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Macro Watch: European sentiment, Bank of Canada rate decision, US trade deficit


The European Commission will release the economic sentiment indicator for May, the Bank of Canada will hold its monetary policy meeting, and the US trade deficit is expected to widen in April.

UK financial markets will be closed for a bank holiday, while across the Atlantic, US markets will shut down in observance of Memorial Day.

The European Central Bank will publish corporate lending growth and money supply data for the bloc. Since mid-2018, growth of bank lending to the private sector has been stable at about 3%. However, the headline number masks marked differences across member states: lending growth has been solid in Germany and France, while Italy and Spain have experienced negative growth. Meanwhile, the European Commission will release the economic sentiment indicator (ESI) for May. Last month, it came in at 104, marking its lowest level since 2016 and extending a downward trend that prevailed in 2018. The deterioration in sentiment across the bloc was attributed to the manufacturing sector, while the services sector stabilised and consumer sentiment improved month-on-month. Indications from the flash eurozone Purchasing Managers’ Index (PMI) for May suggest that the ESI will move sideways in May. Indeed, the composite PMI came in at 51.6, little changed compared to the two previous months, and consistent with annualised growth rates of about 1%. The manufacturing PMI remained in contractionary territory in May, highlighting persistent challenges for the sector, notably due to trade uncertainty. The European Council will hold an informal dinner to discuss the outcome of the European elections and start the nomination process for the top European Union positions. The unusual initiative is probably an attempt to overcome the Spitzenkandidat system, whereby the European Parliament identifies the candidate for the European Commission presidency. This approach was used for the first time in 2014 for the appointment of Jean Claude Juncker, but the European Council seems determine to challenge it now. In the US, the Conference Board should report that consumer confidence edged up to 130.5 in May from 129.2 in the previous month. The index came off its cyclical high, which it touched in October last year. However, it has remained at elevated levels in early 2019. Although the country’s robust labour market should continue to support consumer sentiment, the 4% correction in equity prices this month may be a drag.

Wednesday Icon Consensus forecasts suggest that the Bank of Canada will leave its policy rate unchanged at 1.75% at its monetary policy meeting. Last month, the Canadian central bank abandoned its tightening bias, adopting a neutral stance that brings its approach in line with the US Federal Reserve (Fed) and other major central banks. The increased uncertainty about international trade following the re-escalation of US-China trade tensions this month as well as the country’s subdued inflation picture recently should reinforce the central bank’s cautious approach. Other notable macroeconomic events include the publication of the European Commission’s progress report on Turkey and Mexico’s central bank’s inflation report.
Thursday Icon

Consensus expectations suggest that Brazil’s quarter-on-quarter economic growth will be flat in Q1 (with high dispersion across forecasts). This compares to modest gain of 0.1% in Q4. For 2019, forecasts point to subdued growth of 0.7%, which probably reflects, among other challenges, recent difficulties in passing a much-needed pension reform to rein in the country’s public spending. In the US, the country’s trade deficit for goods is expected to come in at $72.5bn in April. On a 12-month rolling basis, the trade deficit has remained wide at about $600bn in recent months, reflecting a $870bn deficit in trade of goods and a $270bn surplus in trade of services. Meanwhile, Fed Vice Chair Richard Clarida will deliver a speech to the Economic Club of New York entitled ‘Sustaining Maximum Employment and Price Stability’.

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Investors will focus on Japan’s monthly economic data, including the unemployment rate, retail sales and industrial production. Consensus forecasts suggest that the unemployment rate will edge down to 2.4% in April from 2.5% in the previous month. Since 2018, the unemployment rate has averaged 2.4%, which is low by historical standards (lowest since 1993), but a tight labour market has failed to produce inflation. In addition, industrial production is expected to rise 0.2% over the same period, while forecasts suggest that retail sales will enjoy a gain of 1.2% month-on-month. In China, the National Bureau of Statistics will release the PMI readings for May. Last month, surveys showed that China’s economic growth suffered a setback, having surprised to the upside in March. The composite PMI declined to 53.4 in April from 54.0 in the previous month, reflecting weakness in the manufacturing component (down to 50.1 from 50.5 in March). Consensus forecasts suggest that the main indices will be roughly unchanged in May. Our outlook for Chinese growth is one of stabilisation over the balance of the year. Chinese authorities are likely to continue to provide stimulus in a measured and targeted fashion in an effort to offset the negative impact from higher US trade tariffs. Elsewhere, the South Korean central bank is likely to leave its policy rate unchanged at 1.75%. The South Korean economy started 2019 on a weak footing, with GDP contracting by 0.3% quarter-on-quarter in Q1. But surveys are now pointing to a modest rebound in Q2. In Turkey, consensus expectations suggest GDP increased 1.2% on the quarter in Q1, after recording a sharp contraction in H2 2018 (-1.6% in Q3 and -2.5% in Q4). Such growth would allow the economy to stabilise at a year-on-year growth rate of -3%. The country will also publish trade balance data and foreign tourist arrival figures for April. In the UK, the GfK consumer confidence index should be roughly unchanged in May, reflecting the offsetting impact from Brexit uncertainty and a solid labour market. Since 2018, the GfK consumer confidence indicator has been stable at -14/-13, somewhat below the index’s long-term average of -9. The Lloyds business sentiment index fell sharply in H2 2018 and early this year, owing to a deterioration in external conditions. It has recovered in the last couple of months, but at 14, it is still running well below its long-term average of 31. This probably reflects the persistent drag from Brexit uncertainty, which is likely to persist in the short to medium term. Meanwhile, Canadian GDP is expected to rise at a seasonally adjusted annualised rate of 0.8% quarter-on-quarter in Q1 following a disappointing Q4. The Canadian economy slowed in Q4 and in the opening months of this year, reflecting weaker external demand, the impact from lower oil prices in Q1 and the effect of past tightening on credit conditions. The Bank of Canada sees a modest acceleration in Q2, but the recent intensification of trade uncertainty poses downside risk. Elsewhere, the core personal consumption expenditures (PCE) deflator – the Fed’s favourite gauge of underlying inflation – will be probably unchanged at 1.6% in April, having trended down over Q1. According to Fed Chair Jerome Powell, some special factors (affecting portfolio management fees, apparel, airfares) contributed to the recent decline. Yet, even accounting for that, underlying price pressures look contained.


Intensification of US-China trade dispute threatens global growth, says OECD

Impact on the level of GDP and trade by 2021-22, % difference from baseline

Source: OECD as at May 2019. 

Economic growth in China and the US could be 0.2%-0.3% lower by 2021 and world trade could fall by about 0.4% if the two countries do not resolve their tariff dispute, the Organisation for Economic Cooperation and Development (OECD) said in its latest economic outlook. However, if the latest round of tariff increases (announced earlier this month) are maintained, the OECD forecast that the drag on growth could double. Under a hypothetical scenario in which the US and China impose 25% tariffs on all remaining bilateral trade (assumed to occur from July this year), global trade would be almost 1% below baseline by 2021 and output would decline by around 0.6% relative to baseline in the US and 0.8% in China. In addition, uncertainty about trade policies could also result in tighter financial conditions. In this respect, the OECD estimates that increasing investment-risk premiums in all countries by 50bps for three years would reduce the level of global GDP by 0.7% below baseline, while global trade would decline by about 1.5%.


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