Macroeconomics: The Day Ahead for 25 Aug 23

Eminently all eyes will be on Powell’s speech at Jackson Hole, but there are a number of data items worthy of note ahead of that. From the overnight session, there are the weak but better than expected UK GfK Consumer Confidence, Tokyo CPI (mixed, headline & core better than expected, ‘core core’ higher than expected) and the final and detailed German Q2 GDP to digest, ahead lie Germany’s Ifo Business Climate, Brazil’s IBGE Inflation IPCA-15 and US final Michigan Sentiment. There are also a good number of Fed and ECB speakers doing TV/media interviews on the sidelines of Jackson Hole, with ECB’s Lagarde speaking in the evening at Jackson Hole and BoE’s Broadbent tomorrow. The UK will also be looking to the Ofgem quarterly household utility bill ‘price cap’ announcement, which will cut household energy bills by a further 7% from October, perhaps less than some had hoped, and therefore also less of a counter to the upward pressure on inflation from services. A very busy day for China corporate earnings bears some scrutiny given the adverse trends in the economy, with highlights including Bank of Communications CMOC, Huayou Cobalt, Jiangxi Copper, Pilbara Minerals, Shenhua, Tongling Metals, Zijin Mining. A couple of observations on the conclusion of the BRICS summit, which will see Saudi Arabia, UAE, Egypt, Iran, Argentina and Ethiopia join the group as of January 2024: a) it will include 6 of the world’s 9 largest oil producers, with clear implications for ‘petrodollars’ (see table), b) it also includes the number 1, 3 & 4 of the world’s largest wheat producers, c) it encompasses just under 41% of the world’s population, and d) it accounts for 36% of global GDP, so Europe and North America would do well to look to their laurels with a very self-critical eye.

** Germany – Q2 GDP, August Ifo Business Climate ** The Ifo Business Climate is forecast to drop again (exp. 86.7 from 87.3), thanks to a drop 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 was unrevised as expected at flat q/q, though the details were wide of expectations by a large margin, with Capital Investment +0.4% q/q vs. expected unchanged, and Private Consumption unchanged lower than the expected 0.1%, but the huge revisions to Q1 (above Capital Spending 1.3% vs. prior 3.0%) advise against overinterpreting these details, and also raise questions about the quality of data gathering.

** U.S.A. – Powell speech at Jackson Hole **

– As much as the Fed chair’s speech is always much anticipated, and Powell’s very hawkish speech last year pummelled the equity market, quite often it has proven to something of a non-event.  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. Thus if he were to talk about ‘sufficiently restrictive in real terms, this would be probably viewed as opening up a window for nominal rate cuts, if say inflation comes down to 2.0-2.5%%, given that the Fed is unlikely to want to see real rates significantly above 2.0% on a sustained basis. But the fact that both Collins and Harker generally welcomed the rise in Treasury yields as helping the Fed’s cause in bringing down inflation tends to suggest that for the time being the Fed is putting the rise in real yields on the backburner, probably to avoid sending markets a potentially dovish signal. It will also be interesting to see if Powell expresses any concerns about growth prospects in China and Eurozone.