Macroeconomics: The Day Ahead for 27 July

  • All eyes on the Fed on busy day for data and earnings; digesting UK Shop Price surge, falls in German and French Consumer Confidence; awaiting Italy confidence surveys, US Durables, Goods Trade, Pending Home Sales & Wholesale Inventories; Meta Platforms heads busy run of US earnings; UK, German and US govt bond auctions
  • US Durables: transport seen dragging headline down, defense the wildcard; surveys imply downside risks to expected meagre increase in core orders
  • US Goods Trade Balance: further narrowing of deficit expected, pointing to positive next exports contribution to Q2 GDP tomorrow
  • US Pending Home Sales: modest fall expected, but New Home Sales plunge and rising inventories skew risks to downside
  • FOMC: 75 bps rate hike inked in, tricky communications challenge as fresh high in inflation keeps pressure on Fed, but labour market and growth indicators deteriorating; Fed likely to err to hawkish guidance
  • US New Home Sales: months’ worth of inventories

EVENTS PREVIEW

The FOMC meeting is front and centre on a busy day for statistics and earnings. There are UK BRC Shop Prices, Australian Q2 CPI, China Industrial Profits and German & French Consumer Confidence to digest, while ahead lie Eurozone M3, accompanied by US Durable Goods Orders, Goods Trade Balance, Retail and Wholesale Inventories. The following are likely to be among the headline makers in terms of corporate earnings: Tata Motors/JLR, BASF, Carrefour, Credit Suisse, Endesa, Lloyds Banking, Mercedes Benz, Puma, Rio Tinto and Universal Music in Asia & Europe, while the US features: ADP, Boeing, Bunge, Kraft Heinz, Meta Platforms and Qualcomm. Govt bond supply takes the form of UK 29-yr Index-Linked, German 10-yr and US 2-yr FRN.

** U.S.A. – June Durable Goods Orders, Goods Trade Balance & Pending Home Sales **

The busy run of data ahead of the FOMC decision is expected to see headline orders drip 0.3% m/m, while core measures are seen eking out a 0.2% m/m gain. In terms of the headline, much depends how much an expected drop in non-defence transport orders (above all aircraft) is offset by defence, the latter on the assumption of a boost from the Ukraine War. June survey measures implied at best sluggish levels of new orders, and impart some downside risk to core measures. The Advance Goods Trade Balance and the Wholesale & Retail Inventories will likely prompt some last minute tweaks to forecasts for tomorrow’s advance Q2 GDP, with the Trade Balance seen narrowing slightly to $-103.0 Bln, and thus confirming a reasonably strong contribution to GDP, and Wholesale and Retail Inventories are also forecast to post further robust gains of 1.5% and 1.1% m/m. However in contrast to 2021 and early 2022, the stronger the gains are, the more they will be perceived to be ‘involuntary’, and likely to see a sharp reversal in H2 2022 as consumer demand slows. Last but not least Pending Home Sales are seen dropping 1.0% m/m, and following on from the sharp fall in New Home Sales and the sharp climp in New Home Inventories (see chart), the risk is firmly to the downside of forecasts, as rising rates, cost of living pressures and sky high prices weigh heavily. Q2 GDP Housing Investment is expected to drop sharply.

** U.S.A. – FOMC rate decision **

The Fed is expected to hike rates by a further 75 bps to 2.25/2.50%, which would take the Fed Funds target to what the Fed assumes is the longer-term neutral rate. This meeting does not have an update on the FOMC’s summary of projections, and so market reaction will be determined by the language on Inflation, Employment and the growth outlook, initially in the statement and then at Powell’s press conference, as well as forward guidance on the rate trajectory, with markets currently discounting a further 100 bps of rate hikes by the end of the year, and for rates to be reduced by 38 bps in H1 2023. The FOMC faces a big communications challenge, in so far as the June CPI data showed an acceleration in generally rather ‘sticky’ core Services CPI, and a by contrast only a modest deceleration in core Goods CPI. Equally while weekly jobless claims have risen, at 253K they still indicate an overall tight labour market, even if Average Hourly Earnings have been decelerating somewhat. On the other hand, the advance Q2 GDP data on the day after the FOMC Meeting are expected to show growth of just 0.5% SAAR after 1.6% contraction in Q1, even if the key Final Sales to Domestic Buyers expanded 2.0% in Q1, though likely to be in the 0.5% area for Q2, in line with the consensus for GDP. More timely data such as the PMIs on Friday and other surveys (with Consumer Confidence due on Tuesday seen falling to 96.9 from 98.0, and the labour differential above all in focus) point to contraction in Q3. That said, there will be those that counter that the 1970s J Arthur Burns led Fed took its foot off the pedal on hiking rates too quickly due to recession signals, and thus contributed to the ballooning of inflation rates in that era. Thus the statement and Powell will likely reiterate that policy will need to be restrictive to combat inflation, and that there are few signs that it will slow significantly enough to revert to a more modest pace of rate hikes, even while acknowledging growth has slowed significantly, and there has been some loosening of labour demand. Powell may well observe that there will be two rounds of CPI and labour data before the September meeting, but they will have to show clear signs of easing pressures, if the Fed is to slow the pace of tightening at that meeting.

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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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