Macroeconomics: The Day Ahead for 21 Aug 23

Outside of the South Korean trade data, the sharper-than-expected fall in German PPI, and the unexpected small cut in China’s 1-yr Loan Prime Rate, there is nothing on the data or events calendars, which is likely to create a stir in financial markets, with Zoom the sole highlight in terms of US corporate earnings. The question that arises from the small 10 bps cut in the 1-yr China Loan Prime Rate, while leaving the 5-yr rate unchanged is why did they cut the MTLF rate last week. It certainly marks a break with previous policy, and suggests a greater effort to rein in debt fuelled spending, and encourage debt consolidation, as well as leaning more heavily on bank lending, rather than local govt spending. While China’s debt mountain is clearly a problem, this policy tack does imply a so-called ‘balance sheet recession’, i.e. encouraging debt reduction and more saving, but with business and consumer confidence at such weak levels, the risk is that it compounds the headwinds from the property sector and the impact of tensions with the US and Europe. That said it should over the longer run put the economy on a more even keel, above all by reining in non-productive debt fuelled investment. It is also implicitly an admission that cutting rates will have little economic impact, given that it is clearly not high rates, but a lack of credit demand due to lack of confidence that is the biggest headwind, per se putting the onus on fiscal and legislative measures to stimulate the economy. But this is also a very slow and a rather painful road back to recovery, which the developed world will have to adjust to, and implicitly it suggest China’s voracious demand for resources will be considerably smaller, per se a negative for many commodity markets, and notably German exports of finished goods. The biggest danger is that with so much of China’s private savings locked into real estate (estimated at around 70% of savings), the implied erosion of property prices will impinge heavily on private consumption, even if it will bring property prices down to a level that is more sustainable.

RECAP: The Week Ahead – Preview: 

The new week’s schedule is rather limited with the focus statistically on surveys in the US, Eurozone and US, which include ‘flash’ PMIs and Germany’s Ifo. The US also looks to Durable Goods Orders, Existing & New Home Sales, the Eurozone to German PPI, final Q2 GDP and Eurozone Consumer Confidence, while Japan awaits Tokyo CPI, the UK PSNB budget data and Canada has Retail Sales. On the central bank front, there are the much anticipated annual KC Fed Jackson Hole Economic Policy Symposium and August ECB minutes, while rates are expected to be on hold in both Indonesia and South Korea, with Turkey’s TCMB expected to hike a further 250 bps to 20.0%, and China likely to see a 15 bps cut in 1 and 5 yr Loan Prime rates to 3.40% and 4.05% respectively. But the focus in China will continue to remain on the woes of the property sector, and the contagion effects on local government finances and private wealth management companies, particularly in the absence of any sign of major fiscal stimulus. There is also the BRICS summit in South Africa, which amongst other things is supposedly going to try and reach an agreement on a common BRICS currency, perhaps one of the craziest ideas ever, given that the BRICS economies have essentially nothing in common outside of large populations, which is no basis for a common currency, even if the pushback on US dollar dominance is obviously manifest. A relatively quiet week in terms of events in the commodity space, the EU publishes its MARS crops bulletin, while livestock markets look to USDA reports on Milk Production and Cold Storage, Poultry Slaughter and Red Meat Production, while the annual US Corn and Soy Crop Tour takes place Monday through Thursday. In conference terms, there are the ABC Bullion Precious Metals Forum, Asia Coal Summit and Shanghai Power System and Green Energy. Govt bond supply is seasonally light, with the US selling USD 24 Bln FRN 2-yr, USD 16 Bln 20-yr & USD 8.0 Bln I-L 30-yr, and small offerings in the UK, Germany and Belgium.

Wednesday has the release of G7 flash PMIs, which are expected to be little changed, leaving Manufacturing PMIs expected to continue to contract, above all in Germany (exp. 38.5 from 38.8), and Services readings mostly expanding modestly, with the exception of France (exp. 47.5 from 47.1). Friday’s German Ifo Business Climate is forecast to drop again (exp. 86.7 from 87.3), thanks to a drop in Current Conditions to 90.0 from 91.3; the usual caveat applies that the post-pandemic read across from PMIs to hard data is proving to be quite poor in most countries. German Q2 final GDP is seen unrevised at flat q/q, and the details to show a marginal 0.2% q/q recovery in Private Consumption, and a drop of 0.5% in Capital Investment (after Q1’s surp4ise 3.0% q/q jump).

In the US, Existing Home Sales are expected to be little changed, while New Home Sales are forecast to post a 1.0% m/m bounce after falling 2.1% m/m in June. A steep fall in Boeing Orders (July 52 vs. June 304) is expected to pace a sharp -4.0 m/m drop in headline Durable Goods Orders, with the ex-Transport measure forecast at 0.1% and Non-defence Capital Goods ex-Aircraft continuing to a modest expansion of 0.3% m/m (vs. June 0.5%). Given much discussion about the US Payrolls overstating the strength of labour demand, the preliminary annual revisions to the Establishment survey will attract attention, with many expecting a substantial downward revision. Japan looks to Tokyo CPI, with headline seen falling again to 3.0% y/y due to energy prices and base effects, core measures are also down 0.1 ppt to 2.9% y/y ex-Food and 3.9% y/y ex-Food & Energy, the latter above all due to Services prices, particularly recreation and travel related.

The theme of this year’s KC Fed Jackson Hole conference is “Structural Shifts in the Global Economy”, and the question is how Powell balances signalling that policy rates are at ‘sufficiently restrictive’ levels, above all given tighter credit conditions, against underlining that they will have to remain high to bring down inflation to target and hold it there, particularly as overall demand continues to expand, and the labour market is still quite tight. Markets will above all be focussed on any discussion about ‘real’ vs. nominal rates, especially given the recent rise in long-term nominal yields to pre-GFC levels, as well as any concerns voiced about growth prospects in China and Eurozone.

The Q2 corporate earnings season has largely run its course in the US and Europe, but it will be a busy week for Chinese companies reporting, along with Canadian Banks. While the S&P 500 has come under some pressure as long-dated bond yields have risen, the forward P/E ratio at 18.9 remains very high, and in terms of US Q3 earnings, companies offering negative guidance (66) outstrip those offering positive guidance (38) by a substantial margin. Highlights for the week according to Bloomberg News are likely to include: AIA Group, Analog Devices, Anta Sports Products, Autodesk, Baidu, Bank of Communications, Beijing Kingsoft Office Software, BHP Group, China Citic Bank, China Construction Bank, China Life Insurance, China Pacific Insurance Group, China Shenhua Energy, China Tourism Group Duty Free, CRH, Dollar Tree, Intuit, Kuaishou Technology, Lowe’s, Marvell Technology, Medtronic, Meituan, Muyuan Foods, NetEase, Nvidia, Ping An Bank, Royal Bank of Canada, Shanxi Xinghuacun Fen Wine Factory, Snowflake, Toronto-Dominion Bank, Wesfarmers, Woodside Energy Group, Woolworths Group, Workday, Wuliangye Yibin & Zijin Mining.