Macroeconomics: The Day Ahead for 22 August

  • China LPR cuts, South Korea Trade to digest as week gets off to a subdued start; Polish Retail Sales and US Chicago National Fed Activity Index ahead, along with Zoom earnings and Belgian OLO auction
  • Skewed China LPR cuts underscore targeting of measures to prop up woe stricken property sector, but more sticking plaster than solution
  • Week Ahead: Powell Jackson Hole speech the focal point; PMIs, business and consumer surveys in view, along with US PCE deflators, Durables and more Home Sales; Japan Tokyo CPI; extreme weather, energy and power crises, dysfunctional politics and risk of precipitous actions in Ukraine the overarching themes

EVENTS PREVIEW

A light schedule of data and events awaits, as holiday season thinned volumes and a market vigil ahead of Powell’s Jackson Hole speech on Friday likely contribute to subdued trading, but as Friday’s price action amply demonstrated, spikey price action remains a very real risk. China’s skewed LPR cuts, with the 1-yr rate cut 5 bps, while 5-yr was lowered by 15 bps underlines its focus on trying to prop up its woe stricken property sector, even if balance sheet resolution will be far more important than rate tweaks, if prospects for the sector are to genuinely improve. There is also the South Korea August 1-20 Trade data to digest, which highlighted a sharp drop in exports to China, as well as sizeable drop in Semiconductor exports. Outside of that, there are only Polish Retail Sales ahead, primarily of significance for an indication on how much sky high inflation and surging interest rates are bearing down on private consumption, in the wake of last week’s very weak Q2 GDP data. There are no major central bank speakers scheduled, while Zoom is the highlight in terms of corporate earnings, and Belgium sells 5 & 10-yr. Otherwise the overarching themes remain extreme weather, energy crises and power supply woes around the world, along with dysfunctional and polarized politics in so many developed world countries.

RECAP:  Week Ahead Preview

The new week brings the Fed’s Jackson Hole conference, with Powell delivering the keynote speech on Friday, while the ECB publishes the ‘account’ of its August meeting. Surveys dominate the data schedule via way of flash PMIs, Germany’s Ifo Business Climate and a rash of other business and consumer confidence measures, with the US also looking to Personal Income & PCE, Durable Goods, Advance Goods Trade Balance, New and Pending Home Sales. Japan publishes Tokyo CPI, and inflation data also tops the EM schedule, with readings from Brazil, Mexico and South Africa. China is expected to follow last week’s MTLF cuts with a further 10 bps cuts in both its benchmark Loan Prime Rates, with the Bank of Korea seen raising rates 25 bps, Indonesia holding and the Bank of Israel hiking 50 bps.

In the commodity space earnings from a raft of China’s key energy, metals and solar components producers will be watched, along with extreme weather in Europe, China and other parts of the world, as the US ProFarmer crop tour gets underway, and the EU publishes its monthly MARS Crop Bulletin. Oil and gas inventories remain low, with Europe and Asia in a race to restock gas inventories ahead of winter and the ongoing threat of more acute supply disruption from Russia, in turn feeding a US energy export boom, which on the other hand leaves concerns about US domestic inventories. As was evident last week, recession expectations and chatter have dragged many commodity prices lower, but the effect has clearly been exacerbated by funds cutting positions, and poor supply fundamentals have started to reassert themselves. Geopolitical tensions remain extraordinarily high, and while the Russia-Ukraine war looks to be in gridlock, Wednesday brings Ukraine’s Independence Day, and with Russia seemingly gaming the Zaporizhzhia nuclear power plant, and Ukraine now using long distance weapons into Russian occupied Crimea, the danger of some form of highly precipitous action has probably never been higher. For a discussion on China’s drought and impact on energy supply on CGTN Europe last week, see: https://bit.ly/3ccilZS .

The week’s run of PMIs and array of other surveys in Europe and North America are expected to deteriorate vs July readings, with the sole exception of a rebound in the US Services PMI after an unexpectedly steep drop in July. It will as ever be a case of boring down into the details on Orders, Inventories, Prices and Supplier Deliveries to make any proper analysis, and as has been seen on a number of occasions in recent months, surprises (upside and down) are probable. US Durable Goods Orders are expected to post a solid headline gain, on defence related demand, but core measures are at best expected to eke out small gains. Both New and Pending Home Sales are seen falling again, echoing last week’s Existing sales and NAHB Housing Index, while PCE deflators are expected to echo the flat m/m headline and modest core m/m CPI gains.

On the central bank front, the fluidity of market views on central bank rate trajectories continue to feed high levels of volatility in Short Term Interest Rate futures and govt bond yields, and this is unlikely to change anytime soon. Ahead of Powell, the ECB minutes will be of interest in terms of the rationale for the sharper than unexpected July hike and the unceremonious jettisoning of forward guidance, thus bringing it into line with the BoE and Fed, as well discussion around tighter ‘financing conditions’, and the inherent conflict between broadening inflation pressures, and quite rapidly dimming growth prospects. Panetta’s speech on Tuesday will also be of interest given his generally heavy dovish lean. As for Powell, it is likely that he will remain hawkish, stress that the CPI fall was welcome, but still far too high and that labour markets remain tight. Given recent Fed speak, he may stress that smaller future rate cuts will should not be assumed to signal a peak in rates is close, and that easier financial conditions due to lowered market rate trajectories only make the Fed’s task harder. He will doubtless also add the point that markets looking for a Fed pivot to rate cuts in early 2023 are making a mistake. It will also be interesting to see if there are any concerns raised about the housing downturn, and how much he again underlines that a shallow recession and a loosening labour market are a price worth paying as the Fed is full committed to getting inflation down (echoing the July press conference).

Canadian banks, a further rush of Chinese corporate results (Chalco, CATL, CNOOC, JD.com, Meituan and PetrocChina amongst others), and Salesforce and Zoom headlining in the US top the earnings schedule, which is likely to see the following among the headline makers according to Bloomberg news: AIA, Autodesk, Bank of Ningbo, Bank of Nova Scotia, CIBC, China CITIC Bank, China Life Insurance, China Overseas Land & Investment, China Pacific Insurance Group, Cnooc, Dell, Dollar General, Dollar Tree, Intuit, JD, Medtronic, Meituan, PetroChina, Ping An Insurance, Qantas, Royal Bank of Canada, Salesforce, Snowflake, Toronto-Dominion Bank, VMware, Woolworths, Workday, Zoom.

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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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