Macroeconomics: The Day Ahead for 20 July

Once again, the data and events diary looks to be very meagre in terms of genuine potential market movers. Statistically, there are Japan’s CPI and German PPI to digest ahead of Taiwan Export Orders and US Housing Starts. As expected China kept its 1 & 5-yr Loan Prime Rates unchanged for a 15th month, once again dashing some hopes of significant policy easing, and underlining policymakers’ ongoing concerns about speculative and systemic financial risks. Ahead lie a speech by ECB’s Villeroy and the ECB’s Bank Lending survey, with the UK (50-yr) and Germany (7-yr) holding debt auctions. A busier day for US corporate earnings will likely see Chipotle, Halliburton, Netflix among the headline makers, with production reports from Anglo American and BHP also attracting attention. But after a now very typical display of sudden risk aversion as economic and pandemic reality takes a broadside shot at central bank financial repression induced FOMO and TINA, the main talking point will be whether this signal a more significant correction to risk asset prices. From my perspective, the sharp >6.0% slide in oil prices following the OPEC+ agreement on gradual production increases was the straw that broke the camel’s back, above all given that oil prices remain markets’ primary real time inflation proxy. To be sure there are plenty of other factors in play, above all the persistent rise in infection rates, low vaccination rates outside of Europe and North America, along with a good number of indications that the recovery looks to be in a plateau phase (Friday’s PMIs will be very important in that respect). The China ransomware hack accusations by EU and US, with Japan joining the list of accusers, clearly also serve as a reminder of geo-political security tensions. China’s SOE and property sector debt woes are also back in the spotlight. Beyond this appalling liquidity conditions (only partly seasonal, holiday related), the lack of breadth and depth to recent rally, while the slide in US and G7 bond yields is exacerbated / attenuated by central bank QE decimating the “free float” in govt bond markets. But as the array of attached charts highlights, outside of the oil price slide, the widening in credit spreads, correction in equity indices and the pick-up in volatility are for the time being very modest. As ever the critical aspect is that with so much central bank induced leverage in play in markets, will this result in any significant position liquidations or margin calls.

** U.S.A. – June Housing Starts **

– Following from the NAHB Housing Index, today’s Housing Starts are expected to post a modest 1.2% m/m rise to 1.590 Mln, with the persistently faster pace of Permits seen sustained, and implying a strong pipeline that will underpin Starts for some time. Eminently supply chain issues, raw materials costs and labour shortages continue to act as a restraint.