Macroeconomics: The Day Ahead for 28 July

  • Digesting hawkish Fed, better than expected Swedish Q2 GDP; awaiting German CPI/HICP, EC Confidence surveys, US Q2 GDP and weekly jobless claims and Canada CFIB survey; Biden Xi phone meeting, speech by ECB’s Visco; deluge of US, European and Asian earnings features energy giants; Italy and US auctions
  • Germany CPI: rebound expected after June ‘flat fare’ distortion; NRW CPI suggests much stronger than expected outturn, underlines impact of second round effects
  • Markets in danger of another bout of “wishful seeing” and “wilful blindness”
  • US Q2 GDP: tepid bounce expected, focus on Final Sales to Domestic Buyers; strong contribution from Net Exports, Inventories and housing investment likely to drag, Personal Consumption to see modest rise

EVENTS PREVIEW

While the US Q2 GDP tops the data agenda, and there are a deluge of key corporate earnings around the world, it will be the tone of the press / media briefings after the Biden Xi phone call which may prove to be the most  sensitive item, given the very tense state of geopolitics. Statistically there are Australian Retail Sales and Swedish Q2 GDP to digest ahead of German HICP, Eurozone EC Confidence surveys, Canada’s CFIB Business Barometer, with the US also looking to weekly jobless claims and the KC Fed Manufacturing survey. On the earnings front, Samsung and Nissan topped the run in Asia, Europe has Shell, TotalEnergies, Centrica, Neste and Repsol in terms of energy companies, Barclays and Santander in terms of financials, and an array of consumer sector companies such as Anheuser-Busch InBev, Diageo, Nestle, Stellantis, as well as ArcelorMIttal and HeidelbergCement. Amazon and Intel will grab plenty of headlines in the US, with Hershey, Mastercard, Merck & Co, Pfizer and PG&E, and Brazil’s Petrobras rounds off a big day for major energy companies. ECB’s Visco also speaks today, but has already spoken this week, while the govt bond auction schedule sees the usual end of month offering of 5 & 10-yr Italian BTPs, while the US rounds off this week’s coupon issuance with $28 Bln of 7-yr. In terms of earnings, markets appear to be at risk of falling into a self-made trap to feed the greater risk appetite evident at the start of the quarter. Whereby earnings, revenue or KPI “beats” (in many cases on heavily reduced forecasts) are pounced upon as positives (think: Netflix subscriber losses, Google Ad Revenues), even if the reports clearly signal a deteriorating business and economic environment. This is to be frank, no better than central banks hiking rates even as recessionary signals mount, which many market participants are criticizing (even if there is a large spoonful of self-interest attached to this, in terms of a quicker end to rate hikes).

** Germany – July CPI / HICP **

After last month’s CPI was heavily distorted by the one-off effects of the temporary introduction of the flat fare of EUR 9 per month for using public transport, July’s CPI is expected to rebound 0.6% m/m, which thanks to base effects would still see the y/y rate dip 0.2 ppts to 7.4%. However the initial 1.1% m/m reading from German’s most populous state NRW suggests a much higher than expected reading. Within that there were particularly sharp increases for Food (2.2% m/m), Entertainment/Leisure (4.0% m/m), Rents/Utilities (2.0% m/m), Lodging/Catering (1.4% m/m), with the fall in petrol prices providing some offset from Transport (-1.5% m/m), per se confirming fairly broad based second round effects.

** U.S.A. – Q2 Advance GDP **

Q2 GDP data comes the day after the FOMC stuck with a hawkish message, with the statement saying that “recent indicators of spending and production have softened”, but Powell noting that “Demand is still strong and the economy is still on track to continue to grow this year” and “we actually think we need a period of growth below potential in order to create some slack so that the supply side can catch up”. He added that they see a “very strong labor market”, but “we also think that there will be, in all likelihood, some softening in labor market conditions”. Q2 GDP is expected to show growth of just 0.5% SAAR after a 1.6% contraction in Q1, even if the key Final Sales to Domestic Buyers expanded 2.0% in Q1, though it is likely to be in the 0.5% area for Q2, in line with the consensus for GDP. Yesterday’s Goods Trade Balance ($-98.2 Bln vs. expected $-103.0 Bln) and larger than expected jumps in Retail (2.0% m/m) and Wholesale (1.9% m/m) Inventories point to a substantial positive contribution from Net Exports to the headline reading, and a smaller than expected drag from inventories. However Business Investment is likely to have been tepid outside of the mining/drilling sectors, housing investment tumbled (with Pending Home Sales warning of much worse to come), while Personal Consumption is seen slowing to 1.3% SAAR. While the details are obviously critical in any assessment (above all evident in Q1), the risks look to be skewed to the upside on headline GDP, which for the wonderful world of mindless and mind numbing algorithm driven trading may be grist to the mill for risk appetite. Forrest Gump’s ‘stupid is as stupid does’ looks to be an apposite observation. Ironically a higher than expected weekly Jobless Claims reading could add fuel to such fire, in one of those acts of wishful seeing” that spins such an out-turn as restraining the Fed on rate hikes going forward.

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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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