The Week Ahead - Saturday, May 23

The new week starts slowly with the US and UK markets closed on Monday, May 25. Even then, the economic calendar is light. With shutdowns easing in May, April data is too dated to be of much interest to investors. The preliminary May PMIs last week offered a hint that the low point for many high-income countries could be passed.

The US will report more survey data from the regional Feds, the Conference Board, and the University of Michigan. The Federal Reserve's Beige Book is released in the middle of the week, ahead of the FOMC meeting on June 10. It is an anecdotal survey from different regions. They are typically not market movers.

In terms of hard data, the US reports April's income and consumption figures. April has already been written off, and economic forecasts are sobering. The three regional Fed's GDP trackers (St. Loius, New York, and Atlanta) range from an annualized contraction in Q2 of 31%-48%. Personal consumption expenditures are projected to have fallen by around 12.5%, after a 7.5% decline in March.

Although May is likely to show improvement, it is likely to be disappointingly slow. Even where the shutdown has been lifted, consumers have seemed on the whole (often not captured in the media's prurient focus on those abandoning social distancing) to be reluctant to resume their previous consumption patterns (restaurants, ride-sharing apps, etc.).

April's income is expected to have fallen around 6.5%-7.0%. Transfer payments from the government likely go a long way to explaining why income has not fallen as much as consumption. As a consequence, the measured savings rate increased, and some want to draw conclusions from it. That seems premature. It will look quite different in six months.

The public health emergency has resulted in major disruptions and de-synchronizing activity. It seems like the savings rate went up because people who stayed in did not have opportunities to consume and many lost wages, while self-proprietorships and farmers lost income with modest government offsets. 

The Fed targets the PCE deflator at 2% and often talks about the core rate. The headline rarely will move further away from the 2% target. It may fall from 1.3% to 1.0%, and the core rate may slide to 1.1% from 1.7%. It is clear from Fed officials' comments that supporting the economy is the number one priority. With industrial capacity utilization rates below 65% and unemployment likely on its way above 20%, inflation pressures will likely remain subdued.

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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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