Key Events: Will a CPI Surprise Challenge the Rate Cut Narrative?

Key Events

G10

In the US, the headline is CPI and retail sales:

1. CPI – Wednesday. Consensus expects 0.3% MoM for core. I see upside risks due to April’s rising energy prices and strong demand backdrop. Sam’s model will give an early read. Yet even with a positive surprise, this CPI print alone is unlikely to change the Fed’s ‘wait-and-see’ stance.
2. Retail sales – Wednesday. Consensus sees only 0.2% MoM for the control group (used to derive consumption in the GDP data). This seems low as large, under-recorded immigration flows are boosting consumption.

In the Eurozone and UK, the main events will be:

1. UK labour market data – Tuesday.

• Unemployment: consensus expects another rise to 4.3%. I think it matters little. The BoE are rightly sceptical of the number as it gets knocked about by participation. Instead, watch employment growth for signs of further labour market loosening.
• Wage data: the market expects modest YoY decline in total and regular pay growth. Watch regular private pay growth. The BoE looks for Q1 to average 5.1%, meaning a further strong decline. I expect a decline ahead, with the YoY rate below 5% by April. But March could have upside risks if employers have front-loaded the minimum price rise.

2. Final Eurozone CPI – throughout week. Consensus expects no change to headline from prelims. Watch the detail for whether wage-intensive services inflation has slowed.

Elsewhere in G10:

1. Australia Labour Force Survey – Thursday. The RBA remain hawkish on the labour market, insisting it is tighter than NAIRU. April will prove a big test as part-time summer inflows are due to reverse. Keeping up with seasonality could see the unemployment rate reach 4.3%, far above expectations of 3.9%.

EM

1. India trade data – 13-15 May. India’s current account seasonally peaks in Q1 and deteriorates in Q2. The swing might be smaller now due to increased manufacturing. We look for evidence of the same. Consensus is a $17bn deficit.
2. Indonesia trade data – Wednesday. Expect a payback fall in the trade balance due to unusually low March imports. Big picture, the Q1 trade balance suggests gradual deterioration of the current account (we track it at USD3bn deficit for Q1), and the April trade data will show the deterioration continues.
3. China CPI – weekend. China may slip further out of deflation – based on pork and fuel prices. We estimate +0.4% YoY vs market at +0.2% YoY.
4. Brazil MPC minutes – Tuesday. BCB’s 5-4 split highlights divisions within the committee. The minutes will provide colour.
5. Czech CPI – Monday. A difficult base effect and sharply higher fuel prices mean inflation will drift above the 2% target. This will cement the CNB’s hawkish resolve.
6. Poland GDP – Wednesday. Expect growth to bounce modestly after stagnating in Q4. But recent misses on retail sales and IP have pared expectations.
7. Poland core CPI – Friday. Dominance of food (VAT hike) and fuel (higher prices) in the headline 1% MoM CPI gain, alongside a helpful base effect, will mean continued disinflation in core.

Central Banks in Action

1. BSP (Philippines) – Thursday. BSP will keep rates unchanged at 6.5%. Inflation is topping the tolerance band, and they want a stable PHP. So the door for hiking is open in future meetings, but not next week.
2. Fed’s Powell speaks – Tuesday. We expect him to repeat his patience/no change to outlook message. Other speakers will likely deliver variations on the theme.
3. ECB speakers – throughout week: Watch Nagel, Villeroy, Panetta and de Guindos. We expect the ECB broadly agree on a June cut; the bar may be high to do otherwise.
4. BoE speakers – throughout week. Watch Pill, Greene and Mann. We should get more hawkish messaging from Greene and Mann. Bernanke will testify on the BoE.

Markets to Watch

1. G10 FX. AUD/NZD and EUR TWI remain at range highs. This week presents downside risks for AUD/NZD – we see value in AUD/NZD put spreads – while we remain bearish on the euro.
2. Chinese stocks – China A shares are verging on a bull market (defined as 20% rally). The bear trendline also cuts in at 3200 in SCHOMP Index. A clear break here will reinforce the message that the bearish regime in Chinese assets is turning.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)