Macroeconomics: The Day Ahead for 27 July

A busy day for data, events and earnings awaits, with South Korea’s advance Q2 GDP (robust and broadly in line with forecasts), Japan’s Servcies PPI and China Industrial Profits to digest ahead of Eurozone M3, the UK CBI Retailing survey and a rush of US data – Durable Goods, Consumer Confidence, CS & FHFA House Prices and the Richmond Fed surveys. The IMF’s World Economic Outlook update will likely see modest forecast upgrades for Europe and North America, and some downgrades at least for 2021 in Asia (Japan, India, ASEAN 5); but global forecast will be unchanged at 6.0% yr/yr, as already flagged by Georgieva last week. The IMF inflation forecasts also bear some scrutiny, as the April projections for 2021 at 1.6% y/y (2022 1.7%) for advanced economies, and 4.9% y/y in 2021 for developing/EM economies look to be too low, and the IMF is likely to underline that much of the pressure is in non-discretionary areas such as food and energy, which hits lower income consumers in the EM space especially hard, and thus presents a further potential risk to growth. Central bank speakers include BoJ’s Kuroda and ECB’s de Cos, with Hungary’s MNB expected to follow up last month’s initial rate with a further 15 bps hike to its Repo and Deposit Rates. Govt bond supply sees 5-yr auctions in the UK and US and a new 2-yr Zero in Italy. Tech behemoths dominate the US corporate earnings run with Alphabet, Apple and Microsoft all reporting, and 3M, ADM, AMD, GE, Starbucks, UPS and Visa also likely to be among the headline makers.

Thematically, infection rate trends and China’s sweeping regulatory interventions continue to provide the overarching themes. The sharp drop in UK infections rates over the past week, even though this remains high, clearly offers some hope that the re-opening recovery story gets renewed momentum, even if it will be at least another week before the impact of ‘freedom day’ can be properly judged. In respect of China’s interventions, one thing is now very clear and that is this is a row back to Maoist ‘command and control’, even if its economy is totally transformed relative to the Mao era. Perhaps the strongest signal lies in how the focus has been on reining in and taking more control over those companies with no obvious ties to the govt, such as Alibaba, Didi and Tencent, while others tech behemoths for example Huawei and ZTE are left untouched. In the longer run, it is a major headwind to both the Chinese economy and to innovation in the tech sector, which will also heighten tensions with western advanced economies and their allies, embedding a ‘cold war’ like mentality. The challenge for the western advanced economies is large, above all in terms of building up an alternative production and supply chain infrastructure, which will take many years even with all the advanced technology, and with likely substantial implications for costs, margins and profitability.

U.S.A. – Durable Goods Orders, Consumer Confidence & House Prices

Durable Goods Orders should get a sizeable headline boost from transportation (mainly aircraft thanks to a large jump in Boeing Orders, but also vehicles), with core measures seen posting a very solid 0.8% m/m rise, with primary resources pacing that core rise, amid a mixed picture in other categories. Shipments will be closely watched in t terms of final adjustments to Thursday’s Q2 advance GDP forecasts, with another solid 0.8% m/m rise after 1.1% and 0.9% in prior months suggesting a strong CapEx contribution to GDP. Consumer Confidence is expected to dip modestly from a pandemic high of 127.3 to 124.0 (and having skyrocketed from January’s 87.1), buoyed above all by strength in the labour market (Labour Differential hit a 21-yr high at 43.5 in June), and also in stark contrast to the unexpected sharp fall in Michigan Sentiment (80.8, final reading also due) which continues to lag the Conference board heavily. Also of note in the detail will be 1-yr Inflation Expectations that edged up to a cyclical high of 6.7% in June, and above all Income Expectations which rose to a pandemic high of 10.1 in June, but still are well below 2017-2019 levels as per the attached chart. With CPI OER (Owners’ Equivalent Rent) likely to see a sharp rise over the next year from what have been subdued levels and thus boosting core CPI, there will also be plenty of focus on further sharp rises in House Prices: FHFA median 1.5% m/m, CS CoreLogic median 1.6% m/m 16.2% y/y.