Macroeconomics: The Day Ahead for 15 Aug 23

While some of Europe and Latin America are closed for Assumption and India for Independence Day, there is a deluge of major economic data from around the world for markets to tackle. There are the overnight run of activity and property data in China, Japan’s Q2 prov. GDP, Australia’s Q2 Wages, UK labour data and Swedish CPI to digest. Ahead lie Germany’s ZEW survey, Canadian CPI, US Retail Sales, NY Fed Manufacturing and NAHB Housing Market surveys, Import Prices and Business Inventories. Beyond the economic data, there are China’s 1-yr MTLF operation and the RBA Minutes (which had largely been pre-empted by the RBA’s SOMP and semi-annual testimony to parliament), with the de nouveau ever hawkish Minneapolis Fed’s Kashkari the only central bank speaker scheduled. Home Depot kicks off this week’s run of major retailers earnings, with Legal & General, Pandora and Agilent Technologies amongst the other earnings highlights of the day. Govt bond supply comes via German 2-yr and UK 16-yr. Germany’s ZEW Expectations are projected to be largely unchanged at -14.9, though a weaker Dax index on the months, imparts some downside risk, while the run of downbeat German data is expected to push the Current Situation index to its weakest level since November at -6.30 vs. July’s -59.5. Canada’s CPI is expected to pick up at the headline level to 0.3% m/m 3.0% y/y, and as with the US primarily due to energy prices, but ease modestly again (-0.1 ppt) on core measures to 3.6%/3.7%, which should serve to ease the chances of a further hike, with an only 88% chance of one further hike by March 2024. The contrast between market pricing for Fed and BoC rates bears some scrutiny, with no cut seen in Canada by July 2024, while 50 bps of cuts are seen in the US by the same date.

** U.K. – June/July Employment & Average Earnings 

The record rise in Average Earnings will be the headline grabber, and as the breakdown attached highlights the upward pressure is broad based, with the rather unsurprising lag in Construction sector wages. While base effects account for some of the 8.2% y/y rise in headline earnings (given the 202 drop to 5.1% from 6.1%), this is perhaps moot given the sharper than expected rise in ex-Bonus earnings to 7.8% y/y. Eminently wages are very much a lagging indicator, and with skills shortages in both the public (healthcare above all) and private sector adding to cost of living pressures, one might argue that it is fiscal policy that should be deployed given the contribution of structural factors. Be that as it may, it does heap more pressure on the BoE, which is in many ways not being ‘hoist by its own petard’ of failing to give guidance on rates for a very protracted period. Had the BoE stressed the cumulative impact of its rate hikes a lot more, it might have found itself in a better place than the Pavlovian nightmare it finds itself in. The Employment data were again very mixed, and way out of line with forecasts, and sending very mixed signals with July HMRC Payrolls jumping 97K, and June LFS Employment dropping 66K, and the Unemployment Rate picking up to 4.2% from 4.0%, in part due to more people re-joining the workforce, with Vacancies edging down again to 1.02 Mln, still way above pre-pandemic levels. 

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

The PBOC’s decision to cut its 1-yr MTLF rate by 15 bps to 2.50%, its most ‘aggressive’ rate move in over a year speaks more volumes about today’s data run than the data itself, in many ways, even if it screams ‘reactive’ and hints at a degree of panic, not only in reaction to the data, but also to the unravelling of Country Garden, and the problems at private wealth manager Zhongrong International Trust. Both Industrial Production at 3.7% y/y vs. expected 4.3% and Retail Sales t 2.5% y/y vs. expected 4.2% underline the extent of the weakness, and given the stimulus measures already in place, the slowdown in FAI to 3.4% y/y vs. expected 3.8% was equally concerning, while the rise in the Unemployment Rate to 5.3% from 5.2%, and the suspension of publication youth Unemployment data only adds to the concern about a downward spiral. As previously noted, the property sector remains the biggest problem with Investment falling -8.5% y/y vs. expected -8.1%, which marks the 17th monthly decline. The idea that an ‘extend and pretend’ exercise by Country Garden (or any other developer) via lengthening the maturity of its maturing debt might be a solution is clearly beyond misplaced, with the lessons from last decade’s Euro crisis underlining the flaws of such a strategy. Forceful balance sheet resolution is becoming an acute necessity.

** Asia: Japan – Q2 GDP, Australia – Q2 Wage Price Index **

While Japan’s Q2 GDP was much stronger than expected at 1.5% q/q or 6.0% SAAR, thanks to an even stronger than expected contribution from Net Exports, the details on the weakness of domestic demand are a point of concern, with Business CapEx Flat q/q vs. expected 0.4%, and Private Consumption sliding -0.5% q/q vs. expected Flat. The latter supports the BoJ view that inflation is unlikely to hold above target on a sustained basis, even if its YCC policy tweaks still point to gradual move away from ‘ultra-easy monetary policy’. In Australia the slightly weaker than expected Q2 Wage Price Index at 0.8% q/q 3.6% y/y also offered backward looking justification for the August RBA rate pause, and the cautious confidence that inflation is on a downward path evident in the minutes of that meeting, that were published overnight.

** U.S.A. – Retail Sales, Import Prices, NY Fed Manufacturing, NAHB Housing Index **

Retail Sales are expected to post a slightly perkier rise of 0.4% m/m on nearly all measures, with the core ‘Control Group’ seen up 0.5%, following June’s solid 0.6%, with a combination of a boost from Amazon’s Prime Day promotion and a jump in Gasoline prices towards the end of the month the main drivers, and little impact from flat Auto Sales, which would be a solid if unspectacular outturn. Import Prices are likely to get a boost from higher commodity prices, and shipping costs, though a forecast headline rise of 0.2% m/m and -0.2% ex-Petroleum fits with the disinflationary narrative. Housing data are expected to show no change in the NAHB Housing Index at a 13-month high, but still historically sluggish 56, and with Mortgage Rates back above 7.0%, there may be a modest downside risk.