Macroeconomics: The Day Ahead for 17 August

  • Very busy data and events calendar: digesting 40-yr UK inflation high, soft Australian Wages, aggressive RBNZ rate hike & signal, Japan and Singapore Trade
  • Awaiting Eurozone & Poland Q2 GDP, US Retail Sales, Business Inventories, July FOMC Minutes and Bowman speech; US 20-yr sale, European brewer and further run of US retailer corporate earnings
  • UK CPI & PPI: food, transport and restaurants/hotels trounce seasonal discounting, worse to come; will cement expectations of further BoE 50 bps hike, which will do precisely nothing to rein in inflation
  • Eurozone Q2 GDP: ‘strong’ reading expected, but details less impressive, and outlook dire
  • CEE Q2 GDP: much better than expected readings in Hungary & Romania offer hope of smaller contraction of Poland, despite energy crisis and Ukraine war
  • US Retail Sales: marginal headline rise seen on gasoline price slide, core measures expected to post solid gains; likely to be better in real terms than for some months
  • US July FOMC minutes: focus on level of concern about broader inflation pressures, and pushback on easing financial conditions

EVENTS PREVIEW

There is a packed programme of data and events for markets to digest today. Statistically there are the overnight run of Japan and Singapore Trade, Australian Q2 Wages and probably most sensitively UK CPI, RPI and PPI to peruse, with Eurozone and CEE Q2 GDP readings, US Retail Sales and Business Inventories ahead. In event terms, the RBNZ hiked rates a further 50 bps to 3.0% as expected, with the July FOMC minutes and two speeches by Fed’s Bowman, along with an auction of US 20-yr. A busier day for earnings has Carlsberg, Royal Unibrew and Germany’s beleaguered Uniper in Europe, while Cisco accompanies more retailer earnings in the US, which feature Lowe’s, Target and TJX. Weekly EIA oil inventories ahead are likely to be very sensitive, after a very choppy Tuesday in energy markets with WTI trading a $5.0 range (see chart), sinking in the face of the rash of weak economic data, and the prospect of a revival of the Iran JCPOA deal.

** U.K. – July CPI and PPI **

CPI was once again higher than expected at 0.6% m/m to vault the y/y rate into double digits at 10.1%, with very strong pressure in Food 2.2% m/m, Transport 1.7% m/m, Restaurants & Hotels 0.9% m/m trouncing the downward drag from seasonal discounting in Clothing & Footwear -1.6% m/m and Household Goods -1.0% m/m. Core CPI was also higher than expected thanks to Restaurants & Hotels at 0.3% m/m 6.1% y/y. While another larger 50 bps hike will inevitably be priced in for the BoE’s September meeting, it has to be added that it will have precisely zero impact on food and energy prices, with the outlook for Utility prices seemingly deteriorating by the day (as it is across Europe, and many other countries), and also creating enormous headwinds for growth. Pass through pressures were all too evident in PPI that came in higher than expected at 1.6% m/m 17.1% y//y (June 16.5% y/y). However the fall in oil and other commodity prices helped PPI Input to post a negligible 0.1% m/m rise, easing to a still very high 22.6% y/y from 24.0%, but it would be premature to suggest this was the start of a trend, even if base effects should help to bring input prices lower in coming months.

** Eurozone / CEE – Q2 prov. GDP **

The consensus expectation for a solid 0.7% q/q 4.0% y/y increase in Eurozone GDP make sense after the surprising strength in advance national readings (outside of Germany). However, as noted at the time of those releases, the details were a lot more uncomfortable: French domestic demand contracted by 0.2% q/q, and the recovery in net exports will likely prove to be a one-off; Italy’s GDP was above all boosted by govt spending, which will not be repeated as it reverts to its usual corrosive political backdrop; Germany’s GDP was abject and it is now the weakest of the major Eurozone economies, while Spain’s GDP got a much needed boost from tourism after a protracted drag from the sector during the peak pandemic period, and also a weak Q1. But the fact is that even with that Q2 bounce, Spain’s economy is still 2.5% smaller than prior to the pandemic. Given the scale of the energy and drought crisis now engulfing Europe, and plummeting confidence surveys, that Q2 “strength” is in any case historical. Various CEE countries also 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, though both Romania at 2.1% q/q vs. expected -0.2% q/q, and Hungary at 1.1% q/q vs. expected 0.5% were much better than expected, suggesting something better than expected in Poland.

** U.S.A. – July Retail Sales **

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 0.4% 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. It is worth noting that discounting in furniture and electronics may boost volumes but not values, so this may be a rather better report in ‘real’ spending terms than for some months.

** U.S.A. – July FOMC minutes **

It will be recalled that markets put a dovish spin on Powell’s press conference, leaning perhaps a little too hard on the ‘data dependent’ comments, which were primarily there to signal the end of ‘forward guidance’, in itself to give the FOMC greater flexibility now that the Fed Funds rate are at the putative ‘neutral levels’. Of particular note will be views on how restrictive policy may need to get to rein in inflation, how alarmed officials were by the breadth of pressures evident in the June CPI report, and how they viewed some tentative signs at the time of wage pressures ebbing, which the subsequent Q2 ECI and July Average Hourly Earnings have put paid to. Given that markets had already started to push back on the Fed’s rate trajectory, it will also interesting to note any discussion about the Fed needing to push back on this unwanted loosening of financial conditions, and whether the discussion around weaker activity data centred on this being a desired outcome of tightening measures taken so far. Per se there is rather more risk attached to today’s minutes, given the very hefty skew towards ‘dovish takes’ in current market policy expectations and perceptions.

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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.

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