The Week Ahead: Goldilocks reappears amid more green shoots

It’s another busy week starting May 6, after the packed calendar of risk events over the previous few days. Numerous central bank meetings allied to inflation data will keep the markets on their toes.

Last Friday’s monthly US jobs data has left many commentators purring about a ‘goldilocks’ report. That is a scenario of increasing growth momentum with soft inflation,combined with easy monetary policy. In essence, wegot more evidence of the continued strong labour market as the number of jobs created in April significantly beat forecasts, whilst wages stagnated so revealing little inflationary pressures. The Fed is also did its bit by revealing no changes to policy in its latest meeting with no policy bias in either direction.

All that said, the market may be more sensitive to inflation disappointments given Powell’s ‘transitory’ phrasing last week. It seems underlying costs pressures are building, and this may force the Fed’s hand further into the second half of the year.Focus will therefore be on the US CPI reading on Friday which could well begin to rebound or at least stabilisewith the core rate unchanged at 2.1% y/y.

Trade talks between the US and China will restart on Wednesdayin Washington with increased speculation of thepossible announcement of a deal at the end of this week. A summit between President Trump and Xi Jinping is then mooted for later this month or early June as concessions are supposedly being made by both sides to phase out some of the bilateral tariffs. This would certainly lift a lot of uncertainty hanging over the global economy and hopes are high.

Both the Reserve Bank of Australia (RBA) and the of New Zealand (RBNZ) hold policy meetings this week. These are the two most dovish central banksin the G10 according to market pricing with rate cuts anticipatedat potentially these meetings or upcoming ones. Dovish comments from both banks on the back of weak inflation, and the global slowdown have intensifiedexpectations. The question is whether thebanks are more patient and evaluate the stabilisation in global markets and economic conditions. The ripple effect of a less dovish sounding Federal Reserve may also mean holding off on any adjustments.

In Europe, we get some German industrial production and factory orders data. Ordinarily, this isn’t anything particularly exciting, but both figures offer an important signal on how European industry and German growth in general is faring in Q1. The recent rebound in the former conflicts with dismal manufacturing PMIs. However, there are hopes now for stabilisation and with it some respite for the euro, which importantly closed on a weekly basis above the previous cycle low.

Finally, closer to home in the UK, Q1 GDP is released on Friday with 0.5% q/qexpected, in line with the Bank of England’s latest forecast. This print will be distorted by Brexit stockpiling and business investments are due to decline once again, having had negative growth in all four quarters last year. Have a great trading week!