Take Five: All about the data

LONDON (Reuters) – It’s all about the data. Investors are assessing how much U.S rate hikes are biting, whether euro zone inflation is near peaking and how damaging China’s COVID lockdowns are for the world’s No.2 economy.

So, just as markets end a turbulent May, U.S. payrolls, European inflation and Chinese business activity data could set the tone for June. 

Here’s your look at the week ahead from Kevin Buckland in Tokyo, Ira Iosebashvili in New York and Sujata Rao, Tommy Wilkes and Dhara Ranasinghe in London.

1/ STARTING TO BITE?

Friday’s U.S. jobs data could show whether the Federal Reserve’s cumulative 75 basis points worth of rate hikes since March are being felt by a robust labour market.

Analysts polled by Reuters forecast the economy added 350,000 jobs in May, versus a solid 428,000 in April.

Recession worries are now rising, with data showing weakness in areas such as housing. Some banks warn of an increased chance of an economic downturn.

Yet any signs of a softening in the jobs market may not slow a Fed intent on raising rates as high as needed to squash inflation, a battle Fed chief Powell concedes will bring “pain”. Markets expect 50-bps hikes in June and July.

Graphic: US non-farm payrolls – https://fingfx.thomsonreuters.com/gfx/mkt/xmpjoxjrxvr/Pasted%20image%201653499227275.png

2/ ZERO-COVID, ZERO GROWTH    

    The cost of China’s zero-COVID lockdown strategy is clear, with Premier Li Keqiang decrying the economic damage done and pledging to salvage “reasonable” growth for this quarter.

    China has announced a broad package of economy-boosting policy steps, and Li promised detailed guidelines for their implementation soon.

    Yet many economists project a contraction this quarter after a raft of bleak data, including a soaring jobless rate. The health of factories will be on display with the release of the forward-looking PMIs Tuesday and Wednesday.

And while Shanghai aims for a June 1 exit from a crippling, multi-week lockdown, Beijing is tightening controls. No wonder markets appear to lack confidence – the CSI300 stock index is down 20% this year and the yuan is not far off its weakest levels since 2020.

Graphic: China exports, credit & GDP – https://fingfx.thomsonreuters.com/gfx/mkt/12/6912/6843/Pasted%20Image.jpg

3/ A HEADACHE CALLED INFLATION

Euro area inflation likely rose to another record high of 7.6% in May, versus 7.4% in April, a “flash” estimate on Tuesday is forecast to show.

This should seal the case for policy normalisation at the European Central Bank, which meets on June 9.

Economists and markets expect a 25-bps hike in July but a very strong inflation print may fuel talk of a bigger move, which some ECB officials are already pushing for.

The United States, Canada and New Zealand have opted for larger 50-bps rate hikes, given inflationary pressures they had underestimated. The ECB hasn’t kicked off its hiking cycle yet and with inflation well above its 2% target, it may be time to get moving.

Graphic: Euro zone inflation well above its 2% target – https://fingfx.thomsonreuters.com/gfx/mkt/zdpxowadmvx/inflation2505.PNG

4/ SELL IN MAY? KIND OF

The sell-in-May-and-go-away adage applies to equities and yes, investors dumped stocks, especially those listed on the tech-heavy Nasdaq.

But softer data have brought buyers back to bonds, so equities have bounced. Yields on the global Bloomberg-Barclays index have slipped over 10 bps in May.

Still, there is no sign of any monetary policy respite, with Australia, New Zealand, the United States and Britain all upping rates in May to stamp on inflation.

June will bring more of the same – a 50-bps rate hike in Canada and the United States, and a likely quarter-point Bank of England move. Rate-hike laggards, the ECB and Switzerland, should lay out policy-tightening plans.

But listen to rate-setters’ language. Some reckon the Fed may signal a pause if data worsens. Sell in May could give way to buy in June.

Graphic: World stocks end a volatile May – https://fingfx.thomsonreuters.com/gfx/mkt/movanzdldpa/stx2605.PNG

5/ PEAK DOLLAR?

After soaring to two-decade highs, the dollar rally has gone into reverse. Against a basket of currencies it has fallen 3% from mid-May peaks, while the euro has rebounded to a one-month high. Investors are worried the U.S economy may not prove as resilient to a downturn as they thought, should interest rates keep rising.

Added to that, ECB boss Christine Lagarde just signalled that an end to negative interest rates is round the corner – showing that even rate hike-laggards are joining the tightening party. Few investors are willing to call a dollar peak just yet – another tumble on financial markets could see it bid up as a safe-haven once again – but most will keep close tabs on data to see how the U.S. economy is faring.

Graphic: King dollar – https://fingfx.thomsonreuters.com/gfx/mkt/byprjdqgape/King%20dollar.JPG

(Compiled by Dhara Ranasinghe; Editing by Nick Macfie)