Mixed Signals, Murky Outlook
The US economy sends mixed signals as spending cools and trade rebounds. Canada’s GDP overshoots but hides weak demand. Japan faces sticky inflation, and Australia braces for soft Q1 growth. Global uncertainty and policy tension persist.
Weekly Highlights
Big jump on tariff relief
Moderation after strong March
Likely marks low for the year
Stronger than expected
First decline since Q4 2023
Drop in residential investment
Very elevated
Within RBA’s target band
Downside risks for Q1 GDP
US: Mixed Signals in Latest Data
Unsurprisingly, US macro data continues to send mixed messages. Consumer sentiment improved following tariff relief, but personal spending cooled as consumers took a break following a torrid spending month in March. The labor market appears to be fraying further at the edges as continuing claims touched a new post-COVID recovery high. Housing demand remains challenged by unaffordability and uncertainty; the bright side is that house price inflation is cooling, and this may eventually offer a disinflationary impetus. First-quarter GDP growth was revised marginally better, but the economy still contracted 0.2% saar (seasonally adjusted annualized). Consumer spending, especially on services, was revised lower.
On the other hand, advanced trade data for April showed an incredible reversal in performance, with the trade deficit essentially halving to $87.6 billion. The gyrations in the trade data are quite extraordinary, but the latest information suggests that trade will contribute positively to growth in Q2, having been a major detractor in Q1. For what it’s worth, the Atlanta Fed GDPNow tracker rose to 3.8% saar on May 30, following the release of the trade data.
There was good news on inflation but, sadly, nobody is celebrating much given the likelihood that tariffs (some tariffs will undoubtedly survive the latest legal challenges) suggest the April inflation prints may be the lows for the year. Headline PCE (personal consumption expenditures) inflation and core PCE each moderated two-tenths to 2.1% YoY and 2.5% YoY, respectively. These were the corresponding lowest readings since February and March 2021.
Canada: GDP Overshot with Signs of Weakening Domestic Demand
On the surface, the economy is expanding strongly, with a better-than-expected Q1 GDP print. But the details suggest otherwise.
GDP grew by 2.2% QoQ saar (seasonally adjusted at annual rates) in Q1, well above market expectations of 1.7%. Q4 growth was revised lower to 2.1% from 2.6%. Despite higher unemployment, trade policy uncertainty, and a weaker global growth outlook, the flash estimate for April from Statistics Canada showed a 0.1% monthly increase. Given the GDP overshoot and a modest 0.1% estimate for GDP growth in April, a June rate cut now seems unlikely.
Unpicking the details raises questions. Much of the growth came from business inventories as well as net exports, which contributed around 1.4 ppts and 0.7 ppts respectively, in saar terms, reflecting front-loading ahead of tariffs. We expect that this growth will fade in coming months. Meanwhile, household consumption expenditure softened to 1.2% QoQ, from 4.9% in the previous quarter, driven by weaknesses in both goods and services. Household spending will likely further weaken into Q2 as high uncertainty, rising unemployment, and slowing population growth continue to weigh on aggregate demand.
Business investment also dropped by 3.1% QoQ, following a strong gain of 9.4% in the previous quarter. The decline was mainly driven by a sharp contraction in residential investment (-10.9%, from 16.8% in Q4), which we expect to continue in coming months.
Exports gained 6.7% QoQ, driven by high demand for cars and industrial machinery, equipment, and parts. Imports rose 4.4% QoQ, with higher imports of industrial machinery, equipment, parts, and autos partially offset by lower travel imports.
On balance, the headline GDP seems to flatter the economy’s performance. Given rising unemployment, weaker domestic demand, and slower global growth, we expect the BoC will deliver two more rate cuts this year to lift the economy in the second half of the year.
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Japan: Firmer Inflation
Macro risks are rising in Japan. Although sentiment on a trade deal improved after President Trump finally greenlit the US Steel–Nippon Steel tie-up, fresh inflation data from Tokyo sent another warning. The core CPI (excluding fresh food) and the BoJ core (excluding fresh food and energy) both rose two-tenths to 3.6% YoY (0.5% MoM) and 3.3% YoY (0.4% MoM), respectively, in May. Both were above consensus estimates.
Food prices were once again the key driver, with rice prices up another 3.1% MoM (93.6% YoY). With food driving about half of inflation, its outlook has become critical to overall inflation performance. The government recently announced measures aiming to bring rice prices down; it will release another 210,000 tons from stockpiles on top of the 310,000 tons in April. This new rice will be available to consumers from June, but there is also some confusion as to whether this version of rice will be measured in the CPI data. Either way, these measures could help slow the rise in rice prices.
At the same time, inflation may also be broadening; in April, the three segments where inflation was below the 2% mark were housing (1.0%), education (-5.6%, due to recent subsidies), and the miscellaneous component (1.3%). Housing—a segment considered to be resistant to price pressures—is also experiencing a fresh bout of inflation. Given Japan’s labor shortages, supply constraints, and the potential pass-through effects from food/rice prices, inflation is likely to remain stronger for longer.
This puts the Bank of Japan (BoJ) in a tough spot; they cannot hike at the moment given trade uncertainties and, more importantly, turbulence at the long end of Japan’s yield curve. At the same time, they risk runaway inflation by standing pat for longer. Pragmatically speaking, the yields on the superlong JGBs have been managed well by the Ministry of Finance (MoF) by readjusting the issuance across the curve. These measures, coupled with the possibility of the economy rebounding in Q2, make it possible for the turbulence to settle down. The Bank is likely to stand pat until that time, so we retain our forecast of one more hike this year, albeit with lesser conviction.
Industrial production fell 0.9% MoM in April, a bit better than the consensus of -1.4%. This came on the back of potentially frontloaded orders in semiconductors, which were exempt from tariffs by the US. As a result, manufacturers’ projections over the next two months shot up, with the possibility of a 9% rise in output. This will be an important tailwind for growth in Q2.
Australia: No Tailwinds for Q1 GDP So Far
Partial national accounts data released so far were markedly below consensus. Construction activity was flat against expectations of a 0.5% QoQ rise. At the same time, private capex eased 0.1% QoQ against expectations of another 0.5% rise. The details were soft, with the more important plant and equipment spending metric falling 1.3%. However, firms intend to spend 10% more on capex for FY 2026 in the second estimate.
We also highlight that Q1 retail trade data released earlier in May had stalled against expectations of a 0.3% QoQ rise. Regular readers will recall that we have felt consumption was lagging in Australia and that it could culminate in broader economic weakness. We worry that could eventuate next week as GDP data is released. Our pick for Q1 GDP is now at 0.3% QoQ, more than halved from what we penciled in March.
There is still considerable upside risk to our forecast, as three partials are yet to be released on June 3: business inventories, gross company profits, and contribution from net exports. The GDP data will be out the next day.
Separately, April CPI data rebounded 0.8% MoM, but the annual rate was stable at 2.4% YoY. The trimmed-mean metric was up a tenth to 2.8%, but still within the Reserve Bank of Australia’s (RBA) target band for a fifth month. The jump was primarily driven by holiday travel prices (+6.0% MoM) and medical services (+3.2%) as insurance premiums rose.
Spotlight on Next Week
- US job openings are expected to decline further.
- The Bank of Canada is seen holding rates steady; the European Central Bank is expected to cut.
- Australia’s Q1 GDP could rise 0.3% QoQ.