Macroeconomics: The Day Ahead for 4 August

  • UK rate decision tops day’s agenda, as geopolitical fears ebb a little; record Australia Trade surplus, German Orders and UK auto sales drop to digest; UK Construction PMI, US Jobless Claims, Jobs cuts and Trade ahead; Czech rate decision, Fed speak, and further raft of corporate earnings, France and Spain debt auctions
  • BoE rate decision: small majority see 50 bps rather than 25 bps hike due to sky high inflation, solid labour market; but short and medium term growth prospects look dire; “active” QT plans also in view
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EVENTS PREVIEW

While there is some tentative perceived relief in terms of the geopolitical environment, it will continue to cast a long shadow.

The day’s statistical schedule is quite light, with a record Australian Trade surplus, weak but slightly better than expected German Factory Orders, and a further fall in UK auto sales to digest, ahead of UK Construction PMI, US weekly jobless claims and US & Canada Trade.

The UK BoE MPC meeting will be the focal point on the events calendar, which also has the ECB’s monthly Bulletin, an expected further 25 bps rate hike to 7.25% in Czechia, Fed speak from Mester, and US NOA update on this year’s Atlantic hurricane season.

There is another deluge of corporate earnings, though the Tesla AGM may generate as much, if not more interest, as investors are increasingly taking a negative view on CEO Musk.

In Asia Softbank and Toyota feature, while Europe has Adecco, Adidas, Credit Agricole, Glencore, and Rolls Royce, and energy companies (such as Cheniere, ConocoPhillips, EOG Resources) are again among the headliners in the US, with Cigna, Eli Lilly and Kellogg also in view. France and Spain hold multi-maturity auctions of debt.

While not implying any such move was imminent, the comments from Japan Ministry of Finance official Saito that Japan must prepare for an eventual end to the BOJ’s yield cap are a signal moment that the policy wind direction is changing, even if the potential for any such move to unleash a brutal JPY rally suggest it is still a long way off.

** U.K. – MPC rate decision **

A marginal majority is expecting the MPC to take a more aggressive stance with a 50 bps hike to 1.75%, with the rest looking for a further 25 bps hike.

Inflation pressures in the UK are clearly not abating, and a peak of 12.0% y/y in October looks all too plausible, and BoE forecasts for CPI will be revised higher, and growth forecasts for 2022, and perhaps 2023 revised lower.

The phasing of govt payments to consumers to alleviate utility bill pressures on households is clearly an attempt by the UK Treasury to manipulate the ONS to treat the payments as a discount, i.e. to reduce the upward pressure on CPI – cheap tricks are the stuff of successive UK governments. But the fact remains that the UK is suffering from many decades of underinvestment in pretty much everything that is critical to any country’s infrastructure (also true elsewhere in Europe and North America, but so much worse in the UK), which has been compounded by the inability of the current government to fully comprehend the implications of the damage Brexit did to non-tariff barriers to Trade.

The candidates to succeed PM Johnson as PM are just as clueless, as is the Labour opposition; there is little or nothing that is Great about Britain, the headwinds to growth in the current decade will remain high, without a fundamental rethink and grass roots reforms, for which there are no proposals, nor it would seem political appetite.

On balance, the risk is that in the face of the multitude of risks to the UK economic outlook, the MPC sticks with a 25 bps hike, while hinting at further moves going forward, with the other point of focus on what details are provided about its plans to actively (rather than passively) reduce the size of its balance sheet. The consensus on the latter would appear to be a £10 bln per month pace, presumably factoring in adjustments for passive reductions (i.e. redemptions).

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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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