Introduction

Going into what may be escalating rounds of tariffs and counter-tariffs, global economic data appear to be slumping whether employment in the US or output in Germany. Global price data are also going into reverse, well not quite reverse but showing lower rates of inflation to re-evoke the technical term "disinflation", a word that usually appears during economic downturns. But disinflation is not yet the theme for central banks which are fighting against it with increasing intensity.

The Economy

Monetary policy

The Reserve Bank of Australia cut its main policy rate on Tuesday as expected by 25 basis points to a new record low of 1.25 percent. Policy had been on hold since mid-2016 but recent comments from RBA officials strongly indicated they saw a rate cut as necessary to push inflation back toward their 2 to 3 percent target range. Headline inflation has been below target for the last three quarters and for nine of the eleven quarters since the previous change in the policy rate. RBA's statement said the outlook for the global economy remains "reasonable" but cautioned that downside risks from global trade disputes have increased. The outlook for domestic growth was little changed with the bank's central scenario still calling for the economy to expand by around 2.75 percent in both 2019 and 2020. The outlook for household consumption was again cited as the main domestic uncertainty.

The latest characterization of the labor market was more subdued than the April statement. In particular, the labor market was no longer described as "strong" (the 2 tenths increase in April's unemployment rate to 5.2 percent was cited) and policy makers appeared to be more cautious about the outlook for wage growth. Reflecting these assessments, officials concluded that the Australian economy could likely sustain a lower level of unemployment without triggering an unwelcome jolt higher for inflation. RBA Governor Philip Lowe said the decision to lower rates was not in response to a deterioration in the outlook and that he expects the economy to strengthen later in the year. Lowe made his comments ahead of the subsequent release of first-quarter GDP which slowed 5 tenths to a year-on-year 1.8 percent growth rate, the lowest showing for Australia in 10 years.

The Reserve Bank of India cut its benchmark repurchase rate on Thursday by 25 basis points to 5.75 percent, in line with expectations. This follows similar cuts at its two most recent meetings in April and February and takes the rate to its lowest level since July 2010. Officials also changed their description of the policy stance from "neutral" to "accommodative". Since the RBI's last policy meeting, incoming data have shown year-on-year GDP growth slow from 6.6 percent in the fourth quarter to 5.8 percent in the first quarter in what was the weakest showing since late 2014. Industrial production has also slowed while PMI survey data have shown mixed results. Headline inflation has picked up slightly from 2.57 percent in February to 2.86 percent in March and 2.92 percent in April but remains well below the mid-point of the RBI's 2 to 6 percent target range. Looking ahead, RBI officials lowered their GDP forecasts in response to the weaker data. GDP is now forecast to grow 7.0 percent in the 2019-20 fiscal year, down from their previous forecast of 7.2 percent. For the first half of the 2019/20 fiscal year, officials now forecast inflation will be between 3.0 and 3.1 percent, up from the previous forecast of 2.9 to 3.0 percent, and between 3.4 and 3.7 percent in the second half of the fiscal year. June's decision does suggest that officials remain open to lowering rates again if inflation doesn't respond as expected.

The European Central Bank didn't take any action at its meeting on Thursday but, in a surprise move that reflects concern over the Eurozone economy, extended forward guidance from the end of 2019 to the first half of 2020. This means that the benchmark refi rate is now officially expected to be held at zero percent for an additional six months. The deposit rate and marginal lending rate, both in the negative column at minus 0.40 percent and minus 0.25 percent respectively, will also be held at current levels over the same period. At the same time, the central bank reaffirmed its intention to keep its quantitative easing stance unchanged by reinvesting principal payments from maturing securities for an extended period of time past the date when the bank eventually expects to start raising rates.

Like other central banks, economic forecasts are wavering. The ECB sees Eurozone GDP growth at 1.2 percent this year, up a tick from the call made in March, but at 1.4 percent in both 2020 and 2021, down from prior predictions of 1.6 percent and 1.5 percent. And despite the downgrades for the coming years, the risk bias is still tilted to the downside. In a similar vein, HICP inflation this year is now projected at 1.3 percent, up from 1.2 percent in March but at 1.4 percent in 2020 and down from 1.5 percent in the last projection (the 2021 forecast is unchanged at 1.6 percent). Indeed, the big worry for the ECB remains inflation. Not only is core inflation (just 0.8 percent on the narrowest measure last month) still far too weak but inflation expectations, a key metric for the central bank, are declining as well.

Against this backdrop, the latest announcement reinforces the impression that the ECB regards interest rates as being very close to their lower bound. A minor cut at some point is still an option (possibly alongside a tiered deposit rate to help banks' already ailing profitability), but the onus for any significant additional accommodation would seem to be on fresh non-standard policy measures. And next time, these might even involve buying equities. Whatever happens next, it looks as if the ECB's newly installed Chief Economist Philip Lane, formerly the Central Bank of Ireland Governor, has his work cut out for him.

Inflation

The ECB may have edged this year's forecast higher, but Eurozone inflation fell surprisingly sharply in May. The provisional report put the annual rate at just 1.2 percent, down 0.5 percentage points to more than reverse April's 0.3 percent bounce. May equaled the lowest yearly post since February 2018. Distortions caused by the timing of Easter have had a significant impact on the monthly profile since March but May's results are clearly soft. Importantly, the deceleration in the headline rate was largely mirrored in the core measures. Excluding energy, food, alcohol and tobacco, the narrowest gauge also declined 0.5 percentage points to just 0.8 percent to fully unwind the previous period's jump and match its weakest showing since April last year. Excluding only energy and unprocessed food, the rate was down 0.4 percentage points at 1.0 percent, similarly reversing all of April's spurt. Not surprisingly, the main negative came from services where the removal of Easter price hikes saw inflation slide from 1.9 percent to 1.1 percent, in line with its March level. Non-energy industrial goods actually edged a tick higher but, at only 0.3 percent, the rate here remained uncomfortably close to zero. Elsewhere, energy (3.8 percent after 5.3 percent) had a negative impact while food, alcohol and tobacco (1.6 percent after 1.5 percent) provided a minor lift. If inflation doesn't show improvement in June, speculation about some form of additional monetary accommodation by the ECB would no doubt be given a boost.

Employment

Moving forward rate-cut plans is a more upfront theme in the US where, unlike Europe, policy rates actually have room to move lower. And this dovish US theme, supported by extended weakness in industrial production and uneven results for consumer spending, got a major boost from a poor showing in what had been (and probably still is) the US economy's greatest strength – the labor market. Nonfarm payrolls rose only 75,000 in May to come in below Econoday's consensus range. Punctuating the trouble were sizable downward revisions to April and March that totaled 75,000. Data on wage inflation came in at the bottom of the consensus ranges, at only a 0.2 percent monthly increase for average hourly earnings and, in the lowest reading since last September, a slumping 3.1 percent gain for the year-on-year rate.

The US unemployment rate remains very low, unchanged at a lower-than-expected 3.6 percent with the pool of available workers low and holding steady at 10.9 million. Subdued wage gains won't help to pull up the participation rate which was also unchanged at 62.8 percent. And subdued gains show themselves in the payroll breakdown headlined by a soft 3,000 rise for manufacturing. Construction payrolls rose only 4,000 which contrasts sharply against 30,000 and 15,000 gains in the prior two months while government payrolls, after April's 19,000 jump, fell 15,000 in the latest report. Retail, where traditional stores keep closing, extended its long stretch of declines with an 8,000 payroll contraction.

For the Federal Reserve, open talk of a near-term rate cut is likely to pick up force ahead of the mid-month FOMC. Against a backdrop of soft inflation, stalling employment growth at a time of immediate trade risks and approaching Brexit risks may well point to the need, at least for the doves, for a little policy insurance. A special note on the forecasting for the May employment report is that economists were cutting their estimates going into Friday's results, reflecting a very clear signal of abrupt weakness from Wednesday's ADP data (Automated Data Processing), a report that is often hit and miss but definitely was right on in May.

Manufacturing

But not all the week's news is uniformly bad. Prospects for Germany's manufacturing sector took a turn for the better in April. Following an upwardly revised 0.8 percent monthly rise in March, orders increased a further and stronger than expected 0.3 percent with capital goods showing special strength. This marks the first back-to-back gain in headline orders since September and October last year and boosted annual growth, as tracked in the accompanying graph, from minus 5.9 percent to minus 5.0 percent. Yet details on the domestic market are not encouraging, showing a 0.8 percent and fourth straight monthly fall. April's strength (in what contrasts with general worries about exports) came courtesy of overseas demand which rose 1.1 percent after a 4.8 percent spurt in March. Nevertheless overall orders in April, following a cumulative 6.1 percent slump in January and February, were still 0.6 percent below their average level in the first quarter. The worst may be over but there is some way to go for the sector to find its feet again, especially with domestic demand so soft. The near-term outlook for German industrial production remains uncertain.

The rise in May orders should be giving a boost to ongoing German production which, turning back to look at April, were in need of a boost. Goods production in Germany slumped in April, down a much larger than expected 1.9 percent to equal the steepest monthly decline since August 2014. Year-on-year contraction sank from minus 0.8 percent to also minus 1.9 percent. Unlike orders in April which got a boost from capital goods, monthly production of capital goods nosedived 3.3 percent in May. Yet weakness in the report was broad based with consumer goods down 0.8 percent, intermediates down 2.1 percent and with energy struggling at minus 1.1 percent. Only construction, at a modest 0.2 percent, saw any rise. As a result, output for the report's manufacturing component decreased a steep 2.5 percent. April's report puts overall industrial production an ominously large 1.5 percent below its average level in the first quarter. This means that May and June will need to see a major rebound if the industrial sector is not to subtract from second quarter GDP growth. ECB Chief Mario Draghi indicated on Thursday that the central bank's decision to extend its forward guidance was due in part to softness in Eurozone manufacturing. April's data out of Germany pose the risk that perhaps more aggressive policy measures may be needed.

PMI data in the week were mixed to soft with Canada strong, the Eurozone steady, and Japan and Switzerland weak. Also weak was May's PMI for UK manufacturing, at 49.4 which was down sharply from April's 53.1 and below the 50-expansion threshold for the first time since July 2016. Here, Brexit effects appear to be at play. May's result follows the announcement of the October extension to Brexit which seemed to put a lid on precautionary stockpiling. Hence, the rate of increase in finished goods stocks slowed markedly and pre-production inventories dropped for the first time in ten months. And new orders declined for the first time in seven months and at one of the fastest rates in the last six-and-a-half years. Both the domestic and overseas markets contracted which contributed to falls in output and, for a second successive month, employment as well. That said, UK manufacturers remain optimistic and nearly 49 percent expect output to be higher over the coming year. Input costs edged lower but factory gate inflation climbed to a 3-month high. If nothing else, the May results underline what may prove to be the temporary buoyancy of prior PMIs. Missing the earlier boost to activity from Brexit-inspired stock building, the latest survey probably offers a more meaningful guide to underlying developments and trends. As such, it warns that the solid monthly gains in manufacturing output reported by the Office for National Statistics in February (1.0 percent) and March (0.9 percent) may prove only transitory. Ahead of their June 20th meeting, policy makers at the Bank of England will be taking note.

One full year after tariffs and counter-tariffs between the US and many of its trading partners first broke out, the impact on global economic data has generally been elusive to pinpoint. Yet slumping global growth along with specific declines for exports probably betray an overall tariff effect. Should tariff actions indeed begin to accelerate, data out of Asia may well show some of the most immediate and significant effects. Hong Kong's latest PMI fell from moderate contraction of 48.4 in April to significant contraction of 46.9 in May, the lowest level since June 2016 and a 14th straight sub-50 showing. Respondents in the sample attributed the extending deterioration in business conditions to the re-escalation of trade tensions between the US and China. Output was again reported to have fallen in May while new orders fell to their lowest level in nearly three years, largely reflecting reduced business from mainland China. Respondents in the Hong Kong sample also reported greater pessimism for the 12-month outlook.

Confirmation of overall slowing is already being signaled by the global PMI. Composite worldwide activity slowed sharply in May to a 51.2 reading that is 9 tenths below April and one month short of a 3-year low (since June 2016). Services components slowed in the month while manufacturing, which the report specifically warns is being hurt by trade tensions, continued to stagnate. The report's measure of business confidence is the weakest in data for this question going back seven years. Keep this report handy as policy makers may well cite these specific results as early indications of trouble.

International trade

Updates on cross-border trade were posted by Germany and the US in the week and both showed slippage going into the new tariff escalation. Weakening exports shaved Germany's April trade surplus to €17.0 billion from €19.9 billion in March. This was the first downturn in three months and the least black ink for Germany since last July. Exports were down 3.7 percent on the month to €108.7 billion as seen in the graph, easily wiping out March's 1.6 percent gain, while imports also declined, down 1.3 percent. Annual growth for exports dropped from 2.0 percent to minus 0.5 percent and the first negative showing since December. For imports, they slowed from 4.7 percent to 2.1 percent growth, a 4-month low. April results are unfavorable and warn that the 0.2 percentage point boost provided by total net exports to real GDP growth in the first quarter may not be repeated in the current quarter.

For the US, April was a very weak month in cross-border trade headlined by a monthly deficit of $50.8 billion. Exports fell 2.2 percent in the month to $206.8 billion while imports also fell 2.2 percent, to $257.6 billion. The bilateral deficit with China totaled $26.9 billion in April, and though higher than March's $20.7 billion, nevertheless extends a narrowing trend. This deficit has averaged $26.0 billion per month so far this year vs $34.9 billion per month last year. Exports of foods & feeds rose slightly in April to $11.2 billion while imports of foods & feeds fell slightly to $12.8 billion. Exports were otherwise mostly lower including a drop for capital goods that reflected a sharp drop for civilian aircraft exports in what may be emerging 737 effects (and a reminder that the aircraft's grounding may well be an emerging risk for US manufacturing). Imports mostly fell including declines for vehicles and consumer goods. April's data mark a signpost for trade activity going into May, a month when US trade friction with China and Mexico heated up significantly. Though declines for imports will help the US trade balance, declines for exports will not.

Markets: Oil the next risk for disinflation?

Policy makers across the globe are hoping to keep inflation from slipping any further but a central key for inflation is not looking favorable. Oil hasn't been getting any lift from the exclusion of Iranian oil, instead prices have been sinking sharply and suddenly from the mid $70s for Brent at mid May to the low $60s so far this month. Oil inventories in the US have been building and expectations for global growth, as evidenced by the recent central bank forecasts not to mention the global PMI, are on the slide. Putting the supply side aside, oil prices will ultimately turn on the strength or weakness of demand, suggesting that the ongoing price drop is tied less to special factors within the oil industry and more to the general outlook for the global economy. Economics is a play of offsetting balances and normally only those in the oil industry would ever want to see the price of oil climb, but it wouldn't hurt central banks and their efforts if oil were to give inflation at least a little lift.

The increasing move of central banks to easier monetary policy is part of the play of balances, between weakening economic growth which is a negative for corporate profits and lower interest rates and more favorable borrowing conditions which are positives for profits. Stocks appeared to respond early in the week to the cut by the Reserve Bank of Australia and added further to their gains on Friday following the weak US employment report, a report that at once points to economic slowing but also to more accommodative Federal Reserve policy. Japan's Nikkei rose 1.4 percent in the week to lift its year-to-date gain to a still moderate 4.3 percent. Germany's Dax rose a weekly 2.7 percent with this year-to-date gain very strong at 14.1 percent. The Dow's gain so far this year is also very positive, at 11.4 percent. So, the more central banks cut rates the higher stock markets will go? Perhaps, provided that any slump in economic growth is balanced and limited.

The bottom line

This is an interesting time to watch economic indicators as production and trade flows respond to changes in cross-border dynamics. The approaching risk of course is that shifts in these dynamics may accelerate very abruptly as the US and China prepare new actions and counter-actions and as the US takes action against Mexico beginning in the coming week with an initial 5 percent tariff on the country's imports. Of building significance for the markets and global outlook will be the preparations for the Group of 20 meeting at month end where US, Chinese and Mexican officials will all be meeting and whether a breakthrough for trade peace is won or an accelerated round of punitive actions is about to begin.

**Jeremy Hawkins and Brian Jackson contributed to this article

Week of June 10 to June 14

The status of Chinese trade fittingly opens the week and outright contraction for both exports and imports is the call for May's report. Japanese machine orders will follow on Wednesday as will the latest consumer price data out of China. US consumer prices then follow and improvement for the core rate could help cool what are building expectations for a Federal Reserve rate cut. The latest assessment from the Swiss National Bank, whose rate has long been in the negative column, will be Thursday's highlight as will Eurozone industrial production. Major highlights are set for Friday beginning with the monthly round of Chinese data on industrial production, fixed asset investment, and retail sales which in April were all on the soft side. Winding up Friday will be industrial production and retail sales out of the US where rebounds out of the minus columns are forecast, results that would give policy makers on the FOMC some breathing room going into their policy debate at the June 18 and 19 meeting.

Chinese Merchandise Trade Balance for May (Release Time Not Set)

Consensus Forecast: $28.5 billion

Consensus Range: -$6.2 billion to $33.0 billion

Exports, Year-on-Year

Consensus Forecast: -3.9%

Consensus Range: -8.0% to 4.0%

Imports, Year-on-Year

Consensus Forecast: -2.3%

Consensus Range: -10.2% to 11.4%

The May consensus for the merchandise trade balance is a surplus of US$28.5 billion following a $32.6 billion surplus in April. May exports are expected to fall a year-on-year 3.9 percent with imports expected to dip 2.3 percent.

UK Labour Market Report for May (Tue 04:30 EDT; Tue 08:30 GMT; Tue 09:30 BST)

ILO Unemployment Rate,

Consensus Forecast: 3.8%

Average Weekly Earnings, Year-over-Year,

Consensus Forecast: 2.9%

The ILO unemployment rate is expected to hold unchanged in May at 3.8 percent. Average hourly earnings including bonuses, which were subdued in April, are expected to slip a further 3 tenths to a year-on-year 2.9 percent.

Japanese Machine Orders for April (Tue 19:50 EDT; Tue 23:50 GMT; Wed 08:50 JST)

Consensus Forecast, Month-to-Month: 0.5%

At 0.5 percent year-on-year, forecasters see Japanese retail sales in April adding to March's unexpectedly strong 3.8 percent monthly increase. March data showed strength for non-manufacturing orders but weakness for manufacturing.

Chinese CPI for May (Tue 21:30 EDT; Wed 01:30 GMT; Wed 09:30 CEST)

Consensus Forecast, Year-over-Year: 2.7%

Consensus Range: 2.0% to 2.9%

After rising a yearly 2.5 percent in April, the consensus for Chinese consumer prices in May is a yearly increase of 2.7 percent.

US Consumer Price Index for May

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: 0.1% to 0.4%

Consumer Price Index

Consensus Forecast, Year-on-Year Change: 1.9%

Consensus Range: 1.8% to 2.2%

CPI Core, Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.2%

CPI Core, Less Food & Energy

Consensus Forecast, Year-on-Year Change: 2.1%

Consensus Range: 2.0% to 2.2%

Consumer prices were subdued in April and forecasters see only limited pressure in May, at a consensus 0.1 percent increase overall and a gain of 0.2 percent for the ex-food and ex-gas core. Year-on-year rates are expected at 1.9 percent overall (down 1 tenth from April) and 2.1 percent for the core (unchanged from April).

Swiss National Bank Monetary Policy Assessment (Thu 03:30 EDT; Thu 7:30 GMT; Thu 09:30 CEST)

Consensus Forecast, Change: 0 basis points

Consensus Forecast, Level: -0.75%

The Swiss National Bank is expected to keep its key deposit rate at minus 0.75 percent. At its last meeting in March, the bank reinforced its willingness to intervene in the FX market to fight unwanted appreciation in the Swiss franc.

Eurozone Industrial Production for April (Thu 05:00 EDT; Thu 09:00 GMT; Thu 11:00 CEST)

Consensus Forecast, Month-to-Month: -0.4%

Consensus Forecast, Year-over-Year: -0.4%

Eurozone Industrial production has fallen in five of the last six reports and no move higher is expected for April, at a consensus decline of 0.4 percent. Year-on-year, forecasters also see production declining 0.4 percent following minus 0.6 percent in March.

Chinese Fixed Asset Investment for May (Thu 22:00 EDT; Fri 02:00 GMT; Fri 10:00 CST)

Consensus Forecast, Year-to-date: 6.0%

Consensus Range: 5.5% to 6.5%

Fixed asset investment rose at a lower-than-expected 6.1 percent year-to-date in April for a 2 tenths decline against from March. Forecasters see May fixed asset investment rising 6.0 percent in May.

Chinese Industrial Production for May (Thu 22:00 EDT; Fri 02:00 GMT; Fri 10:00 CST)

Consensus Forecast: 5.4%

Consensus Range: 4.8% to 5.8%

Industrial production in April, at a year-on-year increase of 5.4 percent, fell short of expectations on declines in manufacturing. Forecasters see May production holding at 5.4 percent.

Chinese Retail Sales for May (Thu 22:00 EDT; Fri 02:00 GMT; Fri 10:00 CST)

Consensus Forecast: 8.3%

Consensus Range: 6.9% to 9.2%

Retail sales in May are expected to rise a year-on-year 8.3 percent vs unexpected weakness and a 16-year low in April at 7.2 percent. Weakness in April was broad based.

US Retail Sales for May (Fri 08:30 EDT; Fri 12:30 GMT)

Consensus Forecast: 0.7%

Consensus Range: 0.5% to 0.9%

Retail Sales Ex-Autos

Consensus Forecast: 0.4%

Consensus Range: 0.1% to 0.6%

Retail Sales Ex-Autos & Gas

Consensus Forecast: 0.4%

Consensus Range: 0.1% to 0.5%

Retail Sales Control Group (Ex-Food Services, Ex-Autos, Ex-Gas, Ex-Building Materials)

Consensus Forecast: 0.4%

Consensus Range: 0.1% to 0.5%

Solid acceleration is what forecasters see for May retail sales, at a headline consensus increase of 0.7 percent vs a much weaker-than-expected April that was headlined by a 0.2 percent overall decline. Unit vehicle sales rose sharply in May which looks to hold down ex-auto sales where a 0.4 percent rise is the call. Ex-autos & ex-gasoline sales are also expected at 0.4 percent as is the control group, also at 0.4 percent.

US Industrial Production for May (Fri 09:15 EDT; Fri 13:15 GMT)

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: -0.1% to 0.5%       

Manufacturing Production

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: -0.1% to 0.3%

Capacity Utilization Rate

Consensus Forecast: 78.0%

Consensus Range: 77.8% to 78.4%

Manufacturing production has been very weak, falling a sharp 0.5 percent in April in what was a fourth straight poor showing. Forecasters see manufacturing improving in May with a modest 0.2 percent gain and with headline industrial production also seen rising 0.2 percent. Capacity utilization is expected to tighten to 1 tenth to 78.0 percent.