Spotlight On Growth Momentum

May 23, 2024

Elias Haddad

Spotlight On Growth Momentum

The May PMI readings for the US, EU, and UK will determine if growth traction is shifting against the US.

The FOMC May meeting minutes were on the hawkish side.

The ECB Q1 indicator of negotiated wage rate will shape ECB easing expectations beyond June.

USD is holding on to most of yesterday’s gains. The FOMC May meeting minutes were on the hawkish side and highlights the higher-for-longer policy rate environment. Participants “assessed that it would take longer than previously anticipated for them to gain greater confidence that inflation was moving sustainably toward 2%”. Moreover, “many participants commented on their uncertainty about the degree of restrictiveness”.

Interestingly, participants discussed three options: (i) Maintaining the current restrictive policy stance for longer should inflation not show signs of moving sustainably toward 2%. (ii) Reducing policy restraint in the event of an unexpected weakening in labor market conditions. (iii) Tighten policy further should risks to inflation materialize.

The persistence of the recent USD upswing will largely be driven by today’s May PMI readings for the US, EU, and UK. The PMI prints will determine if economic growth momentum is indeed shifting from the US towards other major economies. If so, bond yield spreads between the US and other major economies can narrow further against USD. Otherwise, USD can find a firmer footing.

The Eurozone HCOB preliminary composite PMI is expected to rise three ticks to 52.0 (9:00am London). France and Germany’s PMIs are released earlier (8:15am and 8:30am London, respectively). The UK S&P Global preliminary composite PMI is projected to fall a tick to 54.0 (9:30am London). The US S&P Global preliminary composite PMI is forecast to fall a tick to 51.2 (2:45pm London).

The US weekly initial jobless claims (1:30pm London) and Kansas City Fed manufacturing activity index (4:00pm London) are also noteworthy. Initial claims will be for the BLS survey week (non-farm payrolls report) containing the 12th of the month.

EUR will partly be guided by the ECB Q1 indicator of negotiated wage rate. Annual pay growth is projected to ease further in Q1 after hitting 4.5% in Q4 2023 and a multi-decade high of 4.7% in Q3 2023. The extent of the slowdown in Eurozone wage growth will shape ECB easing expectations beyond June.

GBP largely ignored yesterday’s surprise announcement by UK Prime Minister Rishi Sunak to call a general election for July 4. Most political observers expected Sunak to wait until the autumn or even January to announce a general election. Regardless, the polls are heavily skewed in favour of the Labour Party. According to a Bloomberg survey of investors, a Labour-led government would be the best result for stocks and the pound.

NZD is firm versus most major currencies. New Zealand retail sales volume unexpectedly rose 0.5% q/q in Q1 (consensus: -0.3%) after falling -1.8% q/q in Q4 2023. This was also the first increase in retail activity since Q4 2021. Nonetheless, the deterioration in consumer confidence is not consistent with a sustained recovery in household spending. 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 later today (11:00pm London).

AUD/USD is consolidating above yesterday’s lows. Australia data released overnight validates the RBA’s neutral policy bias. The composite PMI fell four ticks to 52.6 in May but remains firmly in expansionary territory. Meanwhile, consumer inflation expectations over the next 12 months dropped to 4.1% in May, the lowest since August 2021.

USD/JPY brushed off Japan’s improving economic outlook. The compositive PMI rose a tick to 52.4, the highest since August 2023. Nevertheless, the bar for an aggressive Bank of Japan tightening cycle is high because underlying inflation is in a firm downtrend. Japan’s April national CPI comes out tomorrow (00:30am London). Headline is expected to ease three ticks to 2.4% y/y, while core (ex-fresh food) is expected to fall four ticks to 2.2% y/. Core ex-energy is expected to fall five ticks to 2.4% y/y.

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