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The Global Markets Weekly – 5/11/18
Rejoice in Benign Inflation Signs?
Eurozone equities have posted a seventh straight weekly advance, up 8% from late-March lows, now only 2-3% below a January high. U.S. shares have followed a choppier path but are back to their highest level since mid-March, up 5%-plus from correction lows, and still off 5% from the January peak. Echoing a post-jobs-report theme, this most recent week brought a set of benign inflation reports for April in both the Eurozone and U.S., with deceleration likely next week in Japan too. In the U.S., measures of median, sticky, and core inflation hint at settling back after greater vigor in prior months. While admittedly a simple read through a mainly macro lens, market participants can have greater confidence that the Fed has little reason to speed up rate hikes (and the ECB justification to remain on the sidelines), taking some pressure off valuations and allowing firmer fundamentals to shine.
Eurozone price pressures continued to move in the wrong direction in April, as headline inflation as measured by the Harmonized Indices of Consumer Prices (HICP) for all-items was up a scant 1.2% on the year to April 2018, down from 1.3% in March, lowest in over a year. Similarly, the core ex food and energy index rose a paltry 0.7% in April, down from 1.0% in March. Weakness isn’t surprising for a number of reasons including currency strength and some seasonal factors including the early Easter, but labor market slack remains high as well outside Germany. Whereas unemployment in Germany has fallen to 3.6%, the lowest level in over 10 years, unemployment has remained lofty in Italy, Spain and Greece. Youth unemployment and underemployment is also extremely elevated, with political implications. This maldistribution helps to explain why inflation in the overall bloc remains subdued.
Looking ahead and absent an all-out trade war, DE expects Eurozone inflation to firm somewhat in the period ahead, and to average 1.5%-1.7% for the year as a whole. Growth remains fairly strong at about 2.4% and output gaps continue to close, but the message appears to be that inflation will continue to trail the ECB target of near 2.0%. We continue to see any ECB rate adjustment pushed out to 2019.
Coming Week’s Key Indicators and Events
| Release | DE / Consensus | Comment | |
| U.S. | Apr Retl Sales (Tu)
Ex-autos Apr IP (We) Fedspeak |
0.3% / 0.4% m/m
0.4% / 0.5% m/m 0.4% / 0.5% m/m
|
Key for fleshing out Q2 momentum after soft start to the year.
Nominees Clarida and Bowman before Senate Panel (Tu), Bullard (Mo), Williams (Tu), also Kaplan, Mester, Kashkari. |
| Euro | Q1 GDP (second est) (Tu)
Mar Ind. Prod (Tu) ECBspeak
|
0.4% / 0.4% q/q
0.6% / 0.6% m/m
|
No change from advance estimate, country detail available. Final April CPI also due, moderating trend.
Constancio at ECB conference in Frankfurt (Th) |
| UK | Employment and Wkly Earnings (Tu) |
2.6% / 2.6% y/y |
Jobless rate remains low, wages finally keeping pace with inflation. BoE hike still in cards for later this year. |
| Japan | Q1 GDP (We)
Apr CPI (Fr) Ex Fresh Food Ex Food & Energy |
0.1% / unch q/q
0.7% / 0.7% y/y 0.7% / 0.8% y/y 0.4% / 0.4% y/y |
Exports and investment may hold up the GDP with household spending moderate. All CPI figures decelerating in April, compared to March. |
| China | Apr Retail (Tu)
Apr IP (Tu) |
10.1%/10.0% y/y
6.4% / 6.4% y/y |
Tariff chatter a problem ahead? For now, Q2 on solid footing. |
| Brazil | Selic Rate | -25 bps / -25 bps | Significant moderation in inflation has taken rates down as well. |
| Mexico | Overnight Rate | Hold / Hold | At peak of tightening cycle.
|
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