The Week Ahead
A fairly quiet week is expected as the Fed goes into blackout mode. However, the ECB rate decision (Thursday), the US nonfarm payroll reading (Friday), and a host of S&P Global PMI’s will keep markets on their toes. Later today we have the US ISM manufacturing print. The US factory orders and JOLTS prints will garner market attention on Tuesday. The China Caixin services print hits the screens on Wednesday, and later we have the US ISM services reading. Eurozone retail sales, and the ECB decision and President Lagarde’s news conference follow on Thursday. China trade data and the US employment report will take centre stage on Friday.
Mixed data, geopolitics, Nvidia and hawkish Fed comments entertained markets last week. US Treasuries pared some of the mid-week losses following the PCE deflator prints, closing 3bps higher at 4.50%. The S&P Index fell 0.51%. The dollar was marginally lower. Oil also retreated, Brent closed 0.61% lower, at $81.62pb. Over the weekend OPEC+ extended supply cuts from end-2024 to end-2025.
Earlier in the week the Fed’s hawk Kashkari made it clear that the Fed has not taken the option of a hike off the table, adding that given the current data and outlook the wait-and-see approach is favoured. The US consumer appeared confident, however, their confidence on current business conditions was not as rosy. Broadly, respondents perceived the likelihood of a recession in the next twelve months as higher, for the second consecutive month.
Moreover, the Fed’s Beige book noted that despite pockets of resilience, overall economic outlooks grew more pessimistic due to rising uncertainties and downside risks stemming from inflation, tighter financial conditions, and economic headwinds. The US experienced a slower growth rate in the first quarter of the year than initially estimated, primarily due to weaker consumer spending on goods. The second reading estimates that GDP rose 1.3%yoy (prev. 1.6%). Personal spending, the main driver of economic growth, advanced by 2.0% (prev. 2.5%). Adjusted pre-tax profits for corporations declined by 0.6% in the first quarter, marking the first drop in a year. The Fed’s preferred inflation metric, the personal consumption expenditures price index (PCE), rose 3.3% in the first quarter, slightly below the initial projection. The core PCE gauge, which excludes food and energy, increased by 3.6% (prev. 3.7%). Next, we had the hotly awaited, Fed-watched PCE deflator readings for April, which came bang in-line with expectations. The headline rose 0.3%mom and 2.7%yoy, while the core was up 0.2%mom, and 2.8%yoy. Interestingly, personal spending and real personal spending figures missed expectations, at +0.2%yoy and -0.1% in April.
Elsewhere, prelim. eurozone inflation prints came in hotter-than-expected. The headline figure rose for the first time this year, to 2.6%yoy (prev. 2.4%), while the core printed 2.9%yoy (prev. 2.7%), in May. Despite this blip the ECB is still widely expected to go through with a cut at the meeting on Thursday, making it the first major central bank to ease policy this cycle. The path thereafter is unclear. In the words of the ECB’s chief economist the path may be “bumpy and gradual”.
On Monday the IMF raised its 2024 growth forecast for China to 5% from 4.6%, citing a strong first quarter and policy stimulus. It expects core inflation to average 1% in 2024, seeing scope for further monetary easing, and urged more comprehensive policies to revive the property sector. While acknowledging China's remarkable economic development, the IMF called for scaling back industrial policies, removing trade barriers to boost productivity, and strengthening multilateral ties. We also heard from China’s President Xi Jinping who tightened the screws on financial regulators and local government officials, demanding greater accountability in preventing and defusing risks to the country's financial system. Later, the official PMIs disappointed to the downside; the manufacturing figure fell into contraction, at 49.5 (from 50.4). In contrast, this morning’s Caixin manufacturing figure rose to 51.7, the highest level since June 2022, amid stronger production and new order gains, particularly for smaller companies.
Over the weekend we had some historic election results. In a landslide victory, Mexicans elected Claudia Sheinbaum as the nation’s first female president. Elsewhere, according to exit polls Indian’s have chosen Narendra Modi to run his third term. The ANC party in South Africa suffered a huge defeat losing its majority in the National Assembly. Over in Iceland, businesswoman Halla Tomasdottir, beat two other women contenders with 34.3% of the vote, to become the nation’s second female president.
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