Week Ahead – European PMIs, French debate, and Chinese GDP on tap

There are no central bank meetings in the coming week but there’s a ton of data releases to spice things up. The show will kick off with China’s GDP numbers, which will reveal the initial damage from the lockdowns. Meanwhile in Europe, traders will scan the latest PMI surveys to estimate the probability of recession, while keeping one eye on the TV debate between Macron and Le Pen. 

Chinese slowdown

China’s economic growth likely suffered a substantial hit from the latest round of draconian lockdowns. Authorities have doubled down on their ‘zero covid’ policy, trying to stop a variant that is almost unstoppable and inflicting serious economic damage in the process. 

At least that’s what leading indicators suggest. Every single PMI index dropped below 50 in March, signaling a contraction in economic activity as demand crumbled. The upcoming batch of data is expected to reflect that. 

On Monday, the nation will release its GDP stats for the first quarter along with retail sales, fixed asset investment, and industrial production numbers for March. All the indicators for March are expected to have cooled dramatically, with retail sales almost coming to a standstill. 

In contrast, economic growth is expected to have fired up slightly in yearly terms. This probably boils down to the implosion in imports, which mechanically boosts growth in the GDP calculation. 

Disappointing numbers could spell bad news for risk sentiment, hitting commodity currencies like the Australian dollar. Markets are pricing in eight rate increases from the Reserve Bank of Australia for this year, so any hints of negative spillovers from China could see those bets being dialed back. 

The RBA will also release the minutes of its latest meeting on Tuesday, while in neighboring New Zealand, inflation stats for Q1 will hit the markets on Thursday.  

Europe - flirting with recession

The Eurozone economy is losing steam. The spike in energy and food prices is eating into real incomes, forcing people to spend more on necessities and therefore limiting their ability to consume everything else. And with China slowing down, European exports will inevitably come under pressure. 

This hasn’t been reflected in the ‘hard’ data yet, although soft indicators like business and consumer confidence indices have started to roll over. The risk of a recession is rising and with inflation running wild, the European Central Bank cannot help this time. It has to raise interest rates, dampening growth even further. 

We’ll find out exactly how high the risk of recession is on Friday, when the PMI business surveys for April are released. Forecasts point to only a minor decline, with both the manufacturing and services indices set to remain comfortably above the 50 threshold. 

Economists seem to believe the continued rollback of covid measures negated the impact from soaring costs of living. However, this view might be overoptimistic, leaving scope for disappointment should the PMIs mirror the weakness in softer indicators. 

As for the euro, the picture is still negative and any relief rallies might remain shallow until the outlook for growth improves. That’s unlikely to happen until there’s a ceasefire in Ukraine and the French presidential election is out of the way.

Speaking of the election, the final TV debate is scheduled for Wednesday. Opinion polls are running at 53% for Macron against 47% for Le Pen. That’s almost within the margin of error, which means the debate could make a difference in swaying undecided voters.

And yet traders don’t seem very worried, with the spread between French and German bond yields narrowing lately while implied volatility in euro/dollar options has cooled, signaling fading demand for hedging. This suggests a victory for Macron is the market’s baseline scenario, leaving the euro vulnerable in case the race tightens further.

American and British PMIs in focus

The US dollar continues to steamroll its rivals, turbocharged by expectations that the Fed will raise interest rates with brute force to tame inflation. Beyond a strong US economy, the storm clouds gathering over Europe and China have also allowed the reserve currency to shine. 

The main releases next week will be the Markit PMIs on Friday, which will give traders an early glimpse into how inflationary pressures are evolving and could therefore be important in shaping Fed bets. That said, it’s difficult for market pricing to get even more aggressive, with another nine rate hikes already priced in for this year. 

Over in Britain, the PMIs for April will also hit the markets on Friday alongside retail sales for March. The pound received a boost lately after UK inflation hit the 7% mark, fueling bets that the BoE will slam on the brakes even harder. Overall though, sterling seems more sensitive to swings in risk sentiment rather than UK developments lately. 

Inflation from Canada and Japan

The Bank of Canada raised interest rates by 50 basis points this week and signaled that it could deliver a similar move when it meets next. Markets are currently pricing around a 50% chance for such action, which means incoming data will be crucial - starting with inflation stats on Wednesday ahead of retail sales on Friday. 

Finally in Japan, the spotlight will fall on inflation numbers for March, set to be released Friday. The yen has collapsed lately and there are whispers about FX intervention to rescue it. However, that’s unlikely. Instead, if inflation continues to move towards 2%, it might be the Bank of Japan that gives the yen a helping hand by loosening its yield curve control strategy.  

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