Macroeconomics: The Day Ahead for 11 July

What is a busy week for major data and events gets off to a slow start, with the focus likely to fall on the latest news of new restrictions and testing in a number of cities, including Shanghai as China continues with its zero Covid policy, as well as a new round of fines for tech behemoths Alibaba and Tencent, and more defaults in China’s woe begone property sector. The latter, along with the stronger than expected US labour data refuelling Fed rate hike aggression fears, cast a long shadow over risk assets. The data schedule amounts to little more than digesting somewhat better than expected Japan Machinery Orders and Norway’s inflation data, with nothing ahead likely to offer anything in the way of distractions, as US tech sector focuses on Musk abandoning his bid for Twitter and the Uber ‘papers’, while the race to succeed UK PM Johnson starts to take some shape. The central bank speaker schedule has BoE’s Bailey testifying on financial stability, and NY Fed’ Williams in a discussion on Libor, per se not necessarily offering any fresh commentary on respective rate outlooks, and market views thereon remaining fluid and very volatile.

RECAP: The Week Ahead – Preview: 

The new week brings a busy run of first division data from the USA (CPI, Retail Sales, Industrial Production, Michigan Sentiment and PPI), China (Q2 GDP, Retail Sales, Industrial Production and Property Investment) and UK (monthly GDP, Index of Services, Industrial Production, Trade, BRC Retail Sales & RICS House Prices). The BoC, RBNZ and Bank of Korea are all expected to hike rates by 50 bps, the Fed publishes its Beige Book, and China’s PBOC is expected to leave its 1-yr MTLF rate unchanged, but is seen withdrawing liquidity. There is a G20 Finance Ministers meeting, US President Biden visits various Middle East countries, though little should be expected to result from his pleas for higher GCC oil output. The USDA publishes its key WASDE crop S&D report, and OPEC, EIA and IEA all publish monthly Oil Market Reports, while NatGas markets will be looking to the Sydney Energy Forum, and what will happen to Russian gas supplies after the annual 10-day maintenance shutdown period for the main pipeline, which starts on Monday. The US Q2 earnings gets under way with the usual run of results from major financials, which are expected to show pressure on investment banking revenues. According to Factset, the consensus estimate for S&P 500 overall earnings growth stands at 4.3% y/y vs. an end March estimate of 5.9%, but the real question will be how guidance on H2 earnings will look.

In terms of the economic data:

US CPI is expected to remain very high in headline (1.1% m/m rising to a new high of 8.8% y/y) and core terms (0.6% m/m, slowing to 5.7% y/y), PPI is seen little changed in both m/m and y/y terms. Headline Retail Sales are expected to rebound 0.9% m/m, helped by a recovery in auto sales and boosted by energy prices, but the core ‘Control Group’ measure is seen up just 0.3% after a flat m/m reading in May. Industrial Production is forecast to post a tepid 0.1% m/m rise, with Manufacturing Output seen flat m/m. Michigan Sentiment is expected to be unchanged at 50.0, with Expectations seen posting a fresh 42-yr low of 46.5. The Fed’s Beige Book will be scrutinized for anecdotal evidence on demand destruction (above all due to energy and raw materials prices), easing supply chain pressures and labour demand, and overall business outlook optimism.

Following on from a slightly higher than expected, but still benign set of PPI and CPI data, China Q2 GDP is forecast to fall 2.3% q/q and slow to just 1.0% y/y (or 2.9% y.t.d.) thanks to its Zero Covid policy. Monthly activity data for June are projected to see Retail Sales edge back into positive territory at 0.4% y/y, Industrial Production to edge up to 3.5% y/y from 3.3%, while Property Investment is forecast to fall -4.1% y/y (vs. prior -4.0%), and the surveyed Unemployment to dip again to 5.7% from 5.9%. Trade data are forecast to show another large Trade surplus $76.8 Bln, with Exports slowing to 13.0% y/y in USD terms, though rising in CNY terms, while Imports are seen little changed at 4.0% y/y in USD terms, but jumping in CNY terms to 9.6% y/y thanks to USD strength. Credit metrics are expected to see a jump in both Aggregate Social Financing to CNY 4.2 Trln (risks upside due to record monthly municipal bond issuance) and New Yuan Loans to CNY 2.4 Trln.

U.K. monthly is forecast to be flat m/m after falling 0.3% and 0.1% in prior months, with the Index of Services edging up 0.1% m/m (vs. -0.3% and -0.2%), with Industrial Production also seen flat, and Construction Output picking up again (0.5% m/m), and per se painting a picture of a stagnating economy. BRC Retail Sales are likely to remain in negative territory, while the RICS House Price Balance is forecast to remain high on any historical metric, but dip to +70 from +73.

Germany’s ZEW survey is expected to drop back sharply to -40.0 from -28.0 in terms of Expectations, but less sharply on the Current Situation (-34.5 from -27.6). Australia’s labour data are forecast to show Employment growth slowing to 30K from 60.6K, with the Unemployment dipping 0.1 ppt to 3.8%.

A busier week for government bond auctions with the US selling 3, 10 & 30-yr, Japan 5 & 30-yr, Germany 2 & 30-yr, Italy 3, 7 & 16-yr, and both Greece and Netherlands both offer 10-yr. Corporate credit spreads tightened last week and supply picked up somewhat, but with Friday’s post payrolls rise in govt yields, it remains to be seen whether this was little more than a correction on the back of start of quarter asset allocation, as opposed to a genuine pick-up in risk appetite.