The Daily Update: The Week Ahead

Last week the US inflation data was the key focus for markets. On Wednesday, US April CPI surged by 0.8% mom, well above market estimates of 0.2%. The core metric, ex food and energy, posted a 0.9% monthly spike (estimates were for 0.3%), the largest monthly gain since 1982. On a year-on-year basis, CPI increased from 2.6% in March to 4.2% in April, well above expectations of 3.6% yoy. Core inflation jumped to 3.0% yoy from 1.6% in March, the highest pace since 2008 and above market expectations of 2.3%.

Although the market was taken aback by the strength of the CPI numbers, we must bear in mind that it is just one data point and might be an outlier, just as the Non-Farm payroll came in way below expectations (266k vs 1m). Comments by Fed Vice Chair Richard Clarida reflected this sentiment, he noted: “This number was well above what I and outside forecasters expected”, but that “Honestly, we need to recognize that there’s a fair amount of noise right now, and it will be prudent and appropriate to gather more evidence”. He also stated: ‘under my baseline outlook, these one-time increases in prices are likely to have only transitory effects on underlying inflation, and I expect inflation to return to—or perhaps run somewhat above—our 2 percent longer-run goal in 2022 and 2023’.
The stronger US CPI reading triggered a sell-off in bonds and equities midweek. However, USTs and equities recovered somewhat into the end of the week despite Thursday’s US PPI data also erring on the stronger side: Headline PPI increased ahead of expectations gaining 6.2% yoy and 0.6% mom and core readings (ex food and energy) also exceeded expectations. However, Friday’s US April retail sales were unchanged mom, which was below expectations, although the prior month’s figure was revised up to a hefty +10.7% mom from 9.8% mom. The University of Michigan sentiment index for May also came in below expectations and below last month’s reading. Over the week, the UST 10 year yield backed up 5bps to 1.63% at Friday’s close. The 5s30s spread widened 2bps to 152bps. It was also a week of heavy UST issuance with the market absorbing USD58bn in 3 year notes and USD41bn in 10 year and USD27bn in 30 year bonds. The S&P500 ended the week down 1.39%.
Other news over the week included China’s April CPI and PPI inflation data which came in at 0.9% yoy and 6.8% yoy respectively. The CPI reading was below expectations hence the PPI reading which exceeded expectations of 6.5% yoy was more of a focus: the strong reading reflected rising commodity prices and a recovery in domestic production. In the UK Q1 GDP showed the economy contracted 1.5% qoq but the economy started to recover in March expanding by 2.1% as schools reopened. Over the week, the 10 year gilt yield backed up 8bps to 0.86%. Eurozone government bonds also came under some pressure over the week. The ECB minutes for the April meeting, released on Friday, were of interest noting ”it was generally felt that risks to activity had become more balanced over the medium-term horizon, with a view also being expressed that they were now marginally tilted to the upside.”

In the week ahead, the FOMC meeting minutes from the April meeting, due on Wednesday, will be a focus with any discussion on the inflation outlook likely to be scrutinised. Fed speakers appearing over the week include Richard Clarida, Raphael Bostic, Robert Kaplan and James Bullard. ECB speakers include ECB Executive Board member Fabio Panetta and ECB Chief Economist Philip Lane on Wednesday. Philip Lane is also due to appear with Eurogroup President Paschal Donohoe on a webinar on Europe and the Global Economy on Thursday. Key US data releases include April building permits and housing starts on Tuesday and April existing home sales are due on Friday. May readings for the Empire Manufacturing and Philadelphia Fed Business Outlook are due on Monday and Thursday, respectively. At the end of the week, a slew of May preliminary readings for the Markit manufacturing and services PMIs are due for the US, UK, France, Germany and Eurozone are due. Elsewhere, other key data points include UK April inflation data and the Eurozone final reading for April CPI on Wednesday and Thursday respectively: the Bloomberg survey is looking for UK CPI to rise 1.5% yoy up from 0.7% yoy the prior month. On Tuesday Eurozone and Japan Q1 GDP figures are due with the Bloomberg survey looking for -0.6% qoq for the Eurozone and -1.1% qoq for Japan. Earlier today China released April industrial production and retail sales data which came in below expectations and fixed asset investment came in marginally lower (19.9% YTD yoy vs 20% expected). On Thursday, the PBoC is expected to leave the 1 and 5 year loan prime rates unchanged at 3.85% and 4.65% respectively. Other events include the South African Central Bank meeting on Thursday with no change to rates expected and the RBA’s meeting minutes on Tuesday. Euro area Finance Ministers and central banks are also due to hold an informal meeting towards the end of the week.