Macroeconomics: The Day Ahead for 15 August

The week ends with a slew of holidays from Assumption in Europe and other Catholic countries to India’s Independence Day and South Korea’s Liberation Day, as US President Trump meets with Russian President Putin to discuss bringing hostilities in the Ukraine to a halt. The US administration has sought to dampen expectations for any significant outcomes, but along with the EU and UK hopes that this meeting will open up a swiftly arranged and potentially more meaningful trilateral meeting with Ukrainian President Zelenskyy to try and establish a ceasefire. The US administration has signalled penal secondary tariffs on Russian oil if this meeting fails to make any progress. It will also be a busy day for major statistics with Japan’s Q2 GDP and China’s run of monthly activity and property sector indicators to digest, while the afternoon brings US Retail Sales, Industrial Production, Import Prices and preliminary Michigan Sentiment.

** China – July Retail Sales, Industrial Production, FAI & Property Indicators **

– PMIs, anecdotal evidence and high frequency data had all pointed to downside risks for the run of July activity data, and this proved to be correct. Retail Sales at 3.7% y/y were very sluggish, and the -0.14% m/m fall underlines that this was not just a function of a modestly adverse base effect, but rather the cuts to pay and short-time working due to the impact of tariff wars and fading stimulus policy support. Industrial Production at 5.7% y/y missed forecasts more modestly but is clearly suffering from output cuts both due to overcapacity as well as curbs at exporters. Perhaps more worrying was the drop to just 1.6% in Fixed Asset Investment, paced by a sharp slowdown in Govt FAI to 3.5% y/y from 5.0%, and an accelerating fall in Private FAI to -1.5% y/y, both imply that stimulus measures are not getting any traction. The property sector remains a very large millstone around the economy’s neck and implies that a new and more radical approach to resolving the sector’s now 5-yr crisis. That would of course call into question the administration’s authority, and result in some loss of face, but persisting with a policy approach that is clearly not working would be worse.

** Japan – Q2 GDP **

– GDP was better than expected at +0.3% q/q (or 1.0% SAAR), thanks to a further strong contribution from Business CapEx (1.3% q/q vs. Q1 1.0%), a modestly better than expected 0.2% q/q in Private Consumption (though the underlying trend remains sluggish) and a stronger than expected contribution from Net Exports at 0.3 ppt that followed a deduction of -0.8 ppt in Q1, with Inventories deducting 0.3 ppt after a 0.6 ppt deduction in the prior quarter. While the GDP deflator did slow more than expected to 3.0% y/y from Q1 3.3%, it still argues in favour of a further BoJ rate hike. But the latter remains hostage to political uncertainty, and to some extent USD/JPY.

** U.S.A. – July Retail Sales, Industrial Production & August Michigan Sentiment **

– A bumper month for Auto Sales is expected to see headline Retail Sales up 0.5% m/m (risks firmly skewed to the upside), with the ex-Autos measure seen up 0.3% m/m and core ‘Control Group’ easing modestly to 0.4% m/m from June’s 0.5%, assisted by online promotions; revisions will as ever require attention. Industrial Production and Manufacturing Output are forecast to be flat m/m, with the ISM survey’s headline fall masking better readings for production and supply. Last but not lease provisional Michigan Sentiment is expected to edge up to 62.0 from 61.7, with labour demand concerns seen offsetting the impact of a robust equity market. Import Prices are seen up 0.1% m/m both on headline and ex-Petroleum, and will garner more attention thanks to that surge in yesterday’s PPI, which risk assets chose to largely ignore in what can only describe as an act of wilful blindness. Some are pointing to PPI Goods ex-Food & Energy being up only 0.4% m/m as against 0.9% m/m for headline (and double median estimate of 0.2%), but as Fed’s Goolsbee noted the really worrying elements were Services PPI components that are not impacted by tariffs such as airfares and dental care rising sharply. For all that there are likely to be de minimis votes for a rate cut in September, so Powell’s biggest challenge aside from the oppressive political pressures is going to be how to convey a relatively clear Fed policy outlook message, given the increasing divisions on the FOMC.