UK GDP data midweek to confirm drop in Q1

Chris Scicluna

Payrolls disappointment shrugged off by the bond market; Wednesday’s US CPI the next test
A disappointing 266k lift in non-farm payrolls in April – with the March gain revised down by 146k to boot – paired with an unexpected 0.1ppt lift in the U3 unemployment rate unsurprisingly led to volatility in the UST market on Friday, with the 10Y yield slumping below 1.47% at one point. However, a variety of indicators – including weekly jobless claims – suggest that the April report may be an aberration, and our own US Chief Economist Mike Moran advises that random volatility, as well as supply-side restraints, may well have been at play last month. Bond investors appeared to quickly arrive at the same view, with the 10Y quickly rebounding to finish little changed on the day at 1.58%. However, perhaps sensing that they had dodged a potential bullet, equity investors rallied the S&P500 by 0.7% to a new record high, with the DJI also setting a record close. Currency investors were clearly disappointed with the employment report, however, with the greenback finishing weaker despite the rebound in bond yields. So with the employment report providing no motivation for the Fed to bring forward plans to normalise policy settings, the attention will now turn to Wednesday’s CPI report (more on this further below).

The positive tone in US equity markets has continued today with futures re-opening a couple of tenths higher. But, on a quiet day for local data, it has been a relatively mixed start to the week for equity investors in the Asia-Pacific region. The major indices lost modest ground in mainland China, Hong Kong and Taiwan. By contrast, even with six prefectures now under lockdown restrictions until at least the end of this month, and with PM Suga’s popularity hitting new lows amidst dissatisfaction with his handling of the pandemic, Japan’s TOPIX has begun the week with a 1.0% gain. South Korea’s KOSPI has outperformed, increasing 1.7% to set a new closing high.

In Australia, the ASX200 increased 1.2% also setting a new record high for the first time since early last year, amidst higher prices for iron ore and energy – the latter following a late Friday cyberattack impacting a major US fuel pipeline. In domestic Aussie news, while retail sales volumes were confirmed to have fallen slightly in Q1, the latest NAB business survey reported the most upbeat assessment of business conditions on record, with firms’ employment intentions also rising to a record high. The latter suggests that the labour market could continue to surpass the RBA’s expectations, although the 10Y ACGB yield closed just 3bps higher on the day at 1.71%. In Europe, government bonds have opened in reverse, playing catch-up from the losses in the UST market that occurred following Friday’s European close.

Gilts, which outperformed Friday, have thus underperformed so far, with sterling stronger too after the Tories stronger showing in many of last week’s English local elections. And while constitutional confrontation over Scotland’s future in the UK seems inevitable after independence-supporting parties won 72 out of the Scottish parliament’s 129 seats, that currently looks unlikely to kick off until next year at the earliest once Covid-19 should be passed. And with the Government this week to confirm that it will repeal the Fixed Term Parliament Act, opening the door to a 2023 General Election that it might argue would trump any Scottish vote, the issue seems more likely than not to drag on for a number of years to come.

Consumer spending & sentiment indicators of most interest in Japan this week
It was a quiet start to the week in Japan today with no economic releases of any note. The remainder of this week is relatively quiet too, with most interest probably centred on tomorrow’s release of household spending data for March, followed a day later by the BoJ’s Consumption Activity Index. These reports – especially the latter – will cast light on the extent to which private consumption will weigh on next week’s Q1 GDP report. The only other indicators of great note are Thursday’s Economy Watchers survey and bank lending reports for April. Given last week’s surprisingly upbeat PMI readings, the former will likely also suggest that the economy is displaying resilience in the face of the third wave of coronavirus infections and associated restrictions on activity in some prefectures.

Inflation and credit data the focus in China this week
There were no regular economic reports released in China today and there are very few scheduled in the week ahead. Tomorrow will bring the release of the April CPI and PPI reports, which like those elsewhere will see annual inflation rates boosted by base effects associated with the pandemic. Indeed, according to Bloomberg’s survey, analysts expect PPI inflation to hit a 4-year high of 6½%Y/Y, while CPI inflation – which this time last year was still being underpinned by very high prices for pork – will likely increase to a much more restrained 1%Y/Y. Aside from the inflation data, this week should also bring the release of the money and credit aggregates for April, which will provide further evidence on the extent to which the PBoC is gradually winding back monetary stimulus even as it leaves its key interest rate settings unchanged.

Q1 GDP due Wednesday to confirm drop ahead of firm rebound in Q2
The most notable UK data this week are all due on Wednesday, when the first estimates of Q1 GDP will be published. While we expect March to post growth of 1.3%M/M, the strongest since August last year, weakness at the beginning of the quarter will see GDP contract over the first quarter as a whole. Broadly in line with what is now the consensus, we forecast a drop of 1.5%Q/Q (-6.1%Y/Y), following growth of 1.3%Q/Q (-7.3%Y/Y) in Q420 to leave GDP down 8.7% from the pre-pandemic level. Among the components, private consumption certainly fell last quarter due to tighter lockdown measures, as did both exports and imports following the end of the Brexit transition. The contribution from inventories, which had been substantive in the two quarters ahead of the Brexit transition at the start of year, is expected to fall back in Q1. Ahead of the GDP release, tomorrow will bring the BRC’s April retail sales survey, which seems bound to report a firm increase in high-street sales, as non-essential shops in England reopened their doors on 12 April. And that will give a much better indication of what to expect from GDP in Q2 as a whole.

A quiet week ahead for economic data from the euro area
This week’s euro area economic data calendar is relatively quiet with little in terms of new top-tier data to come. Today will bring the release of the euro area Sentix investor confidence indices for May, and perhaps also the Bank of France business indices for April, while tomorrow will bring the German ZEW investor confidence survey for May. Italian and euro area industrial production figures for March will be published tomorrow and Wednesday respectively. Italian IP is expected to rise about ½%M/M to be still down around ½%% from the pre-pandemic level in February 2020. In light of the underwhelming Geman and French data released on Friday, euro area IP looks set to rise about 0.7%M/M and 11.7%Y/Y, which would leave it 0.6% below the pre-Covid level. Further ahead, we will also get final April inflation figures from Germany and France on Wednesday, followed by the Spanish numbers on Friday – all are highly likely to confirm that inflation accelerated across the member states due principally to energy inflation.

Inflation, retail sales and IP reports the key focus in the US this week
Following Friday’s disappointing employment report, it is a quiet start to the week for US economic data with tomorrow’s NFIB small business survey and JOLTS job reports the only releases of note over the next two days. The first key release this week is the CPI report for April, with Daiwa America’s Chief Economist Mike Moran expecting both the headline and core indexes to have increased 0.2%M/M. And with these indexes having fallen 0.5%M/M and 0.4%M/M respectively in April last year, this guarantees another sizeable lift in annual inflation with the headline rate likely to exceed 3½%Y/Y and the core rate rising to around 2.2%Y/Y. The following day will bring news on producer prices, with Mike expecting the headline index to have increased a relatively sedate 0.2%M/M but the recovering economy to generate a 0.3%M/M lift in the core index, with annual inflation in the latter likely to exceed 3½%Y/Y.

On Friday, attention will turn to the latest news on activity and sentiment. With stimulus payments still flowing to households, Mike expects retail sales to lift a further 0.8%M/M in April despite recording a near 10%M/M increase in March. However, with output in the manufacturing sector likely hampered by global semiconductors shortages, Mike expects IP to have been broadly flat in April following a 1.4%M/M lift in March. Meanwhile, he expects that the preliminary results of the University of Michigan’s consumer survey for May will point to a further lift in sentiment, buttressed by rising asset prices and an improving labour market. Economic data aside, there are a number of Fed Presidents and Governors speaking on the economy this week and the corporate earnings season will begin to wind down with just 18 S&P500 companies reporting this week.

Aussie retail sales volumes decline in Q1, but NAB business conditions index hits new record high in April
Today’s final release of retail sales data for March pointed to a 1.4%M/M uplift in spending, just 0.1ppts less than indicated by the preliminary report. Annual growth slowed to 2.2%Y/Y reflecting base effects associated with the pre-lockdown boom in spending in March last year. As indicated by the preliminary report, the growth in March was driven by increased spending at department stores, clothing and accessory stores and at cafes and restaurants, particularly in the states of Victoria and Western Australia following pandemic induced disruptions during the previous month. Even with the growth in March, the volume of retail spending fell 0.5%Q/Q in Q1 – the first decline since Q220 – which was broadly in line with market expectations and left spending up 4.7%Y/Y nonetheless. The decline in Q1, which likely reflects the normalization of spending patterns – including in favour of non-retail provided services – was driven by a 2.7%Q/Q decline in spending on food and a 1.6%Q/Q decline in spending on household goods.

Today’s other key report in Australia was the NAB Business Survey for April, which surpassed last month’s upbeat results with a number of key indexes setting new record highs. The headline business confidence jumped 9pts to a record +26 (now more than 20pts above the historic average) while the closely followed business conditions index increased 7pts to set a new record high of +32 (a whopping 27pts above the long-term average). The components of the business conditions index – trading conditions, profitability and employment – all increased to fresh record highs, with the latter now 20pts above its long-term average and suggesting that more positive labour market surprises could be ahead for the RBA. Encouragingly, the capex index also increase to a three-year high. Also of note – and something to keep an eye on over coming months – was further robust readings in the survey’s pricing indicators. Indeed, for a second consecutive month, firms reporting the largest three-month increase in final product prices since 2008.

Following today’s burst of data, there are no major economic reports due in Australia over the remainder of the week.

Consumer spending, housing and manufacturing PMI reports ahead in New Zealand this week
The first scheduled economic report of any note in New Zealand this week is tomorrow’s Electronic Card Transactions survey, which will provide an indication of retail spending during the month of April. The manufacturing PMI for April will be released on Friday, and will be of interest in light of the record high set in March. Meanwhile, later in the week should bring the release of the REINZ housing report for April, which will provide some insight on how the housing market is responding to RBNZ and Government measures seeking to slow activity and growth in house prices in particular. 

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