WEEK AHEAD PREVIEW: US/China; JCPOA; US PCE, consumer confidence; RBNZ; Aus Capex

NOTE: Previews are listed in day-order

US-CHINA MEETING (TBC)

Top trade officials from the US and China are poised to hold their first meeting to review the Phase 1 trade agreement signed under former US President Trump. The meeting will likely occur at the end of the month, with a potential in-person meeting between President Biden and Xi pencilled in for the summer, according to SGH Macro sources. Topics up for discussion at the confab will likely include China’s pledge to purchase USD 200bln worth of US goods and IP protection. According to the Peterson Institute for International Economics, China purchased around 59% of the contracted goods from the US for 2020, albeit in the year embroiled by the pandemic. In terms of the officials, USTR Tai will be meeting with Vice Premier Lui He as opposed to his recently touted replacement Vice-Premier Hu Chunhua. SGH Macro suggests that, according to their links, Beijing will likely open the door for de-escalation. However, the FT reported that the lack of direct contact over trade thus far has stoked concerns among companies over the trajectory of the economic relationship. 

NZ RETAIL SPENDING (MON)

There are no consensus estimates yet for the Q1 retail spending data, but GS is looking for a modest +0.7% rise. The series showed spending declined by 2.7% in Q4 on the back of a hefty rise in Q3 (as lockdowns were lifted); Goldman Sachs (NYSE:GS) notes that the Q3 data was underpinned by spending on durable household goods; "as spending on such items can be 'lumpy' on a Q/Q basis, it was not surprising to see some easing in December." The bank says that "New Zealand’s recovery is gaining traction and households are continuing to spend up on durable items," adding that "spending continues to be dampened by the sharp slowdown in population growth and the absence of tourists during the normal summer peak."

JCPOA (TUE)

The Iranian nuclear deal discussions are seemingly nearing an accord whereby the US has reportedly agreed to lift several sanctions against Iran, including restrictions on oil exports, as per Iranian President Rouhani. Sources via EnergyIntel suggest that Iran is preparing to hike oil exports to maximum capacity in the upcoming months – in-fitting with reports over the week. According to reports citing the Iranian National Oil Co, the most optimistic scenario suggests that Iran could ramp up production to almost 4mln BPD in three months. Talks are to resume next week, with a possible official announcement also on the cards. “While any announcement confirming the lifting of sanctions would likely hit sentiment further, we believe that this will be short-lived, given that the supply and demand balance remains supportive,” ING said. OPEC+ members will also have to consider any deal when tweaking output quotas as Iran, Venezuela, and Libya is currently exempt from the output restrictions – with the group also poised to meet at the start of June. ING believes that the oil market can handle Iranian oil alongside OPEC+ supply, "We are assuming that Iranian supply returns to 3mln BPD by 4Q21". It’s also worth noting that any deal could have an impact on the June 18th Iranian elections – which in turn would affect US-Iranian ties.

US CONSUMER CONFIDENCE (TUE)

The Conference Board's gauge of consumer confidence is seen paring to 120.0 in May from 121.7 in April. The prelim University of Michigan consumer confidence data for May, released last week, disappointed expectations, and inflation expectations surged to the highest in a decade, and consumer expectations of weaker real income ahead dragged the index to Feb lows. "Messaging from policymakers will be key over the coming months as the economy navigates a strong inflationary impulse, but we expect transitory price pressures will fade as the year progresses, "Oxford Economics says, "and while long term inflation forecasts crept up, they remain tame by historical standards." OxEco argues that, as temporary price pressures fade, and the labour market recovery gains steam, consumer sentiment will gradually return to pre-pandemic levels over the course of 2021, supporting the strongest growth in consumer spending since 1946.

RBNZ PREVIEW (WED)

The RBNZ is expected to maintain policy settings, with the OCR anticipated to be left at 0.25% and Large-Scale Asset Purchases at NZD 100bln; the central bank is also likely to keep its Funding for Lending Programme unchanged. At the last meeting, the RBNZ reiterated that it was prepared to lower the OCR if required, and that the outlook remained highly uncertain, and it will maintain current settings until it is confident inflation and employment targets are achieved. Despite its dovish tone, its actions so far this year have been towards policy normalisation, including the withdrawal of liquidity facilities and reimposition of mortgage Loan-to-Value restrictions, while it now also has to consider the impact of its policy decisions on housing prices, which many analysts believe will continue to surge. This effectively limits the central bank’s ability to loosen policy and it even said in the recent Financial Stability Report that if additional tightening in policy settings is needed, the most straightforward approach was to tighten LVR restrictions further. RBNZ Deputy Governor Bascand has affirmed this view, while the central bank is also planning to provide advice on policy options regarding the government’s directive on housing after having being asked by the government to look into potential debt-to-income ratios and restrictions of interest-only mortgages. The latest key data releases from New Zealand have been encouraging; Employment Change +0.6% (vs exp. 0.2%) and unemployment at 4.7% (vs exp. 4.9%) were better-than-expected in Q1, while Labour Cost Index (1.6% vs exp. 1.5%) and CPI (1.5% vs exp. 1.4%) also topped forecasts, suggesting that additional easing is currently unwarranted. ANZ Bank recently said forecast the RBNZ will begin hiking rates in August 2022, and gradually lift the OCR to 1.25% by end-2023; for the upcoming meeting, however, ASB anticipates upgrades to economic forecasts and for the central bank to maintain policy settings, as well as an accommodative tone.

BOK PREVIEW (THU)

The Bank of Korea is expected to maintain its 7-Day Repo Rate at the record low 0.50%, where it has been since May last year. In April, the BoK unanimously decided to maintain the status quo, and Governor Lee stated that it was too early to discuss changes in monetary policy direction. The BoK also noted that growth uncertainties were high, but added that South Korea's recovery will continue on exports and investments, adding that inflation will run higher, labour market conditions are improving and growth could be around the mid-3% area for this year. The data since the last meeting has been firm; advanced GDP for Q1 topped estimates at 1.8% Y/Y (exp. 1.1%, prev. -1.2%) and with CPI in April at 2.3% (exp. 2.2%, prev. 1.5%), the quickest pace of increases since August 2017. Industrial Production and Retail Sales data also alluded to a firm growth impulse, while exports remained rampant during the first 20 days of May. These firm data suggest a lack of urgency for further easing measures; analysts at SocGen anticipate the BoK to begin hiking rates in February next year, and expects that the BoK will maintain its accommodative stance within the statement, but for Governor Lee to provide a more hawkish tone in his post-meeting remarks.

AUSTRALIA CAPEX DATA (THU)

Having seen spending intentions slashed as the pandemic spread, capex plans are expected to recover, and be lifted into 2021/22 amid re-openings. Aussie bank Westpac anticipates a further upgrade in this week's survey, which was conducted in April and May. Westpac notes that for the 2020/21 year, the fifth estimates saw capex intentions of AUD 121.4bln, around -7% below the estimate a year earlier; the bank reckons it could rebound to AUD 125bln in the latest data, which in percentage terms would be a 3% upgrade on the fifth estimate, which exceeds the 5-year average upgrade size of +1.3%.  Meanwhile, private business capex is seen rising +2.1%; Westpac points out that, although these capex data were hit amid COVID, capex spending ended 2020 on a firmer note, including a rebound in equipment spending, which were supported by tax incentives. "For Q1, we anticipate a further gain of 1.6%," the bank writes, "the recovery in equipment spending appears to have extended into 2021, and businesses are optimistic, activity is rebounding briskly and tax incentives are generous."

US PERSONAL INCOME, SPENDING (FRI)

The street is looking for personal income to decline 14.5% M/M in April, following the +21.1% gain in March (the March upside was a function of stimulus checks, and the April data represents a normalisation); adjusted consumption is estimated to rise by 0.6% against the 4.2% seen in March. The April retail sales report disappointed expectations, although analysts were quick to suggest that the data is likely to be supported in the months ahead as the reopening continues. On the health of the consumer, Pantheon Macroeconomics said that the underlying trend over the next few months will be supported by the full reopening of the economy, which it expects will be followed by a long drawdown of some of the hundreds of billions of dollars of savings accumulated during the pandemic.

US PCE (FRI)

Core PCE is seen rising +0.5% M/M, which would take the Y/Y measure to +2.4% (from +1.8%). Last week’s CPI data for April surprised to the upside, which stoked inflation fears (temporarily) – Treasury yields fell back down in wake of the data, which analysts said demonstrated that the market was beginning to accept the Fed’s argument that the inflation upside in Q2 is a transitory phenomenon, arising as a function of base effects, oil prices and pent-up demand. Indeed, a breakdown of the CPI data revealed that the components which saw hefty upside are areas that are subject to these transitory pressures – airlines and hotels, for instance; components like rent were tepid. The debate on whether what we are seeing is transitory or something more persistent will not be resolved until later in the year, but in the interim, media reports continue to highlight supply chain issues, scarcity of labour, recent higher industrial commodities prices, which threaten to keep inflation more elevated, at least in the near-term.