Macroeconomics: The Day Ahead for 29 June

  • Digesting large divergence in Spanish and German inflation, UK Shop Price rise, Japan & Australia Retail Sales; awaiting EC Confidence surveys, ECB Sintra panel with Lagarde, Powell, Bailey & Carstens, other central bank speakers; EIA crude inventories; OECD-FAO annual Agriculture Outlook
  • Germany/Spain HICP: sharp contrast as public transport reduction drags German inflation lower, while energy, food and services see Spanish HICP spike; on net, heightens risk of more aggressive ECB hikes
  • ECB Sintra forum: high level panel likely to peddle optimism on growth outlook, affirm determination to bring down inflation; may skirt around financial conditions conditionality

EVENTS PREVIEW

While month, quarter and half year ends loom in the headlights for markets, the day’s agenda has plenty to contemplate. The ECB Sintra Forum panel with Powell, Lagarde, Bailey & Carstens gets top billing and while Fed, ECB and BoE views are well known, it is interesting to note Carstens’s comments in this week’s BIS Annual Report that “High inflation and mounting growth headwinds call for quick and decisive action by central banks”. For more see https://nam02.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.bis.org%2Fpubl%2Farpdf%2Far2022e1.htm&data=05%7C01%7CAlfred.Michelin%40admisi.com%7C4c1d7e58916640216bd708da59a20676%7C2f55bf3242d444b3a8c2930ac8b182b2%7C0%7C0%7C637920850150553951%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=N5myAEgF53AiEEzCCJKJXE7Nnrf3KpJM8r56dS%2FcQAA%3D&reserved=0. ECB’s Schnabel also speaks on “The role of inflation expectations in monetary policymaking”, as does de Guindos on “Global value chain pressures, international trade and inflation”. The NATO Summit in Madrid takes up the baton from the 3-day G7 Summit, which as expected was long on fine words and good intentions, but rather less impressive in terms of actions. The annual OECD-FAO annual Agriculture Outlook report also requires close scrutiny. The preliminary HICP readings from Spain and Germany top the statistical run, with UK BRC Shop Prices and Japan and Australia Retail Sales to digest, while ahead lie EC Confidence surveys and the now very historical final US Q1 GDP. The EIA will publish both this week’s and last week’s reports on U.S. oil inventories, supply and demand. In broader terms, newswires are again filled with stories about power crises and extreme weather, serving as a timely reminder that what the world is facing in this critical infrastructure area is an array of structural issues, brought on by decades of complacency and neglect, and these problems will present challenges to the global economy for a very protracted period.

The question for today’s Sintra panel is how much humble pie are these 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. BIS’ Claudio Borio’s look “under the hood” of inflation to better understand how its engine works can be found here: https://nam02.safelinks.protection.outlook.com/?url=https%3A%2F%2Fopen.spotify.com%2Fepisode%2F4NkgpUJNau1RU3148EtRB9%3Fsi%3D4m9Q4S8kQGGvUfh0nw9_qw%26nd%3D1&data=05%7C01%7CAlfred.Michelin%40admisi.com%7C4c1d7e58916640216bd708da59a20676%7C2f55bf3242d444b3a8c2930ac8b182b2%7C0%7C0%7C637920850150553951%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=ihF9JrySWXYrNluYq4rnfJZzT63wZLeV3IcmitPLP6I%3D&reserved=0

** Eurozone – June HICP and EC Confidence surveys

– National HICP inflation readings were expected to show a sizeable jump for Spain (8.8% y/y vs. 8.5%) and little change, though extremely high, in Germany (8.8% vs 8.7%) today, and big jumps in France tomorrow (6.4% y/y vs. 5.8%) and Italy on Friday (7.8% vs. 7.3%). Upward pressure will again come from energy and food, with Spain, France and Italy likely to see additional upward pressure in Services, above all due to the hospitality (i.e. tourism) sector. It is again a case of sharp divergence, with Spanish HICP way above forecasts at 1.8% m/m 10.0% y/y, while only the other hand the first state reading in Germany from North-Rhine Westphalia at -0.1% m/m was way below forecast 0.4% m/m, and is a reminder that forecasters are often not very smart. This being the case given that the introduction of the flat monthly charge of just EUR 9.00 to travel on public transport to discourage car usage was always going to weigh heavily in the German inflation equation, driving the transport sub-index down 6.4% m/m, and along with Clothing & Shoes (-1.7% m/m) helped to offset a 4.1% m/m increase in Entertainment & Leisure and Hotels/Restaurants (1.2% m/m). It will also create a a nasty upward base effect as and when its rolled back, but for the moment it should ensure that German HICP/CPI come in well below forecasts. This is to an extent all rather moot, given that the ECB has pre-announced a 25 bps hike in July, but with Kazaks throwing a sharper July rate hike in the ring yesterday, front end Euribor contracts are vulnerable to anything much above expectations. With Q3 likely to see a further rise, a 50 bps hike in September seems inevitable, barring the quite high probability of a further sharp tightening in financial conditions, which will then create an even greater headache for the world’s major central banks. Notably Lagarde said yesterday: “There are clearly conditions in which gradualism would not be appropriate. If, for example, we were to see higher inflation threatening to de-anchor inflation expectations, or signs of a more permanent loss of economic potential that limits resource availability, we would need to withdraw accommodation more promptly” Former Bundesbank president Weidmann’s ‘Per Jacobsen’ lecture on Sunday also offers some important points on how traditional (central bank) evaluation of economic variables may well be inadequate in dealing with the current round of inflation pressures – see https://nam02.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.bis.org%2Fevents%2Fagm2022%2Fsp220626_lecture.htm&data=05%7C01%7CAlfred.Michelin%40admisi.com%7C4c1d7e58916640216bd708da59a20676%7C2f55bf3242d444b3a8c2930ac8b182b2%7C0%7C0%7C637920850150553951%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=Bir8y5Sff5GHqm3UyHVd6Xg6j5oZbojLUDzj%2FfSwmZ4%3D&reserved=0

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© 2021 ADM Investor Services International Limited.

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