European Outlook: Asian markets were mixed overnight. Shares in Japan declined from a 17-month high amid a wealth of earnings reports today. Electronics and auto makers were under pressure as the Yen held gains and markets are taking stock after the recent rally. The Nikkei is down -0.54%, the Hang Seng managed a marginal 0.9% gain as stocks mainland markets moved higher, and the CSI 300 gained 0.63%, while the ASX was down -0.71%. U.S. futures are also heading south, while the FTSE 100 future is little changed. Yesterday’s BoE report may have hinted that markets are underestimating the BoE’s willingness to tighten policy, but with investors focusing on warnings of challenges for households and not buying into the assumption of a smooth Brexit Sterling declined and yields slipped while the FTSE 100 managed to outperform Eurozone markets. Today’s calendar has German GDP and inflation data at the start of the session as well as EMU production data.
U.S. reports: revealed a hot round of April PPI gains after yesterday’s firm trade price data and a surprisingly low 236k initial claims figure at the start of May that further solidifies Fed tightening expectations for June. For PPI, the expected big 0.5% goods price rise accompanied a solid 0.4% service price increase to leave a pop in the y/y rise to 2.5%, though gasoline price declines in early May should allow a 0.2% headline drop this month that leaves a drop-back in the y/y climb to a still-firm 2.1%. Claims tightness signals upside risk for our 195k May payroll estimate, alongside upside risk from firm consumer, producer, and small business confidence, a solid 237k average monthly ADP rise thus far in 2017, and a likely vehicle sales and assembly bounce in Q2 that accompanies a GDP growth bounce to 3.2%, after weak Q1 performances for both.
The BoE did the expected and kept policy unchanged, leaving the repo rate at 0.25% and QE totals unaltered (GBP 435 bln for government bond purchases, GBP 10 bln for corporate bonds). As last time, one member voted for an immediate hike in Bank Rate, and the updated Inflation Report noted that for some it would take relatively little further upside news on the prospects for activity or inflation to vote for a hike. Its 2017 growth forecast was trimmed to 1.9% from 2.0%, though the central bank’s projections for 2018 and 2019 were both upwardly nudged by 0.1 of a percentage point. At the same time the bank noted that the centrals scenarios of the May inflation report suggest that monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the very gently rising path implied by the market yield curve. However, the underlying assumption is a smooth Brexit transition to the new trading arrangements with the EU and that is a big if markets obviously disagree with. Markets though focused on the downside risks and didn’t buy into the assumption of a smooth Brexit transition so Sterling dropped and Gilt futures recovered losses on the back of the report.
Germany: Q1 GDP growth accelerated to 0.6% q/q in the first quarter of the year, from 0.4% q/q in Q4 last year and in line with expectations. The stats office reported that both domestic and external demand underpinned the quarterly growth rate and highlighted in particular that investment growth strengthened. Consumption growth was modest meanwhile and net exports improved. The annual rate rose 2.9% y/y. German Apr HICP confirmed at 2.0% y/y. The acceleration from just 1.5% y/y in March, was largely explained by the Easter effect, which lifted holiday related prices in April this year, rather than March as in 2016. All in all, pretty much as expected and confirming that the German recovery remains on track.
Main Macro Events Today
- US CPI – April CPI is projected to rebound 0.2% for both the headline and the core, following respective declines of 0.3% and 0.1% in March. Weakness in energy prices was a major reason for the March declines and that should turn around for the April data.
- US Retail Sales – Retail sales are seen bouncing 0.5% after dropping 0.3% in March, while the ex-auto figure should rise 0.4% after the 0.2% gain previously.
- Fedspeak – FOMC Member Evans goes to Dublin to speak on economic conditions and monetary policy, while Harker speaks at Drexel University.
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