The early part of the week will see lower liquidity with the US and UK markets closed on Monday, and China away on both Monday and Tuesday.

US: -

While the market is almost certain that the FOMC will hike rates by 25bps at its mid-June meeting, Fed Funds Futures are still only implying a rate of around 1.25% in January 2018, indicating doubts around the Fed’s March guidance that it is on course to lift rates to 1.25-1.50% in 2017.

In particular, per the Fed’s May meeting minutes, it is becoming clear that some officials want to see more evidence that the Q1 weakness was indeed transitory before re-committing to a hawkish trajectory.

The growth landscape has shown some positive signs: GDP in Q1 was revised up by 0.3ppts on the second look to 1.20%, and the forward-looking nowcasts from the Atlanta Fed and the NY Fed are tracking at a healthy pace in Q2, at 3.70% and 2.20% respectively.

However, the inflation outlook is a slightly more worrying for some Fed officials, with both PCE and core PCE easing away from the Fed’s forecasts made in March. Next week (Tue), both are expected to soften further on a YoY basis (consensus looks each to come in 0.1ppts lower at 1.70% and 1.50% respectively).

While Fed’s Kaplan (voter) still believes tspanee 2017 hikes is appropriate, he has been cognizant of the ‘slow and uneven’ progress towards the Fed’s 2% inflation goal; Kaplan intends to be “patient in critically assessing upcoming data to evaluate whether we are continuing to make progress in reaching our inflation objective.”

Similarly, Harker (voter) this week suggested a June hike was a “distinct” possibility, but he would be ‘worried’ by a downside surprise to inflation. And Kashkari (voter) said low inflation was a specific “concern”, and there was still scope for further slack erosion before it begins stoking inflationary pressures.

These worries will see more importance placed on inflation-sensitive data, particularly wage-related data. And as such, personal income data (Tue) may have added weight: the median forecast looks for a 0.40% rise in April.

There is a degree of optimism around the wage growth data in this week’s Employment Situation Report: analysts look for average hourly earnings to rise by 2.70% in May from 2.50% in April.

While signs of firming wages will be welcomed, it has been noted that the pace of wage growth in this recovery is lagging previous cycles, so may not be enough to satisfy some of the Fed’s more dovish contingent.

Elsewhere, the market expects 177k nonfarm payrolls to be added to the US economy in May, and for the unemployment rate to hold at 4.40%.

Consumer confidence (Tue) has been punchy as of late, but has been easing from 16-year highs. While further slippage is seen in May, the index is likely to remain elevated by historic standards, driven by a buoyant labour market and surging equity prices.

Finally, the ISM manufacturing report for May (Thu) is likely to ease a touch. Last month, the headline fell by 2.4 points. Although new orders remained above 50, it dropped by 7 points, suggesting there is a chance of some easing in this month’s data.

Regional manufacturing surveys have generally been mixed, with the NY Empire Fed survey disappointing to the downside, while the Philly Fed put in an encouraging rebound. Europe: -

EUROPE: -

Wednesday will see the preliminary release of Eurozone CPI for May. Analysts expect the headline Y/Y reading to moderate to 1.5% from 1.9%, as Easter related price rises drop out of the index and fuel prices moderated. As a result, we expect the headline rate to fall back to 1.6% y/y from April’s 1.9%. This is unlikely to worry the European Central Bank (ECB) as we head towards its June meeting, (as such seasonal factors should be somewhat predictable), with policy makers noting that the recovery in the single currency zone continues to firm.

Wednesday also brings the eurozone unemployment rate for April, with analysts looking for a downtick to 9.4% from 9.5%.

Thursday sees the final reading of the Eurozone manufacturing PMI from May. The flash release highlighted the fastest rise in production since 2011, with order backlogs expanding at the fastest rate since 2010. Input prices growth moderated, and finished product inflation slowed. The employment sub-metric recorded a record rise.

UK: -

The only release of note comes on Thursday in the form of May’s manufacturing PMI: analysts are looking for growth to accelerate to 57.3 from 56.1. The UK manufacturing PMI rose tspanee points to 57.3 last time out as output and new orders expanded at faster rates, with stocks of purchases rising at survey record pace. Markit noted that “There was also a solid bounce in new export business, as the weak sterling exchange rate helped manufacturers take full advantage of the recent signs of revival in the global economy, and especially the eurozone, which is enjoying its best growth spell for six years. Although price pressures remain elevated, input cost inflation has eased significantly since hitting a record high in January. “Although only accounting for 10% of the economy, the upturn in the manufacturing sector represents some welcome good news after the sharp slowing in GDP seen in the first quarter. The big question is whether this growth spurt can be maintained, especially given the backdrop of ongoing market volatility and a number of political headwinds such as elections at home and abroad. Other surges seen since the middle of last year have generally proved short-lived, as weak wage growth sapped consumer spending. If this happens again it will inevitably constrain manufacturing, even as the investment and intermediate goods producing sectors continue to expand.”

Asia Pacific: -

The focus in China will fall on May’s PMI set. Wednesday will bring the release of the official manufacturing and non-manufacturing PMIs. Analysts expect the manufacturing release to moderate to 51.0 from 51.2. April’s survey saw the demand sub-metrics moderated weaken across the board, while employment slipped into contractionary territory. The manufacturing sector is also losing a tailwind from rising producer price inflation, which helped fuel strong industrial profits but is now coming off from more than five year highs. With no expectations for the non-manufacturing PMI the point of reference will be April’s release which stood at 54.0. These releases have generated less market reaction in recent times as fears over a Chinese hard economic landing have receded. Thursday will bring the release of the Chinese Caixin Manufacturing PMI, with analysts looking for a relatively steady 50.2 against a prior 50.3. Last month’s release saw output and new orders both increased at the softest rate since last September, staff numbers were cut at quicker pace and business confidence weakened for the second consecutive month. Looking forwards, Chinese economic growth is expected to slow as authorities intensify their battle to cool the property sector and regulators take steps to contain financial risks.

The Japanese docket is centred on Tuesday, which brings March’s labour market report. Analysts are looking for a steady unemployment rate of 2.8% and a modest uptick in the job-to-applicant ratio, with the median estimate looking for 1.46 from 1.45. March’s retail sales data will also be released, with analysts looking for a 0.1% M/M fall, from last month’s 0.2% gain. We will also get the flash industrial production release during the week.

The Australian docket is headlined by the Q1 private capital expenditure release, which is a direct input for the GDP release. Analysts are looking for 0.5% Q/Q from a 2.1% fall in Q4. Eyes will also be on the second estimate for 2017/18 total capital expenditure after the initial AUD 80.6bln forecast. ANZ are looking for “plant and equipment investment to rise in line with capital goods imports and an improved outlook, given strong business conditions and confidence.” Thursday also brings the release of April’s retail sales data, with the median estimate looking for an increase of 0.3% M/M after last month’s fall of 0.1%. The trend seems to be weak, as consumer confidence moderates and wage growth remains muted.

Across the Tasman in New Zealand focus will fall on the releases of the Reserve Bank of New Zealand’s (RBNZ) Financial Stability Report (FSR). TD Securities are looking for similar sentiment to the November FSR with focus on housing and a highly leveraged dairy sector (although Fonterra’s recent dairy price forecast will alleviate some of the worry). Thursday will bring the Q1 terms of trade of trade with expectations of a solid 4.0% rise, on the back of the dairy price jump.