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Week Ahead: Inflation or Stagflation? The UK Reopens and the US Takes it All Off

US inflation data has been coming in higher than expected. Will it be the same in other parts of the world?

Last week, inflation data came in hot for April in the US.  However, since the beginning of the month, manufacturing and jobs data were weaker than expected. Is the inflation truly transitory, as the Fed says, or stagflation coming our way?  This week, we’ll get a better view as more inflation data is released from around the world.  In addition, as mentioned in the last Week Ahead, while some countries continue to battle with the coronavirus and a shortage of vaccines, others are in the middle of their re-openings.  On Monday, the UK continues with their re-opening, while the CDC in the US said masks are no longer necessary for fully vaccinated people.  And although earnings season is coming to an end, we’ll get earnings from big retailers in the US this week!

Inflation

We are halfway through May, and US inflation data for April has been stronger than expected. On Wednesday, the headline April  CPI (MoM) was 0.8% vs 0.2% expected.  The core CPI (MoM) was 0.9% vs 0.3% expected.  On Thursday US PPI (MoM) was 0.6% vs 0.3% expected and the Core PPI (MoM) was 0.7% vs 0.4% expected.  The Fed has indicated that the short-term inflation readings are transitory, meaning that with the US strong re-opening, prices will rise in the short-term, but fall back to “normal” levels in the long-term.  However, some Fed officials who have spoken since the CPI release have been backtracking a bit, such as the Fed’s Clarida, who noted he was surprised by the reading (though he still sees inflation as temporary).  Also, Fed’s Kaplan, who is more on the hawkish, said that he’s worried about how supply/demand imbalances could feed to higher inflation.  Yields initially moved higher on the CPI release, however, have pulled back over the last two days.  The same can be said for the US Dollar. The Fed is paying attention to the stronger inflation data.

Stagflation

Thus far thru May we have seen April Manufacturing data, Non-Farm Payrolls, and Retail Sales data all come in weaker than expected.  The data was expected to be lower than March’s spectacular readings, however, the results were also weaker than the average estimate of economists on Wall Street. Not even they predicted  manufacturing, employment, and retail sales to be this weak.

Strong Inflation along with weak manufacturing, jobs, and spending, is not good.  When an economy is faced with higher inflation, higher unemployment, and lower economic growth, it is in a period of stagflation. 

Economic Data

Is the US, and possibly the world economy, in a stagflation environment?  Its too soon to tell, however this week will give us a better picture as a host of data is released.  The UK releases their Claimant Count, CPI, and Retail Sales for April. The EU also releases CPI.  China releases Industrial Production, Retail Sales, and the Unemployment Rate for April.  Australia also releases their Employment Change for April.  At the end of the week, we will get to see if global manufacturing and services have picked up for  May, as the Markit PMIs Flash are released.  Other important data releases are as follows:

Monday

  • New Zealand: Services NZ PSI (APR)
  • Japan: PPI (APR)
  • China: House Price Index (APR)
  • China: Industrial Production (APR)
  • China: Retail Sales (APR)
  • China: Unemployment Rate  (APR)
  • Japan: Machine Tool Orders (APR)
  • Canada: Housing Starts (APR)
  • US: NY Empire State Manufacturing Index (MAY)

Tuesday

  • Japan: GDP Growth Rate Prel (Q1)
  • Australia: RBA Meeting Minutes
  • UK: Claimant Count Change (APR)
  • EU: Trade Balance (MAR)
  • EU: Employment Change Prel (Q1)
  • US: Building Permits (APR)
  • US: Housing Starts (APR)

Wednesday

  • New Zealand: PPI (Q1)
  • Australia: Westpac Consumer Confidence Index (MAY)
  • Japan: Industrial Production Final (MAR)
  • UK: Inflation Data (APR)
  • EU: CPI (APR)
  • Canada: CPI (APR)
  • US: FOMC Minutes
  • Crude Inventories

Thursday

  • Japan: Reuters Tankan Index (MAY)
  • Japan: Trade Balance (APR)
  • Japan: Machinery Orders (MAR)
  • Australia: Employment Change (APR)
  • Germany: PPI (APR)
  • EU: Construction Output (MAR)
  • UK: CBI Industrial Trends Orders (MAY)
  • Canada: New Housing Price Index (APR)
  • US: Philadelphia Fed Manufacturing Index (MAY)

Friday

  • Global: Markit Manufacturing PMIs Flash (MAY)
  • Japan: CPI (APR)
  • UK: Retail Sales (APR)
  • EU: ECB President Lagarde Speech
  • Canada: Retail Sales (MAR)
  • EU: Consumer Confidence Flash (MAY)
  • US: Existing Home Sales (APR)

Closings and Openings

In some areas of the world, the coronavirus is still ravaging through countries.  India has surpassed 24 million infections and recorded over 4,000 deaths for the 3rd straight day. Many states are either on full or partial lockdown, however a national lockdown has not been imposed. Ontario, Canada extended its stay at home order until June 2nd (though new cases are falling). There are new social restrictions in Singapore and people are beginning to clamor in Japan, as there are still State of Emergencies, only 2% of the population is vaccinated, and the Summer Olympics are closing in.

Compare those countries to those of the UK and US.  The UK is having a grand reopening beginning Monday, as pubs, bars, and restaurants will be allowed to reopen again.  So will cinemas and theaters.  Sporting events will allow up to 10,000! Boris Johnson said on Friday that the country should be ready to lift all restrictions on June 21st!  In the US, the CDC has issued guidance stating that it is safe for fully vaccinated people to no longer wear makes, except for some activities such as flying in airplanes and in hospitals.

Say what you want about the vaccine, but the differentiating component seems to be that more people in the US and the UK are vaccinated compared to the number of people in countries that are still under restrictions.

Earnings

The earnings calendar is coming to an end for Q1.  However, this week retail giants will release their earnings.  It will be interesting to see how the earnings compare to the retail sales data that was released on Friday.  Some of the notable earnings releases this week are as follows:  BIDU, HD, M, WMT, CSCO, LOW, JD, TGT, AMAT, BJ, DE

Chart of the Week:  Daily BTC

Source: Tradingview, FOREX.com

Bitcoin had been on a tear moving from a low of 16218 on November 26th, 2020 to a high of 64895 on April 14th, which incidentally was the IPO for Coinbase. However, notice on the bottom of the chart that the Rate of Change for the Cryptocurrency was moving lower and lower and price was stalling near the high.  Price fell to the 38.2% Fibonacci retracement from the previously mentioned timeframe near 46288 on April 25th.  However, it bounced from there and put in a lower high near 59564.  Price traded near those levels for a few days, until Elon Musk decided Tesla would no longer accept Bitcoin as payment.  BTC dropped precipitously, briefly taking out the April lows to 45700 on Thursday, forming a hammer candlestick pattern, a reversal candle.  What is interesting now is entire price action from November 2020 has formed a rounded top.  However, on a shorter timeframe, BTC appears as if may just be correcting within the larger trend.  First resistance is at the May 5th lows of 52524.  Above there is the downwards sloping top trendline of the corrective channel near 58300 and then the all-time highs at 64895.  Support is at Thursdays low of 45700.  Below there is the bottom, downward sloping trendline of the corrective channel near 43000 and then the 50% retracement level at 40540.

The focus this week will be on the economic data as inflation data, employment data, and manufacturing data are released around the globe.  The US inflation data points have been coming in higher than expected while economic activity data points have been worse than expected.  Will it be the same in other parts of the world?  We’ll have a better picture after this week.

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