Drivers for the Week Ahead

  • Trade tensions should dictate the tone of global financial markets this week, and it won’t be pretty
  • The US data highlight this week is April retail sales Wednesday
  • A deeper and more protracted trade war is one of those exogenous shocks that could tip the US into recession
  • In the eurozone, the focus this week is more political than economic
  • UK reports labor market data Tuesday; Canada reports April CPI Wednesday; Australia reports April labor market data Thursday
  • In EM, several central banks meet this week

Trade tensions should dictate the tone of global financial markets this week, and it won’t be pretty. Talks ended Friday with no breakthrough, and no date has been set for the next round. Despite constructive spin from both sides, we remain pessimistic near term. Indeed, rhetoric from both sides over the weekend suggest things will get worse before they get better. Reports suggest the US is giving China one month to reach an agreement before the second phase of US tariffs kicks in on another $325 bln of Chinese imports. Please see our recent MarketView piece on China for a deeper look at China (My Baby, Xi Wrote Me A Letter).

The US data highlight this week is April retail sales Wednesday. Headline sales are expected to rise 0.2% m/m vs. 1.6% in March, while ex-auto sales are expected to rise 0.7% m/m vs. 1.2% in March. Lastly, the so-called control group used for GDP calculations is expected to rise 0.3% m/m vs. 1.0% in March. Auto sales were a weaker than expected 16.4 mln annualized last month, which warns of downside risks to headline sales.

Other minor US data will be reported this week. These include April IP, March business inventories (both expected flat m/m), and March TIC data Wednesday, April housing starts and building permits and weekly jobless claims Thursday, and May University of Michigan consumer confidence Friday. The regional Fed manufacturing surveys for May kick off this week with Empire manufacturing Wednesday (8.0 expected) followed by the Philly Fed survey Thursday (9.0 expected).

The Atlanta Fed’s GDPNow model is now tracking 1.6% SAAR for Q2, down from 1.7% previously. Elsewhere, the New York Fed’s Nowcast model is now tracking 2.2% SAAR for Q2 vs. 2.1% the previous week. The first revision for Q1 GDP (3.2% SAAR advance) will be May 30, but the clear takeaway is that the US economy remains firm.

While we have remained constructive on the US economic outlook, a deeper and more protracted trade war is one of those exogenous shocks that could tip the US into recession. We feel that it is beyond the Fed’s purview to try and offset the impact of a trade war with monetary policy. Yes, it would likely cut rates if recession hits but we do not think that the Fed would try to pre-empt it.

There are plenty of Fed speakers this week. Rosengren, Clarida, and Kaplan speak Monday, followed by Williams, George, and Daly Tuesday. Quarles and Barkin speak Wednesday, followed by Kashkari and Brainard Thursday. Williams and Clarida speak Friday, while Kaplan puts in some overtime with a speech Saturday.

In the eurozone, the focus this week is more political than economic. With a light data schedule, investors will instead be watching Italy for signs of growing instability. Press reports that Deputy Prime Minister Salvini of the League is preparing to bring down the coalition government it shares with the Five Star Movement. Tensions have been running high, and the breaking point may be Salvini’s efforts to control Italian shipping lanes in a bid to limit migrant rescue ships from docking at Italian ports. Stay tuned.

UK reports labor market data Tuesday. Average weekly earnings are expected to tick down to 3.4% y/y (3.3% ex-bonus). Unemployment is seen steady at 3.9%, while employment is seen rising 140k. While the labor market remains strong, Brexit uncertainty is the name of the game. Indeed, implied rates on short sterling futures have fallen, not risen. The short sterling strip is pricing in the next hike by end-2020 vs. mid-2020 pre-BOE, while the next one is priced in at end-2022 vs. mid-2022 pre-BOE.

Japan has a busy data week. March leading index will be reported Monday, followed by current account Tuesday. April machine tool orders and PPI will be reported Thursday. USD/JPY will remain dependent on the risk-on, risk-off mood of the markets. Despite the slight bounce on Friday, the pair feels heavy. Until trade tensions are addressed once and for all, we look for lower lows.

Canada reports April CPI Wednesday. Headline inflation is expected to rise a tick to 2.0% y/y, while common core is seen steady at 1.8% y/y. Canada jobs data Friday was a head-scratcher. The economy 106.5k jobs, which is the equivalent of the US adding a million jobs. This was clearly an outlier and we think most will look for big payback in May.

Australia reports April labor market data Thursday. Consensus sees 15k jobs added vs. 25.7k in March, while the unemployment rate is seen steady at 5.0%. RBA has made it clear that it views the strong labor market as the engine that keeps the economy going. As such, this data takes on added significance in the coming months as the bank contemplates an easing cycle. Next policy meeting is June 4, and WIPR shows 35% odds of a cut then.

In EM, several central banks meet this week. These include Poland (Wednesday), Indonesia (Thursday), and Mexico (Thursday). All are expected to keep rates steady, though we see a slight chance of a dovish surprise from Bank Indonesia. If so, it would join India, Malaysia, and the Philippines in the rate-cutting camp.

A long and protracted trade war is another headwind for EM to contend with. This is particularly true for those nations that are part of the Greater China supply chain. As a result, virtually all EM central banks are on hold now, with most looking to ease as soon as possible. Those that have the leeway should also use fiscal stimulus.