Macroeconomics: The Day Ahead for 15 August

In terms of the week’s macroeconomic narrative, the focus shifts from inflation to a vast array of major monthly and quarterly activity from China, Japan, UK and USA. There are China’s Retail Sales, Industrial Production, FAI, Property Prices, Sales & Investment, Japan and UK Q2 provisional GDP, UK monthly activity & Trade, and very mixed Australian Unemployment, along with the PBOC’s half expected deferral of its 1-yr MTLF operation, as it repositions its 7-day Reverse Repo as its main policy rate. Ahead lie US Retail Sales, Industrial Production, Import Prices, NY & Philly Fed Manufacturing & NAHB Housing surveys, Weekly Jobless Claims and TIC Portfolio Flows. In central bank terms, Philippines’ BSP cut rates 25 bps, while Norges Bank is expected to hold rates, and there is some Fed speak from Musalem and Harker. China dominates the corporate earnings run, with Alibaba, CK Hutchison, JD.com and Lenovo among the headliners, while in the US Applied Materials, Deere & Co, Tapestry and Walmart will all feature.

** U.K. – Q2 provisional GDP, June Production, Construction Output & Trade **

– On the surface Q2 GDP was in line with forecasts, posting a respectable 0.6% q/q expansion, but the quarterly and monthly details painted a rather different picture of growth dynamics. Private Consumption was up just 0.2% q/q vs. expected 0.5%, implying some downside risks to tomorrow’s Retail Sales relative to forecasts, as well as by an unexpected -0.1% m/m drop in the Index of Services (though still up 0.8% q/q). Q2 Business Investment dropped -0.1% q/q vs. expected 0.4% (though this is often heavily revised, while total Trade volumes were much better than forecast, though primarily due to a 7.7% q/q (vs. expected 1.5%) surge in Imports, while Exports rose 0.8% q/q against forecasts of a -1.2% m/m drop. Saving the day was Government Spending rising 1.4% q/q vs. expected 0.3% and a flat q/q reading in Q1. Monthly Manufacturing (1.1% m/m) and Construction Output (0.5% m/m) were both much better than the expected 0.2% and -0.4%, echoing the relatively solid Manufacturing and Construction PMIs. The concern given the new Labour Govt’s intention to cut spending is that there are headwinds ahead, and with the Manufacturing sector so relatively small in proportionate terms, that it will do little to offset potential services and personal consumption weakness. By extension this does support the case for further BoE rate cuts, though it will continue to be focussed on inflation and wages, with growth a secondary consideration at the current juncture.

** China – July Retail Sales, Production, FAI and Property indicators **

– To be blunt, there was literally nothing in today’s run of data that was encouraging, and plenty that suggests the piecemeal run of fiscal and monetary measures to stimulate the economy are getting no traction, indeed the sector output data (refining, power, steel) points to overcapacity, rising inventories and margins being crushed, with the very notable exception of Aluminium and other non-ferrous metals benefiting from the energy transition. Industrial Production slowed to 5.1% y/y, while Fixed Asset Investment dropped to 3.6% y.t.d. vs. expected 3.9%, whereby Private FAI is now flatlining y/y, and despite a lot of municipal govt borrowing being heavily front loaded, State owned FAI slowed to 6.3% y/y from 6.8%. Retail Sales at 2.7% y/y underline just how weak personal consumption, given a pre-pandemic trend rate of around 8.0%, and with the Unemployment Rate unexpectedly rising to 5.2%, and other wages data continuing to suggest pay is contracting, this is not really a great surprise. Despite some high frequency data implying some improvement in property demand, the official data on Home Prices (declining at a similar pace as in June), Property Investment (-10.2% y/y vs. expected -9.9%) and Sales (-25.9% y/y vs. June -26.9%) suggest otherwise. Fiscal spending clearly needs to be increased, but it is as much about execution as size, and the current drive to expand ‘high quality productive capacity’ will only likely be deflationary for China and the rest of the world, given that protracted weak domestic demand prompts an ever stronger drive to export excess output.

** Japan – Q2 provisional GDP **

– For all the criticism of the BoJ in the aftermath of its rate hike, pretty much every data point that has emerged since that decision offers strong support for the BoJ decision, and indeed to the need for further rate hikes. GDP was better than expected at 0.8% q/q vs. forecast 0.6%, with the first expansion in Private Consumption (1.0% q/q vs. expected 0.6%) accounting for all of the better than expected outturn, with Business CapEx largely in line at 0.9% q/q, and Inventories and Net Exports deducting just 0.1 ppt, as had been anticipated. It also means that departing PM Kishida leaves a relatively solid economy for whoever takes over as LDP leader in September, while raising questions about whether the repricing (lower) of the BoJ’s trajectory can be sustained, given the much cited comments from BoJ’s Uchida last week about not hiking rates against a backdrop of market volatility really did not close the door on further rate hikes, assuming a semblance of calm does materialize.

** U.S.A. – July Retail Sales, Industrial Production, Import Prices, NAHB Housing Index **

– In terms of today’s run of activity data, the simple caveat remains that markets have over the past 18 months all too frequently been hasty in taking one or two months weakness in Retail Sales to ramp up recession calls. Headline should get a boost from the rebound in Auto Sales, with 0.4% m/m rise expected, while a mean reversion to 0.1% m/m after June’s 0.8% m/m jump is seen for the core ‘Control Group’ and ex-Autos measures, much depending on the impact of Amazon Prime day and ‘back to school’ spending. By contrast Industrial Production and Manufacturing Output are forecast to drop -0.3% m/m, after solid gains of 0.6% & 0.4% in June, with the drops in regional Fed surveys and ISM Production index predicating those expectations. The first batch of August surveys are anticipated to see the NY Fed Manufacturing little changed at -5.5, Philly Fed dropping back to 5.0, NAHB improving 1 pt to 43 (some upside risk from the drop in mortgage rates), and Michigan Sentiment remaining weak at 66.9 vs. prior 66.4. An eye also needs to be kept on Business Inventories, which have been rising thanks to a sharp reversal in auto stocks from record low levels thanks to the pandemic, and which now stand well above long-run averages. On balance, this run of data and yesterday’s CPI still seem likely to prompt the Fed to initiate rate cuts in September, though by 25 bps rather than 50 bps.