Macroeconomics: The Day Ahead for 15 June

There is a barrage of China and US data today, but it will be the FOMC meeting that is the focal point, above all in terms of whether it can restore some semblance of calm to markets. Statistically there is the run of China Retail Sales, Industrial Production, FAI and Property data, along with a very robust and unexpected rise in Japan’s Machinery Orders and an unsurprising fall in Australian Consumer Confidence to digest, while ahead lie US Retail Sales, Import Prices, Business Inventories along with the NY Fed and NAHB Housing surveys. Aside from the Fed, Brazil’s BCB also holds its policy meeting, ECB speakers are very numerous, though markets will be waiting for news from the unscheduled meeting to discuss the rout in Eurozone govt bond markets, and following on from Schnabel’s ‘whatever it takes’ type comments. The IEA rounds off this month’s run of Oil Market Reports, which will include the first S&D estimates for 2023. This comes against the backdrop of OPEC approaching the point where its spare or excess production capacity will soon be exhausted, primarily due to years of underinvestment after the 2014-15 oil price slide. As yesterday’s OPEC report conceded it already missed its target to increase output in May by 176K bbls, attributed to the fall in Russian output (and then still made the hollow commitment to increase output at a faster pace when it met in June!). As the attached table highlights, Russia was anything but the sole contributor to that output target miss.

** China – May Retail Sales, Industrial Production, FAI **

– These were a distinctly mixed bag of data, with a sharper than expected recovery in Industrial Production and a smaller than expected deceleration in Fixed Asset Investment on the positive side. But Retail Sales again fell sharply even if slightly less than expected, doubtless heavily constrained by the fact the Unemployment Rate in major cities rose to a record high of 6.9% (despite the fall in headline Unemployment to 5.9%, still above a govt target of 5.5%), and that fall in Residential Property Sales at -34.5% y.t.d. nearly matched the February 2020 low point (-34.7%). Overall it points to a rather lacklustre recovery, with the ongoing threat of further lockdowns also likely to restrain any bounce.

** U.S.A. – May Retail Sales, June NAHB Housing Market Index **

– Retail Sales will the focal point in today’s US run, with the sharp drop in Auto Sales set to weigh on headline with a rise of just 0.1% m/m (Apr 0.9%), though quite heavily offset by a price related rise in Gasoline sales, while the core ‘Control Group’ measure is seen up 0.3% m/m (vs. April 1.0%), and as ever all measures will be considerably weaker once adjusted for inflation. Anything weaker than expected will be jumped all over as signalling demand destruction due to inflation pressures, but equally anything stronger than expected will likely be viewed as a case of ‘good news’ being bad (i.e. putting further upward pressure on rate expectations). Be that as it may, skyrocketing mortgage rates also suggest a good deal of focus on the NAHB Housing Market Index, which is forecast to edge down to 68.0, after sliding sharply to 69.0 in May, with risks given the rise in rates and the broader inflation squeeze on households look to be to the downside of the consensus. Just as a reminder, do take a look at the attached chart of the index as a reminder it has a well-documented capacity to go into freefall.

** U.S.A. – FOMC meeting **

– The consensus on today’s meeting has been shifted by Monday’s WSJ article “How the Fed and the Biden Administration Got Inflation Wrong. Officials applied an old playbook to a new crisis. ‘We fought the last war’” (https://nam02.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.wsj.com%2Farticles%2Finflation-economy-federal-reserve-11655134682%3Fst%3D1b87mf0mujfvumw&data=05%7C01%7CSimrat.Sounthe%40admisi.com%7C488b43bdb842438d287308da4ea0c654%7C2f55bf3242d444b3a8c2930ac8b182b2%7C0%7C0%7C637908749747557561%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=MpRyNsPFqmL4X%2BP1EdyX7jxFYoaJZGITFGj0Q77Fhzg%3D&reserved=0  ) and is now anticipating a 75 bps hike today. The initial observation is simple, putting your foot down on the accelerator of your car does not give you greater control, indeed it raises the risk of losing control. Be that as it may, many have construed that WSJ article as being ‘a plant’ based on an off the record Fed ‘briefing’. If this is indeed the case, markets actually need to get more aggressive in their loss of faith in Fed policymaking (e.g. invert the curve 100 bps), as the Fed truly is nothing but a lapdog to the political fraternity, when it should actually be pushing back very hard on this complete abdication of political responsibility. Indeed what this wreaks of is Biden and Yellen piling the pressure on the Fed to get to neutral (if not beyond) a.s.a.p., so that rate hikes are “done” before the hustings for the mid-term elections, that is not a policy move, it is the very worst form of kowtowing to political pressure, and to be brutally honest would put the Fed in the same place as Turkey’s TCMB. If this is what FOMC policy making is being reduced to, then the Fed deserve the most cantankerous vilification and opprobrium for the tightening in financial conditions that this will likely engender, and the USD’s ascent could easily turn into a sudden rout. What has happened in the past couple of days will look like a walk in the park by comparison, and more than likely this could well go down as the biggest ever error in the history of central bank policy making. If on the other hand, the FOMC does still possess an ounce of common sense, then our previous analysis in the week ahead stands: “two things argue for 50 bps, and against a 75 bps move: a) Powell has already rejected a 75 bps move; if they did hike by 75 bps, they would effectively lose control of forward guidance on the trajectory and become hostage to markets goading them to be even more aggressive. To be sure, they have been wrong on the inflation outlook, and yes they are behind the curve (but then again so are most other central banks, above all DM). b) They have underlined that they are keeping a close eye on financial conditions (see attached chart of GS US Financial Conditions), and these are after the jump in yields, equity market tumble and credit spread widening, and persistent volatility across all asset classes, not to mention sky rocketing mortgage rates (not part of index), rapidly approaching the recent peak, which is close to the danger zone (above 99.50, see 2018/2019 for comparison, rather than the pandemic spike). They learnt a hard lesson in 2018/2019 that fixating on a specific ‘neutral rate’ and ignoring tightening financial conditions is not good policy making, therefore adding fuel to the current fire with a 75 bps hike would be very risky. While they are upbeat on the economic outlook and labour market, they do not want to find themselves being attacked by the political fraternity (and they are already under pressure), above all in a mid-term elections year. They also know that rising rates and withdrawing QE will not resolve any supply chain disruptions or structural issues, and may in fact exacerbate them, above all by crimping investment, as well as demand. Be that as it may, they have a serious dilemma on how they ‘sell’ this to markets and preserve some credibility. As the example of the ECB on Thursday demonstrated, if central banks are vague and ambiguous (as the ECB was about its instrumentation to curb peripheral spread widening), they risk losing any control of the narrative, and per se engendering even more financial instability. As an aside, there will be a torrent of ECB speakers this week, who will effectively be tasked with trying to regain some control over the rates and bond spread narrative.”

** Brazil – BCB rate decision **

Brazil’s central bank has already hiked rates by a cumulative 1,075 bps, and is expected to bring its tightening cycle to an end with a 50 bps hike to 13.25%, while retaining a tightening bias, if circumstances warrant. In the latter respect, the key question is how it assesses the latest proposals to cut federal taxes (PIS, Cofins and Cide) on gasoline and ethanol prices to zero. It has previously warned that while this would initially lower inflation materially, it may serve to put upward pressure on prices in the medium-term, as the high fiscal cost of such measures may raise Brazil’s country risk premium, thereby pressuring the BRL, and “increase inflation expectations, and consequently have an upward effect on prospective inflation.”