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Week Ahead Preview: Highlights Include FOMC Minutes, UK CPI, Global PMIs

By Newsquawk Voice Ltd (Ryan Anderson)Market OverviewMay 17, 2021 08:19
Week Ahead Preview: Highlights Include FOMC Minutes, UK CPI, Global PMIs
By Newsquawk Voice Ltd (Ryan Anderson)   |  May 17, 2021 08:19
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MON: Eurogroup Meeting; Chinese Retail Sales and Industrial Production (Apr)
TUE: RBA Minutes (April); EU Economic & Financial Affairs Council; Japanese GDP (Q1); UK Jobs Report (Mar); EZ Employment (Q1) and GDP (Q1)
WED: FOMC Minutes (April); UK Inflation (Apr); EZ CPI (Apr) Canadian CPI (Apr); Hong Kong Holiday
THU: PBoC LPR, SARB Rate Decision, BoC Financial System Review presser; EU Foreign Affairs Council Meeting (Trade); Australian Jobs data (Apr)
FRI: New Zealand Retail Sales (Q1); UK Retail Sales (Apr)


Participants will likely overlook the economic assessment/outlook in the minutes given the release of the SOMP last week. RBA watchers however could focus on any colour regarding the upcoming July decision on whether to undertake further bond purchases in September and whether to retain the April 2024 bond as the target bond for the 3yr yield target or whether to shift to the next maturity. To recap, the prior meeting saw policy settings unchanged as widely expected whilst the 2021 growth forecast was raised to 4.75% from 3.50%, an upgrade was not much of a surprise as the central bank have previously suggested on several occasions that the rebound in the economy was stronger than it anticipated. The SOMP that followed suggested that the economy is beating prior forecasts, with the 2021 GDP and CPI forecasts upped whilst unemployment was revised lower. That being said, the SOMP also warned that the policy needs to remain highly accommodative and that rates will not be raised until inflation is in the target range which is unlikely until 2024 – in-fitting with guidance.


The preliminary reading for Japanese Q1 GDP is set for release on Tuesday in which analysts estimate GDP Q/Q to contract by 1.2% vs prev. growth of 2.8% and expect Annualized GDP to shrink 4.6% vs prev. expansion of 22.9%. The consensus for a contraction in the economy is mostly due to disruptions from the resurgence of the virus in Japan which forced the government to declare a state of emergency in nearly a dozen areas including the capital of Tokyo from early January that lasted for almost the entire of Q1. Furthermore, the economic growth data for Q2 doesn’t look promising either and risks dragging Japan back into a recession, given that the state of emergency was reimposed again in late April for several cities including Tokyo, just a month after its lifting, and which has since been extended through to at least May 31st. The data releases during Q1 have been mixed including Industrial Production which declined in January and February before returning to 4.0% growth in March, while Exports in March surged by 16.3% which was the largest increase since November 2017 and more than atoned for the 4.5% drop the month before. Conversely, the most recent Japanese Machinery Orders contracted by 7.1% Y/Y which was for February, although monthly Manufacturing PMI data was mostly in expansionary territory during Q1 and the quarterly BoJ Tankan report also showed the large manufacturers sentiment index at its highest since September 2019 and large non-manufacturers sentiment at its best levels in a year, which could suggest the economic climate may not be as bad as some had feared.


The upcoming jobs report is set to see the unemployment rate hold steady at 4.9% in the three months to March. As has been the case since the onset of the pandemic, the presence of the furlough scheme obscures the true picture of the labour market. Accordingly, RBC draws greater attention to the monthly Business Insights and Conditions Survey (BICS). As of March, the survey noted that around 19% of companies’ workforce was on furlough, a number which fell to 11% in the most recent release as the UK economy reopened. This number is set to dwindle further as the UK makes its way through the next phases of lockdown easing before the furlough scheme draws to a close in September. In its most recent MPR, the BoE noted that the unemployment rate will peak at just under 5.5% in Q3 of this year “as not all previously furloughed employees return to work and as the higher than usual flows into inactivity seen while social distancing measures were in place begin to unwind”.


The April 27/28th FOMC meeting was a tranquil one. The Fed continued to affirm its dovish stance and guidance with rates at the zero lower bound, whilst maintaining its QE at USD 120bln per month of Treasury and MBS securities purchases. The statement gave no mention of purchase tapering, while Powell stated in the Q&A that now is not the time to think about such as "substantial further progress" on the Fed's goals has not been made. Some hawkish regional Fed presidents, mainly Kaplan, have shown a preference to get the taper talk going, but the core Board of Governors continue to press back on tapering expectations, as do the majority of the Fed - the Minutes could provide us with some context on the path to tapering. Since the meeting, there has been both a disappointing April jobs report (+266k vs exp. +978k; prev. revised lower to +770k from +916k), a red hot April CPI print (Core M/M +0.9% vs exp. +0.3%), and a relatively less hot April PPI print (Core M/M +0.7% vs exp. +0.4%). There has also been further progress on recovering from the virus - a key goal for the Fed - as US reopening efforts continue with nationwide cases trending lower. Recent core Fed speakers have continued to stress that employment goals are far from complete, even if there are signs of inflation being on its way. While Governors Brainard and Clarida have noted that they will continue to look through near term hot inflation prints so long as longer-term inflation expectations (TIPS and surveys) remain anchored at 2%. Thus, the Minutes on Wednesday should provide some greater clarity into the Fed's tolerance and outlook for inflation, whilst also bringing up some of the intricacies of the debate among members. Furthermore, we could get some further insight on any approaching changes to the Fed's administered rates (IOER/RRP), something the FOMC has hinted at in recent meetings, amid the glut of liquidity weighing on money markets. Finally, it's worth noting that the NY Fed announced the much-anticipated tweaks to its purchases on Thursday to modestly extend the duration to fit more in line with outstanding Treasury debt, so the Minutes will likely show some of the commentary/expectations leading into that decision.


Y/Y headline CPI is seen rising to 1.4% in April from 0.7% in March with base effects from April 2020 set to support the index. More specifically, a combination of movements in petrol prices between March and April last year allied with the recent lifting of the OFGEM price cap are set to bring inflation closer to target for the BoE. This trend is expected to continue in the coming months as CPI rises temporarily above the 2% target towards the end of 2021 as per the most recent BoE MPR. However, policymakers have already cautioned that “these transitory developments should have few direct implications for inflation over the medium term” as headline CPI returns to around 2%. As such, any uptick in inflation, even beyond the current market consensus is likely to be dismissed by market participants and rate-setters alike.


Currently there is no consensus for CPI although analysts at Canadian bank RBC are expecting a 0.4% M/M rise to the headline with the Y/Y rate at 3.3% due to low base effects, which are expected to stand true through to May as well. The desk writes for April, “core strength is behind most of the monthly gain (~0.3pp of the ~0.4pp headline increase), aided to a large degree by the absence of some usual seasonal declines in the month (e.g. travel services)”. BoC Governor Macklem noted the BoC expects inflation to rise to around 3% in the next few months due to base effects but expects it to come down after that as large parts of the economy remain weak – RBC forecasts Y/Y rate to moderate after May. Macklem was also still happy with the latest MPR from the BoC which looks for a 2021 inflation of 2.3%. Last month, the average of the BoC’s core measures ticked up to 1.93%, although RBC highlight the latest MPR noted the Trim and Median metrics, 2.2% and 2.1%, respectively, are likely over-estimating underlying inflation. The recent rise in commodities will likely have an impact and given the large overshoot on the US CPI print (driven higher by used car and truck prices), the print will be more in focus to see if the same occurs north of the border. However, given the BoC is less accommodative than the Fed with it already tapering asset purchases, the concerns may not be as high, especially as the Bank bought forward its rate hike guidance to H2 22 from 2023.


The PBOC is expected to maintain its Loan Prime Rates for a 13th consecutive month with the 1-Year Loan Prime Rate expected to be held at 3.85% and 5-Year Loan Prime Rate at 4.65%. The key tell-tale for the LPR has been action surrounding the MLF. The central bank also maintained the 1-Year Medium-term Lending Facility rate earlier this week, which points to the unlikelihood of any changes to its benchmark rate given that the central bank had previously lowered the MLF rate first before the last three occasions that it reduced the Loan Prime Rate. Further supporting a hold would be the mixed inflation data whereby CPI came short of forecasts while the PPI figure was bolstered by commodity prices. Traders also saw the release of the PBOC Q1 monetary policy implementation report, which noted that real lending rates will be guided further lower but reiterated that it will continue to pursue a prudent monetary policy that is targeted, flexible, and appropriate; will maintain a relatively steady yuan exchange rate.


The 2021 budget is set for release at 14:00NZDT/03:00BST, and similar to their Aussie counterparts, the Kiwi budget is expected to reflect a notable improvement in fiscal spending vs the half-year update. Desks note that the COVID impact on the government's finances has been much less than initially feared given the successful containment of the virus. That being said, the global environment remains uncertain but participants expect the post-COVID recovery to be the focus of this budget. "We expect this year’s operating balance to end up around $8 billion higher than the Treasury forecast back in December…and from there, we anticipate that the deficit will progressively narrow so that the operating balance nears zero by 2025", Westpac says. The analysts note that the overall positive picture will likely feed into a significantly smaller bond issuance programme, with the bank expecting NZD 10bln downgrades to the prior programme in each year from 2022 through to 2024, and a NZD 5bln reduction in 2025 issuance. Desks suggest that the improved fiscal accounts pave the way for an increase in spending and investments. Westpac has no fixed view on what additional spending could be revealed but will likely be aligned with the government's priority list.


The SARB is wholly expected to maintain its repo rate at 3.5%, as per all analysts polled by a major newswire. Expectations are one-sided as domestic inflation is still within a comfortable range for the SARB. CPI YY in March printed at 3.2%, well within the SARB's 3-6% target range, whilst the core metric printed below forecasts at 2.5% (exp. 2.7%), thus backing a "wait and see" approach. That being said, the rise in commodity prices is expected to be reflected in the metrics over the coming months, although some suggested that after the transitory effects have passed, both CPI AND PPI will be relatively contained until demand is lifted. Median expectations point towards the SARB lifting its repo rate by 25% either in January or March 2022, followed by another hike of the same magnitude in July to September.


The headline employment change for April is expected to show an addition of 15k jobs (vs prev. 70.7k), whilst the unemployment rate is seen steady at 5.6% alongside the participation rate at 66.3%. Last month's above-forecast headline figure was driven solely by part-time employment, which rose 91.5k and offset a 21k decline in full-time. Desks suggest that April sees several conflicting factors. The firm jobs vacancy figures and robust employment figures provide favourable omens for the release. However, the ending of the Jobkeeper scheme and subdued tourism and industry could pull in the opposite direction. "Weekly Payrolls are pointing to a soft patch in employment, but caution is needed here as the Easter Holidays fell in the reference period and the ABS will seasonally adjust for this.", Westpac suggests as they forecast the employment change at +10k, unemployment rate at 5.6% and participation rate at 66.3%.


Expectations are for the manufacturing metric to pull back to 62.5 from 62.9 alongside an increase in the services print to 52.0 from 50.5. The extension into further expansionary territory for the services reading would be consistent with the narrative surrounding last month’s release which pointed towards a bottoming out of the sector as Eurozone nations reopen their economies or await imminent easing of existing measures. Manufacturing is set to remain firmly in expansionary territory and not provide too much interest on a headline level. However, details of the release will be eyed for commentary surrounding supply chain disruptions and how this could filter through to prices. A levelling off of the manufacturing data in the coming months would not come as a surprise given recent elevated PMI readings. However, looking ahead, attention will likely focus more on services data and the subsequent strength of the economic rebound as the sector reopens.


Consensus looks for the services metric to rise to 62.0 from 61.0 with the manufacturing print seen ticking higher to 60.0 from 58.9, leaving the composite firmly in expansionary territory of 61.8. The survey period will have fallen between the first and second phases of the UK’s reopening and therefore not encapsulate much of the sentiment stemming from the May unlocking efforts which will see the return of indoor services for bars and restaurants. Therefore, some market participants may wish to opt to wait for next month’s release for greater insight into the strength of the UK’s economic recovery as lockdown measures are unwound. That said, a robust level of expansion is on the cards for the release and will provide further encouragement for the UK’s economic outlook in the wake of its (so far) successful vaccine campaign. As per the Eurozone report, details of the release will be eyed for commentary surrounding supply chain disruptions and how this could filter through to prices.


No consensus is currently available for the release. However, retail sales data has taken somewhat of a backseat to other aspects of the economy with growth in the sector having held up comparably better than others throughout the pandemic. As a reminder, the March release noted that sales were 1.6% higher than February 2020 before the impact of the coronavirus pandemic. For Q1 as a whole, the ONS noted that retail sales were subdued overall, however, such an outcome will likely be viewed as temporary on account of lockdown restrictions. In terms of available indicators for April ahead of the release, Barclaycard UK April consumer spending rose 0.4% vs April 2019 which was the first growth by that measure so far YTD. UK BRC retail sales rose 39.6% on a Y/Y basis amid base effects from 2020, however, BRC did note that the short-term pent-up demand for the shopping experience drew consumers back to stores with “non-food sales across stores and online increasing by a quarter between March and April”

Week Ahead Preview: Highlights Include FOMC Minutes, UK CPI, Global PMIs

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Week Ahead Preview: Highlights Include FOMC Minutes, UK CPI, Global PMIs

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