Macro Features In The Week Ahead - Saturday, May 15

We are halfway through the second quarter. Interest is not so much on Q1 data, even though Japan will report GDP for the January-March period. April data may also get little attention as May reports begin trickling in. Even the May data may be overwhelmed due to the growing sense that the investment climate is changing.

Many investors accept that the vaccine rollout, fiscal and monetary support of various degrees, and pent-up demand will give the major economies a near-term lift. However, as the recent US employment data seemed to suggest, the recovery, even under the best of circumstances, is likely to be bumpy and uneven, driven by a lack of uniform reopening and supply chain disruptions.

Strong demand in some sectors is coming at the same time as supply constraints (e.g., shortages, bottlenecks, low inventories, and geopolitical issues, including the cyber-attack on the largest US gasoline pipeline and blacklisting of Huawei and SMIC, China's largest chip manufacturer). 

To be sure, it is not just in the US that inflation expectations are elevated. Germany's 10-year breakeven is at the upper end of where it has been for the last seven years. It was last below 1.0% on Feb. 22 and approached 1.50% last week. Since the end of Q1, the UK's 10-year breakeven moved above 3.50% for the first time since 2008. Japan's inflation expectations are nothing to write home about, but the 10-year breakeven at 20 bps is back to pre-COVID-19 levels.

The UK reports April CPI on May 19. A small month-over-month increase will lift the year-over-year rate to about 1.0%, matching the high from last July. Last April, UK headline CPI fell by 0.2%. That speaks to the base effect, for which we are now all familiar. However, there is another element of the current inflation that we need to monitor: supply chain and bottlenecks.

To capture that, we have been tracking the three-month annualized pace. For example, in the US, the January-through-April CPI rose at an annualized rate of a little more than 6%. In the UK, the Q1 headline was less than 1% at an annualized pace. Indeed, the UK's CPI in Q4 20 was the same as in Q1 21. In contrast, in Q4 20, US headline CPI rose at about a 2% annualized pace.

Despite large budget deficits, gross debt, and a central bank balance sheet that is a multiple of the Fed's (~130% of GDP vs. ~36.5%), Japan has still not arrested deflationary forces. Headline inflation was -0.2% year-over-year in April. It has not been above zero since last August, and it has not been above 1% since October 2018. The core rate, which in Japan excludes fresh food, was at -0.1% year-over-year in March. It was last above zero in March 2020.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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