Macroeconomics: The Day Ahead for 31 May

There will be the usual rush of data to accompany month end, and the latter may temper or delay (until next week) reaction to any surprises. Otherwise there will be a smattering of central bank speakers, with little else scheduled. While the US PCE deflators will inevitably be the focal point, there are also China’s NBS PMIs, Japan’s Tokyo CPI, Industrial Production & Retail Sales, French CPI and UK Lloyds Business Barometer & Nationwide House Prices to digest. Ahead lie UK Consumer Credit & Mortgage Lending, Eurozone & Italian CPI, Indian GDP & GVA, Canada Q1 & March GDP, with the US also looking to the Chicago PMI, and markets waiting on Sunday’s OPEC+ meeting. Next week’s schedule is packed with the usual start of month run of data, with PMIs/ISMs, US labour data (Payrolls, JOLTS, Challenger & ADP), Auto Sales & Construction Spending; China Trade; German Orders, Production & Trade; Japan Q1 CapEx, Labour Cash Earnings & Household Spending; Australia Q1 GDP & Current Account, Canada labour data. But it will be the anticipated initial rate cuts from the ECB and ahead of it the Bank of Canada, which are likely to capture most attention, above all in terms of implied rate trajectories thereafter, and by extension rate differentials. It’s a busy 7 days for elections, with the seventh and final phase of India’s elections tomorrow, Mexico’s presidential and parliamentary elections on Sunday, and next Thursday the EU parliament elections, which when combined covers just over 2.0 Bln people, i.e. a quarter of the planet’s population, and finally there is the

** China: Both Manufacturing (49.5 vs. expected 50.5) and Non-Manufacturing (51.1 vs. expected 51.5) were weaker than expected, thus confirming there remains little or sign of improving momentum, as the property sector continues to act as a major drag, and the jury very much still out on the latest measures to mop up the large overhang of unsold homes. The impact of the latter (if successful) will in any case take at least a few months to start showing up in activity data.

** Japan – May Tokyo CPI, April Industrial Production & Retail Sales **

– As expected, headline and core CPI moved higher on the back of utility price increases – headline 2.2% vs. 1.8% y/y, core 1.9% vs. 1.6%, but CPI ex-Fresh Food & Energy dipped a little further to 1.8% y/y, which does little to change the BoJ’s thinking on the timing of the next rate hike. There may be some concern that the post auto sector shutdown recovery in Industrial Production has run its course, though expectations of a sharp rebound in May, followed by an equally sharp slide in June advises against over-interpreting this month’s data and instead keep focus on the less volatile 3mth/3mth metric. Retail Sales have proven to be rather more robust than the very weak trend in Household Spending, though the Retail Sales series has been treated with a great deal of scepticism for many a decade, per se the ‘proof of the pudding’ will be whether the stronger than expected 1.2% m/m rise is echoed in next week’s Household Spending, which are forecast to rebound sharply to +0.6% y/y from March’s -1.2%.

** U.K. – April Consumer Credit & Mortgage Lending, May Lloyds Business Barometer, **

– Consumer Credit is seen broadly steady at £1.5 Bln, while Mortgage Lending is forecast to pick up marginally to £500 Mln, after decelerating sharply in March to just £300 Mln, and effectively echoing house price data suggesting that the housing sector recovery remains impeded by high mortgage rates and indeed affordability challenges. Given that polling for the Lloyds Business Barometer is generally conducted mid-month, the big jump to an 8-yr high of 50 from April’s 42 cannot be put down to businesses welcoming the general election, and allied with the renewed upturn in Nationwide House Prices may prompt some members of the MPC to push back their expectations of when rates should be cut, given that it suggests the BoE can adopt a more cautious stance in the face of a somewhat stronger economy than they had been assuming.

** Eurozone – May CPI **

– As has been seen in German, Spanish and this morning’s French CPI readings, well contained m/m rises are not going to be enough to prevent adverse base effects (mostly transport and energy related) from pushing up headline y/y rates, albeit modestly in the case of the pan Eurozone measure, with forecasts looking for 0.2% m/m 2.5% y/y on headline (vs. prior 2.4%) and an unchanged core at 3.0% y/y, with a modest upside risk on headline given the already published national readings, and perhaps also on core given the impact of the German public transport cut last year falling out of the comparison. Be that as it may, the downtrend should resume in June and extend through at least August.

** India – Q1 GDP **

– Some care needs to be taken in any assessment of today’s GDP, which is forecast to slow quite sharply to 7.0% y/y from Q4’s 8.4% y/y, given that the latter was distorted by a number of temporary factors, per se making the anticipated Q1 “slowdown” a case of mean reversion. Indeed the four quarter growth rate for FY2024/2025 is seen at a very robust 7.9%, and underlines the enormous underlying strength of the economy. Attention to today’s data is in any case likely to be short-lived as the focus turns to Tuesday’s general election results, though it does seem likely that it will keep the RBI erring on the side of caution in terms of cutting rates.

** U.S.A. – April Personal Income / PCE **

– Personal Income and Consumption Expenditure are both expected to have risen 0.3% m/m, though the risks on Income would appear to be on the downside given Average Hourly Earnings posted an increase of just 0.2% m/m, and also for Expenditure given the weakness in Retail Sales, and within that a relatively tepid 0.2% m/m increase in ‘Eating & Drinking out’. But it will be the PCE deflators which command most attention, with headline seen posting an unchanged 0.3% m/m 2.7% y/y, while core eases very slightly to 0.2% m/m for an unchanged 2.8% y/y – the FOMC would likely view this as a case of ‘good, but no cigar’ and stick with their current ‘patience’ rhetoric.

** Canada – Q1/March GDP **

– This will be the last major data point ahead of next week’s BoC policy meeting, with GDP forecast to show a seemingly notable acceleration to 2.2% SAAR from Q4’s 1.0%, though it should be added that Q4 was a good deal stronger in the detail than the headline suggested.  However the monthly data are likely to underline that the Q1 strength rests on the ‘outsized’ 0.5% m/m rise in January, that slowed to 0.2% in February, and expected to have stalled in March. Per se the Q1 ‘strength’ is unlikely to be a show stopper for the BoC in terms of embarking on a rate cut cycle next week, particularly given the steady decline in headline and core CPI measures.

** OPEC+ meeting **

– Markets are expecting the official reduction cuts of 3.66 Mln and voluntary cuts of 2.2 Mln bbls to be extended until the end of the year. But increasingly the issue is what is happening with the ‘other’ cuts – not only the voluntary cuts by Saudi Arabia and Russia (the latter being complicated by the fact that Russia does not just utilize crude but also refined products, such as gasoline & diesel, in its reporting, while others actually report on export cuts rather than production), and then there are the ‘compensation’ cuts for countries that have not met official production cut targets or indeed voluntary cuts. In other words, it is actually quite difficult to say how much production has actually been cut, and while most commentators blame a combination of weaker than expected (crude oil) demand, and increases in non-OPEC production (US, Brazil and to a lesser extent Guyana) for the setback in oil prices, it may well be the case that OPEC is producing rather more than it is saying. Given that sort of complexity, the idea of OPEC+ adopting appeared to be fraught with the risk of tensions between members boiling over. But according to sources, OPEC is working on a ‘complex’ deal both to extend some cuts into 2025, and reach agreement on production baselines for 2025. Whether this can be achieved in reality is debatable.