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Good afternoon,

Heads are set to roll this jam-packed week of ECB speak. Across the pond, eyes will roll at the ticking time bomb of a potential US default as it becomes front and center for investors.

Let’s dive in.

Economy Heat Check

As of 5/12/2023 market close, unless otherwise stated.

Friday Flashback

• Consumer sentiment in May came in lower than expected (57.7 versus 63.0) – the lowest level since November 2022 (MSCI, preliminary).

• BOJ Governor Ueda said the bank could cancel YCC (yield curve control) and shrink their balance sheet if their inflation target is met.

• RBA research revealed three rate paths; two saw rates at 4.8% in either 15 or 50 bps increments. The other was for rates at 3.35% (already surpassed).

• US debt ceiling talks dragged on as heated discussions between Democrats and Republicans remained in a deadlock.

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Bullish & Bearish

↓ S&P 500: The “sell in May, go away” trend of lower trading volumes between May and November is playing out thus far, with the index slightly down MTD.

↑ USD: Posted strong gains as traders priced out the odds of rate cuts this year.

↓ Currencies: TRY (lira) traders should manage their risk as Turkey now looks set to be heading to a runoff election.

↑ Gold: Prices are holding firmly above $2,000 an ounce as consumer sentiment sours rapidly due to growing recession fears and a potential debt crisis.

↓ Oil: Prices are falling as economic concerns offset the prospect of tighter supplies.

↓ Crypto: Bitcoin struggles to get back to its $30K level, now wading in $25K waters.

↑ Money-Markets: Fund assets rose to $5.33T – an all-time high – extending the trend of moving away from lower paying US bank deposits.

Week Ahead: Signal to Noise

This week’s market outlook and whether you should actually care.

Signals 

US Debt Ceiling

In a plot twist that surprised absolutely nobody, the Democrats and Republicans failed to make any progress whatsoever during talks to raise the debt ceiling. Now, Treasury Secretary Janet Yellen will meet with JPMorgan CEO Jamie Dimon, Citigroup CEO Jane Fraser and other board members of the Bank Policy Institute in Washington to discuss the debt limit talks.

Both sides continue to run down the clock in a bid to gain leverage over their opponent, and will likely continue to do so until the final minutes of the 11th hour. We’ll then finally see who has the stronger hand.

Spoiler: The debt ceiling will likely be raised. Again.

So, that likely leaves a couple of weeks of deadlocked bickering. Expect this uncertainty to wash over into markets. From an investor perspective, it means uncertainty and a drag on risk appetites. This theme is unlikely to be resolved soon, so expect it to cloud upside potential for sentiment until a resolution is found.

Eurozone GDP and Inflation

Just when you thought you couldn’t handle any more televised European screaming after Eurovision, this week’s EU economic releases are expected to scream inflationary pressures. It all kicks off on Tuesday when Q1 data is released, alongside flash GDP data. Employment data is also set to be released, which is unlikely to bode well for the ECB.

Even if one of Tuesday’s prints is more positive than expected, Eurozone employment surged to a new record high in Q4. Though you’d think that lowers the market’s expectations, it leaves plenty room and content to scream about. Especially when Q4 employment is what kicked off the screams of inflationary pressures. Attention will quickly turn, though, to final HICP data on Wednesday.

However, the forward-looking ZEW (i.e. sentiment) report on Tuesday is arguably the bigger data point after business expectations unexpectedly fell in April. Should this tick higher alongside a strong employment report, the “higher for longer” calls could begin again.

Some ECB members have already alluded to staying on their hike to (seemingly) nowhere. Overall, expect ECB members to remain hawkish. So, any stronger data simply keeps the ECB on track for further hikes. That aside, it’s all about the ECB speak this week, most notably from President Lagarde on Tuesday and Friday.

RBA Minutes and Australian Employment

Tuesday is a fresh chance to scrutinize a central bank chair besides J Pow, as minutes of the RBA’s recent monetary policy decision will be released. Analysts will be reading between the lines to reveal exactly where in the outback the central bank voters sourced the drugs they smoked before entering the last meeting.

In case you missed it, the RBA surprised many with a 25 bps hike last week. That was following the now-single policy pause at their April meeting. The incoming minutes are even more important now following Bloomberg’s revelation that the RBA weighed up plans for a peak rate at 4.8% ahead of the February meeting.

In other words, the notes are expected to reveal further, if any, clues on the reasons behind the RBA’s surprise rate hike. Economists will be monitoring closely, in hopes of gleaning the RBA’s thought processes and future actions. RBA voter Lowe said inflation remained “too high” on the evening of the RBA’s last rate hike. More, he sees a 3% inflation print in two years as a “good result.”

The fun doesn’t stop there. On Thursday, employment data for April drops. The expectation is a slowdown in hiring, with 25K new additions from 53K added in March. Meanwhile, the unemployment rate is expected to hold steady at 3.5% in April, close to a 50-year low.

If wages and employment both continue to increase, bets are on a June hike. This would most likely catapult the Aussie and see the ASX falter.

Japan Inflation

The BOJ’s monetary policy thus far has been easier than getting a minor in physical education. The Japanese central bank has a busy week of economic releases lined up, much of which is packed with key inflationary data. Most should offer clues on the pace of the BOJ’s ultra-easy monetary policy normalization. So far, tightening isn’t expected to take shape until the second half of 2023.

On Monday, growth in producer prices is forecasted to dip to 6.5% year-on-year in April from 7.2% in March. Next up, Q1 GDP will be released on Wednesday. Consensus expects an annualized improvement in growth to 0.7% from 0.1% recorded in the previous quarter.

The balance of trade for April will then be out on Thursday. Though less consequential to markets, most likely, than the GDP release, it is currently forecast to have narrowed to JPY 690 billion from JPY 754.5 billion. So, at least you could get a good 69 meme out of it. Then again, we all know how accurate expectations are.

The all-important consumer inflation rate for April will be released on Friday. Core inflation is forecast to have increased to 3.2% year-on-year from 3.1% in March. The core rate (excluding food and energy) is forecast to have accelerated to 3.9% year-on-year from 3.8% in March. If this holds true, that print would be close to a 30-year high.

With BOJ Governor Ueda recently saying that yield curve control could be canceled if their inflation target is reached, higher levels of inflation obviously pushes that outcome further into the future. And as Tokyo CPI rose, there is a decent chance Japan’s nationwide CPI will also rise.

Noise

Monday, May 15:

• US: NY Fed Manufacturing

• EU: Industrial Production; Reserve Assets; Wholesale Price Index (Germany)

• Canada: Housing starts; Wholesale Trade

Tuesday, May 16:

• US: Retail sales; Industrial production; Business inventories; NAHB Housing Market Index

• EU: Total trade balance; ZEW Economic Sentiment (Germany)

• China: Urban investment; Industrial output; Retail sales; Unemployment

• Japan: GDP

• UK: Employment

• Canada: CPI Inflation; Manufacturing sales

Wednesday, May 17:

• US: Building permits

• EU: HICP

• Singapore: Non-oil exports

• Japan: Industrial Output

• New Zealand: PPI

• Japan: Trade balance

Thursday, May 18:

• US: Initial jobless claims; Philly Fed Business Index; Existing home sales

• Mexico: Interest rate

• UK: Consumer confidence

• Australia: Reserve assets

• New Zealand: Budget cash balance; Trade balance

Friday, May 19:

• Japan: Tertiary Industry Activity

• EU: Producer Prices (Germany)

• Canada: Retail sales

Lit's Picks

• Platinum supply cuts may creating a record shortage of metal (BBG)

• TikTok is delaying its live commerce launch in the US after tepid early tests (WSJ)

• Saudi Aramco's dividend is worth more than payouts from the next five largest global companies combined (BBG)

• Pokemon GO creator Niantic released its newest product - an AR pet simulation (TechCrunch)

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