Macroeconomics: The Day Ahead for 29 May

Today’s schedule has a good number of items of importance, but outside of German CPI and the Fed’s Beige Book, most of these will be region/country specific. There are Australia’s CPI and the first key element of its GDP: Q1 Construction Work Done, along with German and French Consumer Confidence to digest, while ahead lie Richmond and Dallas Fed surveys. South Africa holds its fiercely contested general election, with the outcome too close to call, if opinion polls are correct, even if the ANC are very likely to remain the largest party in seat terms. Earnings highlights for the day include Abercrombie & Fitch, Bank of Montreal and Salesforce, while there are govt debt auctions in UK (15-yr I-L), Germany (14 & 17-yr) and the US (7-yr and FRN 2-yr). Australia’s higher than expected CPI (3.6% y/y) pushed back heavily on market expectations for an initial rate cut to mid-2025, but while this will serve to harden the RBA’s hawkish rhetoric, a further rate hike would require a rather clearer signal that the medium term downtrend is no longer in place, which is not the case, and it should be remembered that unlike other G10 central banks, the RBA’s target is 2.0-3.0%.

** Germany – May prov. CPI / June GfK Consumer Confidence **

– Given that Germany is expected to be the ‘fly in the ointment’ of Friday’s preliminary Eurozone CPI data, it is perhaps fortunate that it is the first of the major economies to publish May inflation data. CPI and HICP are seen up a modest 0.2% m/m, but HICP would jump up to 2.7% from 2.4% y/y if forecasts are correct, as last year’s cut in public transport costs falls out of the comparison. In turn this would see Eurozone CPI edging up to 2.5% y/y from 2.4%, though the core measure is seen unchanged at 2.7%, and this will in any case likely prove to be no more than a bump in the road, as the downtrend is likely to resume in June. In contrast to Monday’s unexpected though modest Ifo survey setback, today’s GfK Consumer Confidence at -20.9 vs. May -24.0 was paced by expectations of higher incomes and a better economy, though the willingness to spend index was barely changed, and underlining that the inflation ‘hangover’ continues to weigh on household spending.

** U.S.A. – Fed Beige Book **

– Yesterday’s Consumer Confidence offered yet another point lesson for momentum/trend fixated markets, bouncing back to 102.0 against market expectations of a modest further dip to 96.0 from April’s 97.0. As a casual glance at the attached chart of headline Consumer Confidence highlights, the trend is sideways, and while m/m changes are a lot more volatile than pre-pandemic, there is a good deal of stability, not dissimilar to the immediate period before the GFC. Markets will therefore be hoping that the Fed’s Beige Book offers some signs of the economy losing momentum, and indeed prices and labour demand, though these are likely to be highly nuanced. April’s Beige Book described overall ‘economic activity expanded slightly, on balance, since late February. Ten out of twelve Districts experienced either slight or modest economic growth—up from eight in the previous report, while the other two reported no changes in activity. Consumer spending barely increased overall, but reports were quite mixed across Districts and spending categories.’ It noted ‘Employment rose at a slight pace overall, with nine Districts reporting very slow to modest increases, and the remaining three Districts reporting no changes in employment’ and ‘Price increases were modest, on average, running at about the same pace as in the last report.’ Adding ‘another frequent comment was that firms’ ability to pass cost increases on to consumers had weakened considerably in recent months, resulting in smaller profit margins. Inflation also caused strain at nonprofit entities, resulting in service reductions in some cases. On balance, contacts expected that inflation would hold steady at a slow pace moving forward.’ Be that as it may, as should be more than obvious from last week’s price action, markets remain fixated on the Fed rate outlook, blowing hot and cold, or rather falling into the trap of over-extrapolating from one or two months data or nuanced changes in Fed rhetoric about medium-term trends. The fact that volatility is so very sporadic underlines the overall lack of conviction about the outlook for the global economy, in no small part precisely because it is in a period of enormous transition, as the disparate and very uneven forces of major technological evolution contending with intense geopolitical tensions reduce visibility and embed a great deal of uncertainty.