Macroeconomics: The Day Ahead for 15 August

  • Weak China activity data and ‘surprise’ rate cut, Japan Q2 GDP rebound and UK Rightmove House Price fall to digest; US NY Fed and NAHB Housing Index, Canada Existing Home and Manufacturing Sales ahead; Fed’s Waller speaks; Europe energy crisis and drought also in view
  • China July activity data: deepening property sector crisis a bigger headwind than Zero Covid policy
  • Japan Q2 GDP: solid domestic demand drives rebound, but weak export demand an increasing concern
  • US NY Fed Manufacturing: setback seen after sharper July rebound; details of greater significance than headline
  • US NAHB Housing Market Index: seen stabilizing after July slide as mortgage rates drop back, but risks downside
  • Week Ahead: very busy run of US, China, UK and Canada data dominates; US Retailer and array of China corporate earnings; Norway, NZ and Philippines rate hikes, Fed and RBA minutes

EVENTS PREVIEW

The week kicks off with the unexpected China rate cuts and a raft of statistics in Asia: Japan’s provisional Q2 GDP and China’s run of Retail Sales, Industrial Production, FAI, Unemployment and property data, with GDP from Thailand and Denmark, and BHP earnings also to digest. Ahead lie US NY Fed Manufacturing and NAHB Housing Market surveys, and Canada’s Manufacturing and Existing Home Sales along with Brazilian monthly GDP. The events schedule is thin with a speech from Fed’s Waller the only real highlight, while the highlights of the corporate earnings run are primarily the run of Chinese reports, featuring state owned banks and Cosco Shipping amongst others, while Henkel tops the run in Europe.

** China – July Retail Sales, Industrial Production & Property Investment **

  • After Friday’s very soft credit aggregates and today’s rather dismal run of activity and property sector data, the modest 10 bps cuts to the 7-day Reverse Repo and 1-yr MTLF rates were wholly unsurprising, and underlining the sizeable headwinds to China’s economy.  All the indicators not only missed forecasts, but were also weaker than in June, and whilst one can attribute some of this to the persistent run of Covid-19 related regional lockdowns, the fact is that the property sector meltdown is clearly the overarching factor. As was the case with the Global Financial Crisis, and the contrast between the US and Eurozone, the sooner that Chinese authorities bite the bitter bullet of acutely needed and likely brutal balance sheet resolution, the better. Going down the route of ‘extend and pretend’ will only serve to exacerbate the problems, and almost certainly foment more social unrest, especially with youth Unemployment rising to a 19.9% in July.

** Japan – Q2 GDP **

  • By contrast with China’s run of data, the slightly weaker than expected 2.2% SAAR rebound in Japan’s Q2 GDP was encouraging in terms of the 1.4% q/q rebound in Business CapEx, even if Private Consumption at 1.1% q/q was below forecast, and suggesting that rising cost of living is constraining household spending; both components should make another solid contribution to Q3 GDP. The larger concern is that the weakness in China and its broader impact on the rest of Asia will continue to be a major headwind for exports, along with ongoing supply chain constraints, above all in Japan’s auto sector.
  • See Week Ahead below for comments on today’s US NAHB and NY Fed surveys.

RECAP: The Week Ahead Preview

The new week may be the peak of the summer holiday season in Europe, but has a deluge of statistics from the US and China, which will include Retail Sales, Industrial Production and housing data, and another busy week for the UK with CPI, labour data and Retail Sales, and indeed Canada (CPI, Retail and Manufacturing Sales, and Teranet House Prices), with Japan Q2 prov. GDP and Private Machinery Orders also on tap. It will be seasonally quite light in terms of central bank speakers, though there will be July FOMC and August RBA meeting minutes, while rate hikes are expected in New Zealand, Norway and Philippines (all 50 bps). US corporate earnings are dominated by retailers: Walmart, Home Depot, Kohl’s, Lowe’s, Tapestry, Target and TJX inter alia, with Agilent Technologies, Analog Devices, Cisco and Deere & Co also reporting. The week will get off to a rather slow start, with Assumption in many Catholic/Orthodox countries and other bank holidays around the world.

The summer market mood is very much risk on, emboldened by the lower than expected, but still very high US inflation statistics, while swotting away the persistent push back on current market rate trajectories by all Fed speakers, a mixed earnings season, geopolitical tensions and protectionist narratives, the energy crisis in the EU and the UK, and ignoring the implications of a tentative bounce in energy and commodity prices on inflation, or indeed that central bank balance sheet reductions (i.e. liquidity withdrawals) are only just starting to crank up to full speed. Complacency is probably a better description than euphoria, and there appears to be an element of credit spread tightening feeding the equity market rally, above all the 150 bps tightening in US HY Credit spreads from their recent peak (see chart). The latter is however primarily a function of the spectacular swing in free cashflow in the once heavily US Shale oil sector being used to pay down debt, and only modestly to increase upstream oil and gas investment from rock bottom levels. This all attests to the point that not only have developed world central banks been ‘behind the curve’ on raising rates, but also in reducing excess QE liquidity.

In the US, Retail Sales are forecast to edge up by 0.1% m/m, with the fall in gasoline prices (-7.7% m/m) weighing heavily on the headline, with the ex-Autos & Gas measure seen at 0.3% m/m and the core ‘Control Group’ measure up 0.6% m/m, boosted by online sales thanks to the mid-month Amazon Prime Day promotion, and given that discounting in furniture and electronics may boost volumes but not values, this may be a rather better report in ‘real’ terms than for some months. After a weak June print (-0.2% m/m), Industrial Production is expected to recover modestly by 0.3% m/m, though the risks look to be firmly skewed to the upside, given a combination of higher utilities output due to hot weather, a beneficial seasonal adjustment for auto output due to retooling being less of a pronounced drag, and a strong contribution from mining (above all oil output). The first of regional Fed manufacturing surveys are expected to see a downtick in NY to +5.0 after a sharp bounce in July, and a modest recovery in Philadelphia to -5.0, but as ever details will matter more than headline levels, above all Orders (new & backlogs), Outlooks, Prices, inventories and supplier deliveries. Housing data will be the other focal point, with little respite expected after a number of months of sharp deteriorations: NAHB seen unchanged at 55.0, but Housing Starts(-1.9% m/m), Permits (-2.7% m/m) and Existing Home Sales (-4.5% m/m after June -5.4%) all falling further, as the fall in mortgage rates does little to offset affordability and cost of living pressures. Within Existing Home Sales a close eye will need to be kept on volume of supply, still quite low at 3.0 months in June, but trending higher, though not as acutely as New Home supply, which is at levels not seen since 2006/2007 sub-prime crisis.

Over in the UK, labour data get the week under way, with HMRC Payrolls seen up a modest 25K in July, while Q2 LFS Employment is expected to have posted a very robust 273K gain, only marginally less than the March-May 296K, and the Unemployment Rate seen steady at 3.8%, just above its all-time low of 3.7%. But it will be Average Weekly Earnings that attract most attention, with base effects accounting for the forecast drop in headline to 4.6% y/y from 6.2%, and more importantly some upward creep expected in the ex-Bonus measure to 4.5% y/y from 4.3%. But the latter will still be heavily negative in real terms, as the CPI data on Wednesday are expected to confirm with a 0.4% m/m rise pushing the y/y rate up to 8.6% from 8.2%, and core to 6.0% y/y from 5.8%, and as is well documented expected to keep on climbing to a peak of 13.3% y/y in October, according to BoE forecasts. Pipeline pressures are expected to remain high with PPI Input seen up 0.7% m/m 23.8% y/y and Output 0.9% m/m 16.5% y/y. The week ends with Retail Sales expected to drop -0.2% m/m, the seventh fall in 9 months, which have only seen one gain of just 0.1%, with the ex-Auto Fuel seen at -0.3% m/m, while July PSNB data are expected to see a deficit of £-2.8 Bln, in a month which normally sees a surplus due to hefty corporation tax receipts.

Elsewhere, Australian Unemployment is seen steady at all-time low of 3.5%, with Employment growing a more modest 26.5K, while Q2 Wages are forecast to rise a little faster in q/q terms (0.8% vs. 0.7%) and pick up to a still very subdued 2.7% y/y from 2.4%. Canada’s headline CPI is expected to echo the US and fall to 7.6% from 8.1% thanks to falling gasoline prices, core measures are however seen little changed at an average 5.0% y/y, per se implying that while the BoC may not opt for quite such an aggressive hike in September, it will remain hawkish, though this week’s Teranet House Prices will likely underline the very negative impact those aggressive rates are having. Germany’s ZEW Expectations survey should see a more marked improvement than the expected marginal gain from -53.8 to -52.7, given that the Dax has had a strong rally since early July, while the Current Situation is seen dropping further to a new low of -48.0 from -45.8, hardly surprising given the array of energy crisis inputs and chaos in Rhine transport due to low water levels.  Last but not least, various CEE countries publish Q2 GDP data, which will show the extent of the impact of the war in Ukraine, energy crisis and very sharp interest rate increases in recent months, with forecasts looking for a -0.7% q/q for Poland and -0.2% q/q for Romania, and by contrast a +0.5% q/q for Hungary; Bulgaria and Slovakia also report.

In the commodities space, it will still be a case of numerous supply concerns contending with rapid swings in sentiment about the economic outlook, and by extension demand. Last Friday’s WADSE was mixed, see summary infographic and watch ADMIS’s Steve Freed’s assessment here . As noted above, Rhine Water levels are now so low that barge transport is reduced to a minimum and may have to stop completely, with barge rates up in the sky, and thus creating huge problems for diesel and coal transport, which is in part being switched to rail. There are Saudi Aramco’s record Q2 profits to digest, with the company pledging to raise output to maximum levels, while Monday sees the focus switch to miners with behemoth BHP results, and above all its outlook for demand, given concerns about demand in China and the EU. Results and outlook expectations from Deere & Co will also be watched closely as a proxy for the global economic outlook.

As noted Retailers dominate the US earnings run, with the focus on how Walmart are dealing with rising input costs (goods and wages) and reducing an involuntary build-up of inventories. The earnings schedule also has a busy run of Chinese corporates reporting, and is likely to see the following among the highlights according to Bloomberg news: Adyen, Agilent Technologies, Analog Devices, Applied Materials, Bath and Body Works, BHP Group, China Merchants Bank, China Telecom, Cisco Systems, CSL, Deere, Estee Lauder, Galaxy Entertainment Group, Goodman Group, Henkel, Hong Kong Exchanges & Clearing, Jiangsu Hengrui Medicine, Keysight Technologies, Kohl’s, Li Auto, Macy’s, NetEase, Ping An Bank, Ross Stores, Saudi Arabian Oil, Sea, Shenzhen Mindray Bio-Medical Electronics, Synopsys, Tencent, TJX, Tongwei, Transurban Group, Wuxi Biologics Cayman, Xiaomi, Yunnan Energy New Material, Zhangzhou Pientzehuang Pharmaceutical.

To view the full report and to sign up for daily market commentary please email admisi@admisi.com

The information within this publication has been compiled for general purposes only. Although every attempt has been made to ensure the accuracy of the information, ADM Investor Services International Limited (ADMISI) assumes no responsibility for any errors or omissions and will not update it. The views in this publication reflect solely those of the authors and not necessarily those of ADMISI or its affiliated institutions. This publication and information herein should not be considered investment advice nor an offer to sell or an invitation to invest in any products mentioned by ADMISI.

Risk Warning: Investments in Equities, Contracts for Difference (CFDs) in any instrument, Futures, Options, Derivatives and Foreign Exchange can fluctuate in value. Investors should therefore be aware that they may not realise the initial amount invested and may incur additional liabilities. These investments may be subject to above average financial risk of loss. Investors should consider their financial circumstances, investment experience and if it is appropriate to invest. If necessary, seek independent financial advice.

ADM Investor Services International Limited, registered in England No. 2547805, is authorised and regulated by the Financial Conduct Authority [FRN 148474] and is a member of the London Stock Exchange. Registered office: 3rd Floor, The Minster Building, 21 Mincing Lane, London EC3R 7AG.                  

A subsidiary of Archer Daniels Midland Company.

© 2022 ADM Investor Services International Limited.

Risk Warning: Investments in Equities, Contracts for Difference (CFDs) in any instrument, Futures, Options, Derivatives and Foreign Exchange can fluctuate in value. Investors should therefore be aware that they may not realise the initial amount invested and may incur additional liabilities. These investments may be subject to above average financial risk of loss. Investors should consider their financial circumstances, investment experience and if it is appropriate to invest. If necessary, seek independent financial advice.

ADM Investor Services International Limited, registered in England No. 2547805, is authorised and regulated by the Financial Conduct Authority [FRN 148474] and is a member of the London Stock Exchange. Registered office: 3rd Floor, The Minster Building, 21 Mincing Lane, London EC3R 7AG.                  

A subsidiary of Archer Daniels Midland Company.

© 2021 ADM Investor Services International Limited.

Futures and options trading involve significant risk of loss and may not be suitable for everyone.  Therefore, carefully consider whether such trading is suitable for you in light of your financial condition.  The information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM.  The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared.  The information provided is designed to assist in your analysis and evaluation of the futures and options markets.  However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.

Latest News & Market Commentary

Explore the latest edition of The Ghost in the Machine

Explore Now