Macroeconomics: The Week Ahead: 1 to 5 June 2021

The new week sees the usual run of start of month data: Manufacturing and Services PMIs from around the world, Eurozone and national CPIs, German and US labour data, US Auto Sales, along with Australia and Canada Q1 GDP, Japan’s Industrial Production and Retail Sales, UK Credit aggregates and BRC Shop Prices. In event terms the RBA and India’s RBI hold policy meetings (no changes expected), there will again be plenty of central speakers, the Fed publishes its Beige Book and the OECD its latest economic forecast update, while G7 Finance Ministers hold a face to face meeting to end the week. The earnings schedule is sparse, with Zoom, Broadcom, Lululemon Athletica, Remy Cointreau and Canopy Growth likely to be among the headline makers. The Eurozone sees increased govt bond supply with auctions in Belgium, France, Germany & Spain, the US has no coupon supply, while the UK sells 10 & 25-yr and Japan 10-yr. In the commodity space, OPEC+ meets to consider its production output plans for the next two months, with a planned increase of 840K in July expected to be rubber stamped, bringing the total cumulative increase to 2.0 Mln bbls. Ostensibly after the run down in excess crude inventories a large output gap appears to be looming in H2. But as the aggressive Covid-19 variant outbreak in India and ongoing measures to contain a rebound in infection rates in a number of Asian countries demonstrate, a smooth path to more normal patterns of oil demand is unlikely, and OPEC+ also needs to consider how it would accommodate additional supply from Iran (probably more a function of the large volume of Iranian output in floating storage than a seismic rise in output), if some form of revived JCPOA agreement is achieved. The BIS’ Green Swan conference on financing the energy sector and a ‘green’ transition will be one point of focus, above all after last week’s court defeat for Shell. The BMI EV Supply Chain Festival, various USDA agriculture reports and the International Cotton Advisory Committee world outlook offer further points of interest.

Politically the focus remains on elevated tensions between the ‘Dragon Bear’ (China & Russia) and the West, China’s regulatory interventions in a wide range of areas including commodities, and prospects for the Biden infrastructure spending proposals and FY 2022 budget proposals. The ECJ ruling on Hungary’s Article 7 ‘Rule of Law’ challenge on Thursday will very closely watched, even if the consequences in terms of taking action will be drawn out, just as the ratification of the Recovery Pact has proved to be, which now looks unlikely to be sufficient to meet what remain structural challenges in the EU and the Eurozone. Latin America continues to see social and political tensions; with no end in sight to two months of mass protests in Colombia, an upsurge in protests in Brazil about Bolsonaro’s pandemic management, as well as concerns about interventions in key resource sectors, above all nationalization risks in the copper sector, which find their focal point this week in Peru’s presidential election next Sunday, with the far left candidate Castillo leading polls for the final round of voting.

In terms of the statistical run, PMIs around the world are expected to confirm what has already been seen in the flash G7 readings, namely that manufacturing output remains robust, and is picking up in Asia, while Services output in the Euro area is catching up with strength in the US and UK, on the back of re-openings and accelerated vaccination rates. The focus will be on prices and delivery time indices, and whether China is seeing some loss of momentum. Eurozone CPI readings are expected to pick up in y/y terms to 1.9% from 1.6%, though the m/m increase is expected to slow to 0.2% from 0.6%, and core CPI is seen remaining very low at 0.9% y/y from 0.7%. The big test however comes in Q3 with large m/m declines (-0.4%) falling out of the comparison in July and August, and doubtless hardening the debate in the ECB about PEPP monthly volumes, amid signs that the compromise will be to use the BoE trick of underlining that any reduction is technical (lower summer govt bond issuance volumes) and not tapering. Such rhetoric may sound hollow to markets if the divisions on the council get a lot of public air time, above all if CPI reports post successive upside misses.

US Auto Sales are expected to decelerate after April’s outsized 18.5l Mln SAAR pace to a still robust 17.50 Mln, with adverse seasonal adjustment imparting downside risks along with low inventories due to supply chain issues (above all semiconductor). All eyes will however be on Friday’s labour data, which are forecast to suggest that April’s meagre 266K headline and 218K Private Payrolls were outliers, with readings of 650K and 600K, though the forecast range for the latter is 750K/350K. It remains the case that Underemployment and Participation rates, last 10.4% and 61.8% respectively, are more material to the Fed policy outlook, continuing to point to a still large amount of slack and allowing the Fed to stick to its patience narrative, though a gradual shift to entertaining a taper timing discussion is clearly emergent.

The rest of the data schedule will doubtless have the odd outlier which prompts some passing market reaction. However, as noted on Friday, while there has been a deluge of talk about inflation fears and market taper tantrums, risk assets and indeed ‘safe’ assets such as govt bonds would appear to be in rude health, judging by very lofty valuations and tight credit spreads. The question is whether this is complacency, or such risks being dismissed by the majority as overblown, or perhaps a case of a ‘it ain’t over until the fat lady sings’ conditioned by more than a decade of central bank financial repression. In broader terms, two interlinked issues need to be considered, namely that if the pandemic pressures start to ease, then governments’ labour market, housing and insolvency measures will need to be rolled back, with potentially profound consequences as a return to the prior status quo in labour markets is unlikely, and be very uneven, while the pace of debt accumulation in govt and corporate terms will force some tough decisions to be made. The question is whether the combination of the deep structural inequalities in many countries which were long evident pre-pandemic, and the likelihood that all the measures have engendered a dependency and entitlement culture prove to be rather incendiary in socio-political terms, leaving aside any discussion of the psychological scars that the pandemic will doubtless leave on many people.

As noted it is a very light earnings week, with Bloomberg News highlighting the following: Bank of Nova cotia, Broadcom, Chemring, Crowdstrike, DocuSign, ITC, Lululemon Athletica, Zoom Video Communications, Hewlett Packard Enterprise, Canopy Growth, Splunk, Slack Technologies, Remy Cointreau, Wizz Air and Aeroflot.