Macroeconomics: The Day Ahead for 27 June

The new week gets off to a slow start in statistical terms with US Durable Goods and Pending Home Sales the sole highlights on the agenda, as a wholly unsurprising, lockdown induced fall in China’s May Industrial Profits is digested. In events terms, the G7 leaders’ meeting continues in Germany, but increasingly looks like a group that is all talk and little action, with the display of unity not matched by anything of great note in terms of actions, with most of the leaders in a weak position domestically, being challenged both by the various domestic cost of living crises, and by in-fighting in their respective governments. This toothlessness is perhaps best encapsulated by the efforts to ban Russian Gold imports, which might at the margin have some impact on prices, but little impact on global gold trade given that Asia and the GCC will not be party to any such agreement; per se any such G7 agreement looks to be on the wings of there being limited economic impact, thus consigning it to the category of ‘gesture politics’. Following on from the joing call by French energy companies for consumers to cut back on energy consumption, EU energy ministers will now meet to discuss how to curb usage, the question is how this ends up sitting with the general public, primarily whether it just sows even more divisions with the potential to prompt social unrest. The ECB’s Sintra Forum on Central banking gets under way, though the major highlights in speech terms will be on Tuesday and Wednesday. As noted in the week ahead below, price action in many asset classes for much of the week will be dominated by quarter end flows, and as the end of Q1 rally demonstrated, it will say little about actual risk sentiment, let alone signal greater optimism about the overall economic outlook.

** U.S.A. – May Durable Goods Orders / Pending Home Sales **

– Durable Goods Orders are expected to rise a meagre 0.2% m/m, with the ex-Transport measure seen up 0.3% m/m/ while the core CapEx proxy Non-defence Capital Goods ex-Aircraft is forecast to rise 0.1%. The loss of momentum has been palpable for some months, and the weakness in PMIs and regional Fed surveys impart downside risks relative to forecasts. Pending Home Sales are forecast to tumble another 3.9% m/m, as was the case in April, but with MBA Mortgage Applications tumbling and mortgage rates soaring, a weaker than expected outturn looks to be a strong possibility.

Last but not least, I look forward to joining Izabella Kaminska on Monday at 11:00 BST for an online chat ‘Spot Markets Live’ (reviving the FT Alphaville ‘Markets Live’ format) about markets and macro on https://nam02.safelinks.protection.outlook.com/?url=https%3A%2F%2Fthe-blindspot.com%2Fspot-markets-live-lives%2F&data=05%7C01%7CAlfred.Michelin%40admisi.com%7C0b804deece2a4a146d9708da581088b3%7C2f55bf3242d444b3a8c2930ac8b182b2%7C0%7C0%7C637919125300984602%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=rYXB4m%2BGTLPFuVW6Wq4qZjAdQCpKAEo%2F4FxUtjyLvm4%3D&reserved=0

RECAP: The Week Ahead – Preview:

  As a tempestuous and volatile H1 2022 draws to a close, quarter end rebalancing is likely to dominate market flows, and with many funds sitting on very high allocations to cash, price action may hint at renewed risk appetite. But the fluid (market) views on inflation and growth risks, central banks that have lost control of the rate trajectory narrative and, whose economic forecasting credibility is shot, ongoing supply chain disruptions and a rather toxic political backdrop, be that at national or geopolitical levels remain the overarching themes which will continue to dominate in H2 2022. The tech sector offers a useful frame of reference for thinking about what ails the global and national economies. When a computer network is set up, the critical primary aspect is security, this encompasses ensuring that there are no vulnerability to single points of failure that disrupt network operations, i.e. there is always a failover, as well as obviously ensuring that the network is secured against external attacks. The post-Cold War technological revolution may have delivered a sustained period of disinflation, but primarily by cutting costs on infrastructure (in the broadest of terms) security, and prizing efficiency over ensuring robust supply chains and output stability. The flaws of this approach has been brutally exposed by the pandemic and the Russian invasion of Ukraine in so many ways. There are no quick fixes, though there are plenty of opportunities as a consequence. The gravest danger is that the world lapses into a time old narrative of ‘when all economic solutions have been exhausted, then there is always the military option’. This was, and always will be an archetypal demonstration of deficit of thought, a declaration of intellectual, emotional and moral bankruptcy, whose primary consequence is death and destruction on a massive scale. It is generally only espoused by imperialists, despots and those lame and vain political leaders who have no interest in serving their nations and the populations therein, and their only concern being about holding onto the levers of power to satisfy their inflated egos.

The week ahead will probably be most notable for its series of geopolitical events, starting with the G7 meeting in Germany, rolling through the NATO summit in Madrid and ending with a keynote speech by China’s President Xi to mark the 25th anniversary of the handover of Hong Kong to China. The ECB’s annual Sintra Forum on Central Banking will be the focal point in central bank terms, in addition to another busy schedule of other central bank speakers, and the delayed Brazil BCB quarterly inflation report. The US dominates the data schedule via way of Consumer Confidence, Durable Goods, Personal Income/PCE, House Prices and Auto Sales, the Eurozone has provisional CPI readings, China has NBS PMIs, the UK looks to credit aggregates, BRC Shop and Nationwide House Prices, while Japan has Tokyo CPI and BoJ Q2 Tankan, Canada April GDP and Australia Retail Sales. The week ends with Manufacturing PMIs/ISM, which are likely to underline that the energy crisis along with geopolitical tensions are prompting some demand destruction, easing some supply chain bottlenecks, though not in labour markets. Price action in the commodity space remains subject to concerns about the global economy, often temporarily overriding underlying supply and demand considerations, which generally reassert themselves, once the flow of ‘paper’ trades has ironed itself out. As elsewhere, market liquidity conditions remain very poor. The week brings the monthly OPEC production meeting, the EIA’s monthly Production report, USDA acreage estimates and a slew of other grains & oilseeds reports, the International Cotton Advisory committee’s S&D report, and there are two major Lithium conferences in Australia and USA.

Statistically Eurozone HICP inflation readings take top billing, with sizeable jumps seen for France (6.4% y/y vs. 5.8%) and Spain (8.8% vs. 8.5%) and Italy (7.8% vs. 7.3% and little change in Germany (8.8% vs 8.7%) and Italy. Given that the ECB has pre-announced a 25 bps hike in July, and with Q3 likely to see a further increase, a 50 bps hike in September seems inevitable, barring the quite probability of a further sharp tightening in financial conditions, which will likely create an even greater headache for the world’s major central banks. EC Confidence surveys are expected to echo PMIs with broad based and relatively sharp fall in all categories, while US Consumer Confidence is seen tumbling to 100.0 from 106.4, which would be the lowest reading since February 2021. US Pending Home Sales are forecast to tumble another 3.9% m/m, while House Price indices (for April) are expected to post further sharp gains (1.6% and 1.8% m/m). Durable Goods Orders are seen posting at best tepid increased on headline and core measures. The focus will however be on the PCE deflators, which are expected to accelerate in m/m terms to 0.7% m/m headline edging up the y/y rate yo 6.4%, with core seen up 0.4% m/m, for a 0.1 ppt dip in the y/y rate to 4.8%. US Auto Sales are likely to bounce from an abject 12.69 Mln SAAR pace in May to a still weak 13.4 Mln, as low inventories and output continue to constrain, the cumulative short fall relative to the avg 2018/19 pace since the start of the pandemic now amounts to around 6.0 Mln. Japan’s Q2 Tankan is forecast to show current Manufacturing DIs little changed, but outlooks upgraded, while Services measure pick up sharply in current and outlook terms, in turn helping to boost All Industry CapEx to 8.3%, after a tepid 2.2% in Q1. For the UK the Lloyds Business Barometer seems likely to reverse some of May’s unexpected rebound to 38 from April’s 33, and with household finances under pressure, there will be particular focus on the growth in credit card spending, which surged in April, with overall Consumer Credit expected to ease slightly, while Mortgage Approvals are seen dipping to 64K from 66K. But overall it remains the case that high frequency data will offer more valuable insights into the extent of the current slowdown and demand destruction.

The question for the ECB’s Forum on Central Banking is very simply, how much humble pie are central bankers willing to eat in terms of how badly they have misjudged the build-up of inflationary pressures (notably much worse in Europe, North and South America and Africa than much of Asia). We can certainly expect the expression of much bravado that rising policy rates will not tip economies into recession, the question is how much of a slowdown in growth, and how far they will allow financial conditions they will tolerate before they might relent.

Retailers/consumer oriented companies dominate a modest US corporate earnings schedule, with Bloomberg News highlighting the following as likely to be among the headline makers: Nike, H&M, Bed Bath & Beyond and Walgreens Boots Alliance, Alimentation Couche-Tard, Constellation Brands, General Mills, Micron Technology, Paychex, and Prosus. Govt bond supply is relatively plentiful led by the US with $131 Bln of 2, 5 & 7-yr, with the EU, Germany and Italy holding auctions in the Eurozone, the UK sells I-L and Japan 2-yr.