PKB's Market Espresso
May 30, 2024

Eurozone - CPI on Friday!

Disinflationary trend remains bumpy in Europe – Friday’s CPI is expected to show a slight uptick in inflation.

• CPI m/m* for May is expected to rise by 0.2% 
• This rise largely reflects base effects in the energy and transport services components of the basket 
• 2/3 of today’s observable inflation is attributable to  the much more sticky services inflation – energy and  core goods prices will remain volatile and not provide  any support in the near future
• Nevertheless… ECB should not be derailed and procced with a first rate cut in June!

Positive vibes in Germany

• In April the IFO Business Climate Index rose to 90.4 
• This is the 4th consecutive monthly advance
• The current assessment is still lagging though
• The Citi Economic Surprise for the Eurozone is also recovering 
• It topped at 57.1 in March after a steady recovery from a trough of -146.50 in July 2023 
• Equity investors are taking notice: – German and Spanish equities +12.1% ytd* – Italian equities +14.5%

Fed, running out of time

• The next 10 days should provide interesting insights  into whether the Fed might cut rates before December 
• The second update for the first quarter GDP, the PCE  deflator (so dear to the Fed…), personal income and  spending data, PMI and ISM, followed by factory  orders and durable goods orders will be released  
• The bar is relatively high to shift the balanced mood of  the Fed committee, but if the data were to show that  economic activity is slowing, with the labour market  more fragile and consumption declining, it will be  interesting to observe any changes in the wording of  the various Fed governors to see if the meeting at the  very end of July (31) is still live
• In the last week, the market reduced the scope of the  Fed’s cuts until December by 10 basis points (now at 34  basis points)

Consumer fatigue

• Retail sales on May 15th were a  bit disappointing
• The “control group” fell -0.3%  against expectations of +0.1%
• Results from Walmart and  Target were good, but…
• …both noted that consumers  are trading down

• While delinquencies on mortgages remain well behaved…
• … those on auto loans and especially on credit cards are on the rise
• Consumer staples are outperforming their discretionary brethren

US - China tensions escalate

Another round in the trade conflict with China has been passed by US President Biden. In addition, multiple threats are perceived throughout the country. Experts are already comparing the anti China mood in the US with the hysteria during the time of President Joseph McCarthy, when members of the Communist Party were hounded out of fear of espionage.

• The litany of US accusations manifests unsubstantiated fears under the cover of national security. The fears are not just limited to IT technology, automobiles and medical equipment. 
• Recently US President Joe Biden is ramping up tariffs on Chinese-made solar panels, steel and other goods, also including a hefty 100% border tax on electric cars from China. 
• China said it was opposed to the hikes and would take retaliatory measures. 
• The European Union will inform electric car importers on 4th of June whether customs duties will be levied. If the decision is positive for this case, other sectors are likely to follow quickly.
• Experts see not only China but also the USA and Europe will suffer as a result of the sanctions and tariffs and, last but not least, free global trade will be the loser and have a lasting negative impact on growth.