Drivers for the Week of May 19, 2024

May 19, 2024

Win Thin

Here's a look at the main drivers in Developed Markets this week.

The dollar came under broad-based pressure last week. NZD, NOK, and GBP outperformed while CHF, JPY, and CAD underperformed. Global PMI readings this week should help determine with the U.S. economic outperformance is indeed dwindling. If so, the dollar should remain under pressure and risk assets should continue to rally.

AMERICAS

FOMC minutes will be released Wednesday. At that meeting, the Fed kept rates steady. The tone of the policy statement was little changed, with the Fed acknowledging the worsening inflation outlook by adding that “In recent months, there has been a lack of further progress toward the Committee's 2% inflation objective.” There were no updated macroeconomic projections, which come at the June 11-12 meeting. Of course, Powell delivered the fireworks in his post-meeting press conference. As such, the minutes will be key to seeing whether there was any underlying dissent with Powell’s tone.

Despite last week’s data, Fed officials remain very cautious about easing prematurely. Bostic (thrice), Barr, Waller, Jefferson, and Mester speak Monday. Barkin, Waller, Williams, Barr, Collins, Mester, and Bostic (twice) speak Tuesday. Goolsbee speaks Wednesday. Bostic speaks Thursday. Waller speaks Friday. The market sees 10% odds of a cut in June, rising to 33% in July and over 80% in September. While these odds rose after last week’s data, it’s clear that the market remains unconvinced that the Fed will pivot earlier than previously anticipated.

Financial conditions continue to loosen. They have loosened four straight weeks through Friday May 10 and are the loosest since mid-January 2022. This simply does not square with Fed comments that policy is restrictive. With equities higher and yields lower last week, we expect to get another week of loosening when the data are reported Wednesday.

S&P Global preliminary May PMIs will be reported Thursday. Manufacturing is expected at 49.9 vs. 50.0 in April, services is expected to rise a tick to 51.4. If so, the composite is likely to remain steady at. 51.3. ISM PMIs won’t be reported until the first week of June.

Regional Fed surveys for May will continue to roll out. Philly non-manufacturing will be reported Tuesday. Kansas City manufacturing will be reported Thursday and is expected at -7 vs. -8 in April. Kansas City services will be reported Friday.

April Chicago Fed National Activity Index will be reported Thursday. Recall that a positive reading means the economy is growing above trend. Headline is expected at 0.13 vs. 0.15 in March. If so, the 3-month moving average would rise to 0.12 vs. -0.19 in March and the highest since September 2022 and move further above the -0.7 threshold for recession.

Weekly jobless claims Thursday will hold some interest. That’s because initial claims will be for the BLS survey week containing the 12th of the month and these are expected at 220k vs. 222k the previous week. Continuing claims are reported with a one-week lag and are expected at 1.791 mln vs. 1.794 mln the previous week. Bloomberg consensus for May NFP stands at 225k vs. 175k in April while its whisper number stands at 191k.

Housing sector data will remain in focus. April existing home sales will be reported Wednesday and are expected at 0.6% m/m vs. -4.3% in March. New home sales will be reported Wednesday and are expected at -2.1% m/m vs. 8.8% in March.

Canada data highlight will be April CPI Tuesday. Headline is expected to fall two ticks to 2.7% y/y. If so, it would be the lowest since March 2021 and further within the 1-3% target range. Core median is expected to fall a tick to 2.7% y/y, while core trim is expected to fall two ticks to 2.9% y/y. Progress on inflation is tracking the BOC’s forecast and supports BOC Governor Macklem statement earlier this month that “we are getting closer” to a point where it could be time to cut rates. Interest rate futures imply over 40% odds of a cut in June and a July cut fully priced in.

March retail sales Friday will also be important. Headline is expected at -0.1% m/m. Statistics Canada’s advanced retail indicator suggests sales were unchanged in March. According to the Bank of Canada population growth is projected to boost consumer spending in the first half of 2024.

EUROPE/MIDDLE EAST/AFRICA

Eurozone data highlight will be preliminary May PMIs Thursday. Headline manufacturing is expected at 46.1 vs. 45.7 in April, services is expected at 53.6 vs. 53.3 in April, and the composite is expected at 52.0 vs. 51.7 in April. Looking at the country breakdown, the German composite is expected at 51.0 vs. 50.6 in April and the French composite is expected at 51.1 vs. 50.5 in April. Italy and Spain will be reported with the final PMI readings in early June.

The European Central Bank reports Q1 wage data Thursday. Wage growth appears to have peaked in Q3. If wages continue to ease, this would be the final piece of the puzzle to ensure that the bank is on track to cut rates in June.

If the data cooperate, expect ECB official to continue laying the groundwork for a June cut. Lagarde speaks Tuesday and Wednesday. Villeroy speaks Thursday. Schnabel, Vasle, Muller, Nagel, de Cos, and Centeno all speak Friday.

U.K. highlight will be April CPI Wednesday. Headline is expected at 2.1% y/y vs. 3.2% in March, core is expected at 3.6% y/y vs. 4.2% in March, and CPIH is expected at 2.8% y/y vs. 3.8% in March. If so, headline would be the lowest since July 2021 and nearly at the 2% target. Of note, the drop reflects energy-related base effects and a fall in the Ofgem energy price cap. Keep an eye on services inflation, which is expected at 5.4% y/y vs. 6.0% in March. A bigger drop in services inflation would raise the likelihood of a June BOE rate cut which is currently 60% priced-in.

U.K. preliminary May PMIs Thursday will also be key. Manufacturing is expected at 49.5 vs. 49.1 in April, services is expected at 54.7 vs. 55.0 in April, and the composite is expected at 54.0 vs. 54.1 in April.

U.K. April retail sales Friday will be closely watched. Headline is expected at -0.5% m/m vs. 0.0% in March, while sales ex-auto fuel is expected at -0.8% m/m vs. -0.3% in March. Positive real wage growth and improving consumer confidence point to some upside risk to this week’s retail sales print.

U.K. CBI releases its May industrial trends survey Tuesday. Total orders are expected at -20 vs. -23 in April, while selling prices are expected at 25 vs. 27 in April. Distributive trades survey will be reported next Tuesday.

The start of the Bank of England’s easing cycle remains a toss-up. Odds of a June cut are around 55% but become fully priced in for August. This week’s CPI data will be key, though we get one more CPI report before the June 20 decision. Bailey speaks Tuesday. Breeden speaks Wednesday. Chief Economist Pill speaks Thursday.

ASIA

Japan highlight will be April national CPI Friday. Headline is expected to fell three ticks to 2.4% y/y, core (ex-fresh food) is expected to fall four ticks to 2.2% y/y, and core ex-energy is expected to fall five ticks to 2.4% y/y. if so, core would be the lowest since January and nearing the 2% target. Overall, underlying inflation is in a firm downtrend and nearing the BOJ’s 2% target. As such, the bar for an aggressive BOJ tightening cycle is high and remains a drag for JPY.

Preliminary May PMIs Thursday will also be key. Japan’s economy contracted 0.5% in Q1. The PMIs will offer some insights about the extent of Japan’s economic recovery in Q2. The composite PMI rose to a one year high at 52.3 in April.

April trade and March core machine orders will be reported Wednesday. Exports are expected at 11.0% y/y vs. 7.3% in March, imports are expected at 8.8% y/y vs. -5.1% in March, and orders are expected at 1.4% y/y vs. -1.8% in February.

Reserve Bank of Australia releases its minutes Tuesday. At that May 7 meeting, the RBA left the policy rate at 4.35% (no surprise) and stuck to its neutral policy guidance that “the Board is not ruling anything in or out.” The minutes will offer details on the discussion around tightening policy further. During her post-meeting press conference RBA Governor Bullock said the board discussed option of raising rates at the May meeting.

Preliminary May PMIs Thursday will be the data highlight.

Reserve Bank of New Zealand meets Wednesday and is expected to keep rates steady at 5.5%. The RBNZ will release its Monetary Policy Statement with updated macro forecasts at the same time. The bank should reiterate “interest rates need to remain at a restrictive level for a sustained period.” The focus will be on the updated rate path projections. The RBNZ currently forecasts the OCR to peak at 5.60% in Q3 2024, implying 40% odds of another 25 bp rate hike. In our view, the revised RBNZ projections will rule out an additional policy rate increase. Inflation remains high but is in a firm downtrend, labor market pressures are easing rapidly as employment unexpectedly dropped 0.2% in Q1, and business and consumer surveys point to sluggish growth.

New Zealand Q1 retail sales Thursday will be the data highlight. Sales are expected at -0.3% q/q vs. -1.9% in Q4. The deterioration in consumer confidence does not bode well for household spending activity. The ANZ-Roy Morgan consumer confidence index fell in April to an eleven-month low at 82.1 in April. The reading for May is released Thursday.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2023. All rights reserved.