Week Ahead – Busy week for PMI and GDP data; Fed speakers also eyed

Raffi Boyadjian, XM Investment Research Desk

Preliminary PMI readings for the Eurozone will be among the main data releases of the coming week along with second estimate GDP for the first quarter for the UK, the US and Germany, as well as Japanese inflation. The US calendar will be the busiest with housing data and durable goods orders also due. However, upcoming speeches from several Fed officials could attract more attention given the recent strong signals coming from the Fed lately on a possible June/July rate hike.

Japan inflation expected to dip deeper in negative territory

Japanese data will start the week with trade data on Monday. Exports in April are expected to post a 10% year-on-year drop, down from the previous month’s -6.8% rate. Imports are also forecast to worsen, from -14.9% in March to -19% y/y in April. The accelerated decline in exports points to a weak start to the second quarter and may yet persuade the Bank of Japan to ease further even though the economy held up reasonably well in the first quarter against the backdrop of global financial market volatility and weak external demand.

Inflation data out on Friday may prove more significant though as the nationwide CPI rate is expected to decline to a three-year low of -0.4% y/y in April from -0.1% in March. The core rate, which excludes fresh food, is also forecast to dip to -0.4% y/y, suggesting the BoJ’s move to introduce negative rates has yet to have an upward effect on consumer prices in Japan.

Eurozone PMI to edge higher

Eurozone GDP growth was disappointingly revised down from 0.6% to 0.5% for the first quarter but this still represents a faster pace than the 0.3% rate seen in the previous two quarters. The modest pickup in growth appears to be extending into the second quarter with the Markit composite PMI expected to increase from 53.0 in April to 53.2 in May according to the flash reading out on Monday. The manufacturing and services components are estimated to have improved in May, rising to 51.9 and 53.2 respectively.

Also to be watched next week are GDP and business sentiment surveys out of the bloc’s largest economy, Germany. German first quarter growth is expected to be confirmed at 0.7% quarter-on-quarter on Tuesday – the fastest since the final quarter of 2014. Meanwhile, both the ZEW and Ifo surveys are due next week, on Tuesday and Wednesday respectively. The closely watched indices have been painting a less optimistic picture than the PMI surveys in recent months but should improve in May. The ZEW economic sentiment index is forecast to increase from 11.2 to 12.0 in May, while the Ifo business climate index is expected to rise slightly from 106.6 to 106.8 in May.

UK growth to remain unrevised

The UK will be the second country to release the second estimate of GDP growth for the first three months of the year. Quarterly growth is expected to be confirmed at 0.4% on Thursday, but more important will be the breakdown figures on exports, business investment and private consumption, which are not released with the first estimates. The slower growth in 2016 has in recent months increased the odds of a rate cut by the Bank of England, though more recent data suggests growth is rebounding. The weaker pound, which remains well below its 2015 highs even after the recent bounce back, should provide a much-needed boost to UK exports.

Busy week for the US

In the US, there will be a flurry of housing data, including new home sales on Tuesday, building permits on Wednesday and pending home sales on Thursday. New homes sales are forecast to rebound by 2.0% in April following a 1.5% drop in March.

Also expected to see decent growth in April are durable goods orders. Demand for goods that are meant to last three years or more is estimated to ease to 0.4% month-on-month in April, down from 0.8% in March. Meanwhile, sentiment surveys from Markit and the University of Michigan are due as well. The Markit manufacturing and services PMIs out on Monday and Wednesday respectively are expected to show a small improvement in the flash reading. But the University of Michigan’s final confidence reading for May could see a small downward revision on Friday.

The US is likely to be the only country to see a revision to its first quarter GDP estimates next week. Annualized growth in the first three months of the year is expected to be revised up from 0.5% to 0.9% on Friday. A sharper upward revision would likely further fuel expectations that the Fed could raise rates as early as next month, while a surprise downward revision could force the dollar to retrace some of its recent gains.

Another potential mover for the dollar next week could come from Fed policymakers as more of them are expected to make public appearances. Bullard, Williams and Harker are due to speak on Monday, with Kashkari and Kaplan to follow on Wednesday. Bullard will speak again on Thursday, with Powell also due to speak the same day. Any comments on monetary policy will likely be closely scrutinized by traders as we move closer to the June policy meeting.

Bank of Canada to hold rates

The Bank of Canada will be the only major central bank to hold a policy meeting next week but is unlikely to excite the markets as it’s expected to hold rates at 0.5%. Recent economic data for Canada has been broadly on the upside and with crude oil’s recent strong gains, the Bank of Canada has less reason to be worried about the downside risks to growth. Although the stronger Canadian dollar may provide some concern to the central bank. The impact from the wildfires in the Canadian oil sands could be another factor that could limit growth in the coming months if mining output in the area continues to be disrupted.