – Following on from the surprising election result, attention turns to CPI, WPI and Industrial Production. CPI is seen barely changed at 4.88% y/y, with food prices likely to exercise some very modest upward pressure (more significantly on WPI, but core CPI will likely remain around its April record low of 3.2%. Industrial Production is expected to slow modestly to 4.6% from 4.9% y/y, echoing a modest setback in the Manufacturing PMI, though the sharp drop in non-petroleum exports imparts some downside risks.

– Monthly Energy Market reports from EIA, IEA and OPEC are all scheduled for this week, and follows last week’s OPEC production cut tapering decision, which caught many by surprise. Of particular interest will be whether OPEC makes any changes to its oil demand growth estimate of 2.25 Mln bbls for 2024, which stands in sharp contrast to an EIA estimate of just 960K and IEA of 1.06 Mln, the former having been cut sharply from January’s 1.39 Mln, above all in April. The week also sees the release of USDA’s World Agricultural Supply & Demand Estimates (WASDE), where 2024-25 stocks of Wheat and Corn are seen revised lower according to Bloomberg Consensus estimates, while US Soybean stocks are expected to be revised higher, elsewhere China’s CASDE, France’s Agrimer and Brazil’s Conab monthly S&D reports are also published.

– Govt bond supply: the US auctions $119 Bln 3, 10 & 30-yr, the UK sells a new 4.25% 2034 via syndication, as well £900 Mln I-L21-yr, Germany EUR 4.0 Bln 10-yr, Netherlands EUR 2.0 Bln 10-yr and Italy holds its mid-month sale of 3, 7 & long-dated BTPS (details Monday).