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Macro

Saxo Spotlight: G7 Summit, US Debt Ceiling Talks, and Chinese Tech Giants Earnings, May 15-19

APAC Strategy Team

Summary:  The heads of the G7 are meeting from May 19-21 and are set to consider a new supply chain partnership, contingent on meeting minimum human rights and environmental policies standards. As debt ceiling talks continue, markets remain in a risk-off mode, with worries increasing about a US default. Chinese activity data is expected to bounce in April due to a low base while there are high expectations for Japan’s Q1 GDP with persistent inflation concerns. Investors will scrutinize Walmart, Home Depot, and Target results to assess American consumer health. This week, Chinese tech giants, Tencent, Alibaba, Meituan, and Baidu report results.

Market Data weekly 20230515

G7 Summit: Potential for clear geopolitical implications

The heads of the G7 will convene for a summit held from May 19-21 in Hiroshima, Japan. The leaders are expected to deliberate on a range of topics, including the health of the global economy, risks of a recession and persistent inflation. Global food security and geopolitics will also be a key focus as the war in Ukraine rages on, along with the escalating tensions between US and China. There is considerable anticipation that the meeting could produce major geopolitical signals related to the nature of the nations’ relationship with China. Bloomberg reported that G7 finance heads will propose a new partnership on supply chains that will only allow participation if certain minimum standards are met on human rights and environmental policies. The statement will be scrutinized by China in case it feels targeted, after China last month called a G7 statement "full of arrogance, prejudice against China," and lodged complaints with this year's G7 host, Japan.

US: Debt ceiling talks, retail sales and jobless claims

Despite inflation concerns easing somewhat last week, at least for the near term, markets still remain in a risk-off as debt ceiling talks linger. President Biden is expected to continue debt-ceiling talks with Congress leaders on Tuesday after last Friday’s meeting was postponed. The market is increasingly getting worried about a US default, and bond volatility and a switch to safe-haven assets will likely continue as talks linger and the X-date of June 1 doesn’t see a clear delay. Spending cuts could also bring pressure on sectors like defense that are heavily dependent on government spending.

The other battle that the market continues to fight is to justify the current aggressive rate-cut pricing for this year, which remains at odds with economic data. The Michigan survey on Friday hinted at inflation becoming embedded in the long term, and the focus will shift to the growth side of the story this week. Tuesday’s retail sales print will be a test of the strength of the US consumer, while industrial production will be on watch to see if they confirm the uptick seen in PMIs. Headline retail sales are seen rising 0.8% M/M in April, offsetting some of the 0.6% M/M decline in March, core (ex-auto and gas) retail sales are seen up 0.2% M/M (prev. -0.3%), while the Control Group is expected to be up by 0.3% M/M, after -0.3% in March. Thursday’s jobless claims will also be key to watch after last week’s higher-than-expected print has sparked concerns of a cooling in the labor market. If the trend extends further, we could see a material shift in next month’s non-farm payroll expectations due on June 2.

China: Activity data in April set to bounce on Y/Y growth due to a low base

China is set to unveil its April activity data encompassing industrial production, retail sales, and fixed asset investment on Tuesday. According to a Bloomberg survey, industrial production is projected to grow by 10.8% Y/Y in April, above the 3.9% Y/Y in March. Retail sales are expected to increase by 22.0% Y/Y in April, much higher than the 10.6% Y/Y in March. However, the increases in the year-on-year rate of changes were due to the low base in April last year when Shanghai and other cities in China were under lockdown. On a sequential basis, April industrial production and retail sales are expected to have decelerated from March. Fixed asset investment is expected to rise by 5.7% year-to-date in April versus 5.1% year-to-date in March. Property investment is expected to dip year-to-date by 5.7% from last year.

Japan: High expectations for Q1 GDP, with persistent inflation concerns

Japan’s preliminary GDP for Q1 is due on Wednesday and will provide the latest insight into the health of the economy. Bloomberg consensus expects an improvement to 0.8% Q/Q annualized from 0.1% in Q4 when the economy narrowly avoided a recession. While a broader reopening of the economy in the first quarter and the return of some Chinese tourists may have meant a further uptick in the services sector, exports and manufacturing likely remained weak on the back of weakness in global demand. If domestic consumption weakens substantially despite the government travel subsidies and high winter bonuses, it could continue to highlight the risk of a recession.

April CPI will also be released on Friday which will likely confirm that price pressures remain concerning. Tokyo CPI for April had come in above expectations despite the falling commodity prices and the base effect. Bloomberg consensus expects national CPI for April to come in at 3.5% for the headline from 3.2% previously while the core-core measure (ex-fresh food and energy) is expected to rise to 4.2% from 3.8% in March.

Australia: Jobs, wage data and RBA minutes on tap

Australia’s labor market data is out on Thursday and expected to show the addition of 25k jobs in April after 53k jobs added in March, with the unemployment and participation rates seen steady at 3.5% and 66.7% respectively. Just a day ahead of this release, we also get the Q1 wage price index which could be a key focus as RBA Governor Lowe emphasised the importance of the “evolution of labor costs” to justify the recent increase in the cash rate. A big upside surprise in wage and labor data could continue to suggest a tight job market in Australia, and bring back “sticky” inflation concerns which could be a tricky situation for the RBA and potentially mean more downside for the AUDUSD which has broken below the 50DMA. RBA minutes from the May meeting are also out on Tuesday.

UK: Labor data to keep Bank of England expectations hawkish

The Bank of England has made it clear that the decision on June rate hike will be underpinned by the two sets of wage and inflation data out before the next meeting. The first of these unemployment and wage numbers will be out on Tuesday, with consensus expectations not suggesting any let up in concerns yet. Expectations are for the unemployment rate in the three months to March to hold steady at 3.8%, employment change to remain at 160k from 169k and headline earnings growth to also remain steady at 5.8% from 5.9%, whilst the ex-bonus metric is seen firming up to 6.8% from 6.6%. Firmer data could bring the expectation for a June rate hike from Bank of England higher from a 69% probability for now and bring the focus also on next CPI release on May 24. EURGBP remains on the verge of a breakout on the downside after trading in a range since the start of the year.

Food inflation concerns back in focus

Wheat and corn futures could be in for a volatile week ahead as uncertainty looms over the future of Black Sea trade from Ukrainian ports. The latest talks on extending Ukraine’s grain export deal ended with a pact extension agreement, with Russia reiterating its threat to withdraw from the pact in one week. Heatwave and risks of El Nino are also threatening rice crop output, with Thai farmers asked to cut rice production due to lack of irrigation facilities. Thailand is the world's second-biggest exporter of rice, and this brings risks for rice shortages globally.

Investors scrutinize Walmart, Home Depot, and Target results to assess American consumer health

With 92% of S&P 500 companies having reported their Q1, 2023 earnings in the U.S, investors will closely monitor the forthcoming releases from Walmart (WMT:xnys), Home Depot (HD:xnys), and Target (TGT:xnys) this week to gain insight into the spending power of US consumers. Additionally, investors will be keeping a watchful eye on whether the information technology sector's earnings-beat trend persists, with Cisco (CSCO:xnas) and Applied Materials (AMAT:xnas) among those expected to report.

Mega-cap Chinese Internet companies set to release Q1 Earnings

As the US earnings season draws to a close, Chinese tech giants Tencent (00700:xhkg), Alibaba (09988:xhkg), Meituan (03690:xhkg), and Baidu (09888:xhkg) are gearing up to report their Q1 earnings this week.

Kicking off the earnings parade is Meituan, which is expected to report robust figures on Monday, with Bloomberg consensus predicting a 24% Y/Y increase in Q1 revenues, reaching RMB57.5 billion, and non-GAAP net profit surging to RMB1.9 billion from a loss of RMB3.6 billion in the same period last year. These gains are predicted to be driven by low-double-digit growth in food delivery order volume and substantial margin expansion in this sector. Additionally, in-store service revenue is expected to increase by over 20% Y/Y, as demand for in-person services soars following the easing of Covid restrictions.

On Tuesday, Baidu is set to report a 3.5% YoY decline in revenues, but a 2.2% YoY increase in non-GAAP net income in Q1. Despite pressure to invest in more computing power to support its AI initiatives, Baidu is expected to expand its operating margin modestly.

Tencent, reporting on Wednesday, is forecast to see revenue growth of 7.5% Y/Y, with non-GAAP net income expected to surge by 27%. Growth is expected across online advertising, gaming, and value-added services, with gross, operating, and net profit margins anticipated to expand both Y/Y and sequentially from the previous quarter.

Finally, on Thursday, Alibaba is expected to report Q4 FY23 revenues of RMB210.2 billion, representing a 2.5% Y/Y increase, according to Bloomberg consensus. While Alibaba's e-commerce business faces challenges, AliCloud revenues are expected to outperform. Adjusted net income is expected to increase by 14.5% to RMB24.56 billion, with operating and net profit margins expanding Y/Y but contracting sequentially.

Earnings this week:

Monday: Constellation Software, Siemens Energy, Meituan, Bridgestone, NU Holdings, Trip.com

Tuesday: KBC Group, Vodafone, Nibe Industrier, Sonova, Home Depot, Baidu

Wednesday: Siemens, Munich Re, Commerzbank, Tencent, Experian, Cisco, TJX, Target, Sea Ltd

Thursday: KE Holdings, National Grid, Walmart, Alibaba, Applied Materials

Friday: Deere

 

Key economic events this week:

Monday, 15 May

US                   Empire State manufacturing survey (May)

Eurozone         Industrial production (Mar)

Japan              PPI (Apr)

India                Wholesale prices (Apr)

India                Exports (Apr)

 

Tuesday 16 May

US                   Retail sales (Apr)

US                   Industrial production (Apr)

Eurozone         GDP (Q1, 2nd)

Germany         ZEW Survey (May)

UK                   Employment (Mar)

UK                   Payrolls (Apr)

China               Industrial production (Apr)

China               Retail sales (Apr)

China               Fixed asset investment (Apr)

 

Wednesday 17 May

US                   Housing starts & building permits (Apr)

US                   Manheim used vehicle prices (May)

US                   20-year Treasury bond auction

Eurozone         CPI (Apr, final)

Japan              GDP (Q1)

 

Thursday 18 May

US                   Philly Fed survey (May)

US                   Existing home sales (Apr)

US                   10-year TIPS auction

Eurozone         ECB Economic Bulletin

Japan              Exports (Apr)

 

Friday 19 May

Germany         PPI (Apr)

UK                   GfK consumer confidence index

Japan              National CPI (Apr)

 



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