Risk-on start to the week aided by Chinese Covid news

Chris Scicluna
Emily Nicol

Risk-on start to the week aided by Chinese Covid news; German inflation weighs on Bunds
After Friday’s strong end to the week on Wall St. in the wake of firmer US data, the baton’s been passed to Asian markets today, with most major stock indices up starting the week with firm gains. With sentiment buoyed by lower Covid-19 case counts in Beijing and Shanghai and an associated easing of pandemic restrictions, ahead of tomorrow’s Chinese PMIs the Hang Seng is up roughly 2%, while the offshore yuan has strengthened about 0.9%. In Japan, on a quiet day for economic news but ahead of tomorrow’s usual end-month data deluge, the TOPIX closed up 1.9% while the yen bucked the appreciation trend of other major currencies by remaining little changed against USD. US stock futures are up close to 1% or more. In fixed income, JGBs were little changed while – ahead of the start of Fed balance sheet roll-off from the start of June – USTs didn’t trade due to the US holiday. But Bunds have started the week with yields some 5-7bps higher as the early indications from the German states suggest that the flash May inflation data from Germany (today) and euro area (tomorrow) will report another significant rise in both the headline and core measures.

Euro area inflation for May set to rise to a fresh high
It will be a busy week for top-tier euro area data releases, with the calendar including flash CPI estimates (today and tomorrow), the European Commission’s business and consumer confidence surveys (today), unemployment rates (Wednesday), and retail sales numbers (Friday). Of most importance, we expect tomorrow’s inflation data to report that the euro area headline HICP rate rose yet again in May, by 0.3ppt to a fresh series high of 7.7%Y/Y, due not least to higher food inflation and still elevated energy prices. We also expect the core HICP measure to rise 0.1ppt to a new high of 3.6%Y/Y. Certainly, figures published so far this morning from Germany’s various states – including North Rhine Westphalia, which accounts for roughly one fifth of German output and saw headline inflation rise 0.4ppt to 8.1%Y/Y – supports the expectation that German HICP inflation will rise at least 0.3ppt to above 8%Y/Y for the first time since re-unification (data due at 13.00 BST). The equivalent Spanish numbers, due shortly, are expected to report no change in the EU-harmonised measure (from 8.3%Y/Y), albeit with the risks also to the upside (indeed, the national CPI measure is expected to rise again following a drop of 1.5ppts in April).

Japanese unemployment, retail sales and consumer confidence reports due
After a quiet start to the week for Japanese data, tomorrow brings the usual end-month deluge of top-tier releases including the latest labour market, retail sales, IP and consumer confidence reports. Given the ongoing normalisation in the economy since the lifting of restrictions, the unemployment rate might well edge lower from the 2.6% reading in March. Retail sales are expected to record the second successive monthly increase in April (0.9%M/M), although this will again be flattered by price effects. Indeed, consumer confidence is forecast to have improved only very slightly this month, with the headline sentiment index forecast to still remain below February’s reading and still well below levels seen through H221. Meanwhile, the latest IP figures are expected to flag the ongoing challenges facing the sector amid supply chain disruption and higher cost burdens, which has been exacerbated by China’s lockdowns and the Ukraine war.

Chinese PMIs to signal still very subdued activity in the face of persisting Covid restrictions
While the Chinese authorities yesterday loosened some Covid restrictions in several districts and will allow all manufacturing to restart from 1 June, this week’s PMIs on Wednesday seem bound to illustrate the continued significant hit to economy over the past month, with the services and manufacturing PMIs likely to remain firmly in contractionary territory for the third consecutive month. The private sector Caixin manufacturing PMI (Friday) which focuses on private sector SMEs will also point to a sharp decline in output this month. 

US payrolls reports the highlight this week
After today’s national holiday, a busy week for US top-tier data releases will conclude on Friday with arguably the most noteworthy, May’s payrolls report. Although job openings remain elevated, a pickup in initial claims for unemployment insurance suggest that job growth will lag the average of 552k in the previous twelve months. Nevertheless, our colleagues in America forecast an increase in non-farm payrolls of 400k, only slightly below the outturns in March and April (428k) and above the consensus forecast (325k). They also expect the unemployment rate to edge lower by 0.1ppt to 3.5%. Friday will also bring the services ISM, which is expected to point to an accelerated pace of recovery in May (up 0.9pt to 58.0), albeit remained below the recent high (68.4) recorded in November. The Conference Board consumer confidence survey (tomorrow) and manufacturing ISM (Wednesday) are also due.

UK lending numbers to suggest increase demand for credit amid higher living costs
In the UK, the Bank Holiday-shortened week ahead is set to be exceptionally quiet on the economic data front. Of most interest tomorrow will be the BoE’s latest bank lending numbers, which are expected to confirm that demand for consumer credit remained strong at the start of the second quarter. In addition, the BRC’s shop price index (Wednesday) seems bound to flag elevated price pressures on the High Street, not least due higher global food prices, with the headline rate likely to have risen further above April’s 9½-year high of 2.7%Y/Y.

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