Macroeconomics: The Day Ahead for 2 September

While there are overnight items of data to consider: Korea CPI, German Trade and Spanish Unemployment, it will be the US labour data and ahead of that the UN FAO Food Price index, which may reverse some of its recent retreat from May’s highs, that are likely to be front and centre. The events schedule has a G7 Finance Ministers and Central Banks meeting, which amongst other things is tasking itself with creating a price cap mechanism for Russian oil. But the fact is that with allies such as Japan and South Korea recently entering into long-term gas supply agreements with the new operator of the Russian Sakhalin gas project, despite the sanctions that are already in place, this looks to be an exercise in ’tilting at windmills’, which may ultimately only serve to put Europe at an even bigger disadvantage in terms of energy supplies. As the long and rather tortured process of electing a new UK Conservative party leader (and PM) concludes, with the result due on Monday, Chancellor (finance minister) Zahawi speaks about priorities for the new prime minister, even if it is far from assured that he will be in the new PM’s cabinet. Talking of UK inflation, attached is a chart of the 2068 I-L Gilt price, which serves as a very brutal reminder that inflation protection has a high price in capital terms, with the price down a whopping 220 points from its high on 1 December 2021, while the real yield has risen from -2.53% to -0.22%, and underlining the extent of the risk premium being factored into UK assets.

Next week will get off to a slow start in trading terms with the US Labor Day holiday on Monday, which also sees Services PMIs elsewhere, and a much anticipated OPEC+ meeting. Another much anticipated ECB meeting on Thursday takes centre stage amid a seemingly knife-edge decision on whether to hike 50 bps or an even more aggressive 75 bps. There is a light US schedule of data, as China publishes CPI, PPI and Trade (and possibly credit aggregates), while Germany looks to Factory Orders and Industrial Production. Elsewhere Canada has its labour data, with Brazil, Mexico and South Africa consumer inflation readings headlining in the EM space.

** Germany – July Trade Balance **

Imports (-1.5% m/m) were weaker than expected, which should in truth come as little surprise, given that data on oil and gas imports have shown a sharp drop in recent months, and with crude prices dropping in July, the import drop was seemingly inevitable. Weaker exports should equally be no surprise given that many companies have been reducing output due to high input costs, and at -2.1% m/m were broadly in line with a forecast of -2.3% m/m. The more worrying export detail was the sharp 13.7% m/m drop in exports to the U.S., even if volumes are erratic on a m/m basis.

** U.S.A. – August Labour report **

There rather too many market participants and commentators during the earlier part of this summer, who were far too hasty to proclaim that US labour demand was dropping away, based on the move up from an unsustainable low of 166K in March to around 250K, which in pre-pandemic times was considered to indicate solid labour demand. The recent dip in Claims, July’s very strong Payrolls (even if the household survey was rather tepid) and this week’s surging rebound in July JOLTS Job Openings all serve as a reminder that at best what was a red hot labour market earlier in the year is now just hot. August’s report is expected to see a lower but still robust 300K Payrolls gain, with Average Hourly Earnings only expected to ease modestly to 0.4% m/m, to leave the y/y pace unchanged at 5.2%, with the Unemployment Rate also seen holding at a more than 50 year low of 3.5%, and it seems likely that the Underemployment will remain at or close to its record low of 6.7%. But for a hawkish Fed, it may well be the fact that the Participation Rate has retreated from March’s high of 62.4% to 62.1%, still a fairly far cry from the pre-pandemic level of 63.4%, which may be of greatest concern, given that it suggests a fundamental structural change in the labour market, which will only make its task of reining in inflation all the more difficult.