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Macro Watch: Flash PMIs; Fed minutes; European elections


The US Federal Reserve (Fed) will publish the minutes from its latest meeting, Markit will release the flash Purchasing Managers' Index (PMI) readings for Japan, the eurozone and the US for May and voters will go to the polls in the European Parliamentary elections.

Japan is expected to report a mild economic contraction in Q1 following weakness in hard economic data and surveys in recent months. Consensus forecasts suggest that the country’s GDP will contract by 0.1%, compared to a 0.5% expansion in Q4. The composite PMI has hovered at 50.5 in recent months – a level which is typically associated with an almost stagnant economy. In addition, hard data has been weaker than suggested by surveys: industrial production contracted by 2.6% in Q1 and retail sales declined by 1.3% over the same period. Elsewhere, the European Central Bank (ECB) will publish seasonally-adjusted data for the eurozone’s current account. In recent years, the eurozone has consistently run a current account surplus. In February, the bloc’s current account balance came in at €26.8bn – equivalent to 2.7% of GDP.

The Organization for Economic Co-operation and Development (OECD) will publish its latest global growth forecasts. They are likely to be little changed and the OECD will probably continue to flag downside risks, notably from trade-policy uncertainty. In February, the OECD expected global growth to ease further this year to 3.3% and edge higher to 3.4% in 2020. Meanwhile, the European Commission will release the bloc’s consumer confidence reading for May. In April, the eurozone consumer confidence indicator dropped to -7.9 from -7.2 in the previous month.  Although the April reading was well below a cyclical high of -3.4 (it touched this level in December 2017), the index is still running above its long-term average of -10.5, which is probably testament to the relative strength of the labour market. Elsewhere, Bank of England (BoE) Governor Mark Carney will testify before the UK Parliament’s Treasury Committee about the central bank’s latest Inflation Report. Deputy Governor for Monetary Policy Ben Broadbent and policymakers Silvana Tenreyro and Michael Saunders will also appear before the committee. At its last monetary policy committee meeting, the BoE reiterated its tightening bias and suggested that expectations in financial markets (which are pencilling in just one rate hike in the next three years) are too complacent. However, an imminent move is unlikely as caution is likely to prevail against a backdrop of protracted Brexit-related uncertainty. Accordingly, most of the discussions will likely focus on Brexit

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UK inflation – as measured by the consumer price index – probably increased to 2.3% in April from 1.9% in the previous month, reflecting significant increases in energy prices. Gasoline prices increased by about 2.5% in April amid pressures from international oil prices, while the ‘Big Six’ utility providers increased electricity and gas prices by about 10% on 1 April. The move followed energy-market regulator Ofgem's decision to raise the cap for utility prices in February. In addition, core inflation will probably edge up to 1.9% in April from 1.8% in the previous month, owing to Easter-related distortions. Meanwhile, the Office for National Statistics will release the first piece of information on the UK’s public finances for FY2019-2020. In FY2018-2019, the budget deficit came in at £24.7bn – the lowest level since 2001-2002 and down £17.2bn compared to FY2017-2018, but £1.8bn above the latest forecast from the Office for Budget Responsibility (OBR). For FY2019-20, the OBR forecasts that the budget deficit will widen somewhat to £29.3bn, reflecting modest fiscal loosening to cushion the impact from Brexit. However, a potentially disorderly no-deal Brexit would call for a sharper fiscal response. Across the Atlantic, the Fed will release the minutes from its last monetary policy meeting. During the meeting, the Fed confirmed that it was firmly in patience mode – i.e. there is no hurry to move in either direction. Importantly, Fed Chair Jerome Powell pushed back on market expectations of an imminent rate cut. He reiterated that the US economy is in a good place because fundamentals are solid. In addition, Powell explained that the recent decline in personal consumption expenditures (PCE) inflation was largely due to transitory factors. The minutes are likely to show more nuances about the discussion on inflation. However, the message from the majority of the committee is likely to be the same: patience means patience and the timing and direction of the next move will be determined by data developments.

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Markit will publish the flash PMIs for the eurozone, the US and Japan for May. The global composite PMI fell to 52.1 in April, returning to the level it touched in January (which at the time, marked its lowest level since September 2016). The decline reflected a modest broad-based deterioration across major countries, including China. The eurozone indices remained weak: the composite PMI was little changed at 51.5 in April as a modest improvement in manufacturing was offset by weaker activity in the services sector. In addition, the US composite PMI declined to 53 in April from 54.6 in the previous month, reflecting drops in the manufacturing and services components. There is no consensus for May. However, downward pressures will probably continue amid growing trade-policy uncertainty. Elsewhere, the German Ifo Institute will release its business climate indicator for May. In the opening months of 2019, the index has shown no convincing signs of a rebound, bouncing at low levels. In April, it declined to 99.2 from 99.7 in the previous month. Meanwhile, the ECB will publish the accounts from last month’s monetary policy meeting. Although the meeting did not deliver any change in policy, the tone remained dovish amid unconvincing signs of stabilisation in economic activity in early 2019 as well as persistent downside risks. Accordingly, the tone of the discussion on the outlook in the accounts is likely to be cautious. Investors will be looking for any indication on forthcoming policy adjustments, notably the conditions of the targeted longer-term refinancing operations programme (which is due to start in September) and possible measures to mitigate the negative effect of negative rates. At the same time, European Parliamentary elections get underway across EU member states (they run until Sunday). The elections are likely to show a significant gain for populist parties. However, as populist parties are highly fragmented on most issues except the reinforcement of national sovereignty, mainstream political forces are likely to maintain a majority in Parliament. Accordingly, they are likely to influence the appointments of top European positions, i.e. European Commission President, ECB President and European Council President. Nonetheless, populists will gain enough seats in Parliament to potentially disrupt the functioning of European institutions from within, hindering an already challenging process of integration going forward. On Sunday, there will also be regional elections in Germany (Bremen) and Italy (Piedmont), carrying some relevance for domestic political dynamics. Meanwhile, in South Africa, the central bank is likely to keep the policy rate unchanged at 6.75%. At this stage, political developments carry more relevance. The ruling ANC party won the election earlier this month, taking 57% of the votes. President Cyril Ramaphosa will be inaugurated on 25 May and a new executive should be announced by 27 May. As we have previously argued, the choice of the new cabinet is crucial as it will show Ramaphosa’s resolve to reform the country and his party.

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Japan’s core CPI inflation (excluding energy and fresh food) is likely to be little changed at 0.4%-0.5% year-on-year in April. In 2018, core inflation averaged 0.4%. In the UK, retail sales are likely to moderate somewhat in April after they rose by 1.1% month-on-month in March. In Q1, retail sales increased by 1.6%, compared to 0.1% in the previous quarter. Consumption is likely to remain the main driver of growth this year, reflecting a solid labour market. Across the Atlantic, investors will shift their attention to US durable goods orders. In March, core capital goods orders (excluding defence and aircrafts) jumped 1.4% month-on-month, compared to a flat reading in the previous month. Orders rose 2% on an annualised basis in Q1, pointing to a modest rebound in capital expenditure in early 2019 after contracting in H2 2018.


China's economy lost momentum in April

Source: National Bureau of Statistics of China as at May 2019.

China’s economy suffered a setback in April after showing tentative signs of a rebound in Q1. In particular, industrial production growth slipped to 5.4% year-on-year from 8.5% in the previous month. In addition, retail sales growth slowed to 7.2% over the same period, down from 8.7%, suggesting that consumer demand is struggling to take the reins from business investment as the main driver of growth. The weakness experienced in April confirms that Chinese authorities have adopted a measured approach to stimulus, in order to balance the objectives of growth stabilisation on the one hand and de-risking/de-leveraging on the other hand. Going forward, the balancing act may become more challenging as trade tensions with the US have re-intensified recently. Indeed, the US administration increased tariffs on $200bn worth of Chinese goods from 10% to 25% and initiated the process to target an additional $300bn of Chinese imports.


Trump’s tariffs on Chinese goods, the European elections and the cyclicality of fiscal policy over the last 40 years are among the interesting reads that you may have missed.

Trump's 2019 protection could push China back to Smoot-Hawley tariff levels

If US President Donald Trump follows through with additional tariff threats, it could raise US tariffs on China to levels similar to those resulting from the infamous Smoot-Hawley Tariff Act of 1930 enacted on the eve of the Great Depression, writes Chad Bown and Eva Zhang of the Peterson Institute of International Economics.  

European elections: is the party over for the centre-right?

The European People's Party has been dominant in EU politics for two decades, but it fears a backlash from populist rivals at next week’s polls, writes the Financial Times Brussels Bureau Chief Alex Barker.   

How stabilising has fiscal policy been?

A paper by the Brookings Institute investigates the cyclicality of fiscal policy in the US over the past 40 years, using a measure that weights the changes in the components of fiscal policy by their likely impact on the economy.

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