Macroeconomics: The Day Ahead for 19 May

  • Inflation dominates data run: Australia Wages, UK, Eurozone, Canada & South Africa CPI; UK ONS House Prices & EU27 Auto Sales; ECB Financial Stability Report & April FOMC minutes and ECB/Fed speakers; more US retailer earnings; Japan, Germany, UK, US & Canada auctions

  • G7 inflation: base effects driving jump in y/y rates, core measures little changed from pre-pandemic levels, perspective required; signal on ‘stickiness’ a long way off

  • FOMC minutes to offer more of the same on transitory inflation and labour market slack; in any case predates latest CPI and jobs data

  • Bitcoin slide a reminder about bad governance, lack of market liquidity,  regulatory squeeze, also symptomatic of rising volatility

EVENTS PREVIEW

Inflation risks may be one of the topics of the moment, but as much as overnight Australia Wages along with CPI readings from the UK, Eurozone, Canada and South Africa dominate the statistical schedule today, they may prompt little in the way of market reaction. UK ONS House Prices, EU New Car Registrations and South Africa Retail Sales are also due. A busy day for central banks with the Bank of Thailand holding policy as expected, the ECB publishing its Financial Stability Review and a raft of ECB and a few Fed speakers. The Fed also publishes its April FOMC minutes, but this seems unlikely to offer anything other than the ad nauseam repetition of looking through a ‘transitory’ spike in inflation, underlining labour market slack, while extolling the ‘virtues’ of patient and reactive policy settings; it also predates the jobs and inflation data. It will be interesting to see if there was any discussion of financial stability risks, which as per the Fed’s semi-annual report at the start of this month (Click here) are ‘elevated’ and ” “the combination of stretched valuations with very high levels of corporate indebtedness bear watching because of the potential to amplify the effects of a re-pricing event.” In corporate earnings terms, Porsche and Telecom Italia accompany more US retailer reports, while a busy day for govt bond auctions has Japan 5-yr, UK 14-yr, Germany 10-yr, US 20-yr and Canadian 3-yr. Beyond all of this, the other talking point will again be the cryptocurrency space, with Bitcoin sliding below the $40,000 level, a far cry from April’s high of $64,829.14 – with the extraordinarily poor and highly reprehensible governance displayed by Tesla’s Musk in his comments on Bitcoin, and today’s China decision to decision to ban fintech and payments companies from using crypto currencies driving the latest slide. It is a reminder that volatility is on the rise (also very choppy in oil overnight due to conflicting Iran talks headlines), and the fact that there is no depth in this largely unregulated crypto ‘market’, as well as the mounting pressure on the crypto arena from official sources, above all on concerns about the threat to traditional payment systems. Some thoughts on this in recent editions of The Ghost in The Machine from me a) Click here  and our colleague Rohan Ziegelaar b) Click here

 

** UK, Eurozone and Canada – April CPI **

– Base effects are clearly the watchword not only for inflation but many activity indicators, but perspective is also required. Firstly comparisons will be made from today’s readings UK, Eurozone and Canada to the US, though the latter is much further along the road with re-opening, secondly the Eurozone already saw an upward shift in January due to base effects, thirdly there are substantial compositional differences. Be that as it may, take a look at the table below comparing April & March 2021 y/y rates with February 2020 (as pre-pandemic baseline) headline and core CPI readings, and by way of an aside 3- and 6-mth annualized rates.

 

——————————————————————–

                       2021      2020    I    Annualized Rates

                    Apr    Mar    Feb    I     3-mth    6-mth

——————————————————————–

U.K.     Headline   1.5    0.7    1.7    I      4.0      2.4

         Core       1.3    1.1    1.7    I      3.2      1.0

Eurozone Headline   1.6    1.3    1.2    I      6.8      3.8

         Core       0.8    0.9    1.2    I      6.8      2.2

Canada   Headline   3.2*   2.2    2.2    I      6.8      3.6

         Core       1.7*   1.5    1.7    I      0.8      1.8

U.S.A.   Headline   4.2    2.6    2.3    I      7.2      5.0

         Core       3.0    1.6    2.4    I      5.2      3.2

——————————————————————–

* = consensus forecast

 

The simple observations would be that a) aside from the US, where used cars are heavily distorting core CPI, core inflation measures are where they were just prior to the pandemic, and are for the time being benign; b) on a 3-mth annualized basis there is actually no material difference between the US and Eurozone on headline, and the Eurozone is in fact worse in core terms. However a look at the evolution of 5 yr breakeven inflation rates (see chart) suggests very different trajectories, as do consumer inflation expectations. Last but not least with respect to today’s Canadian data, the risks look to be skewed to the upside in headline terms, though they would likely be higher if the US/Canada border was open (due to spill-over demand). Be that all as it may, the real test on how sticky the current upticks in inflation actually prove to be is how they look going into the final quarter of 2021, what happens in the meantime will be very, very noisy.

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