Macroeconomics: The Day Ahead for 5 August

The week ends with the US monthly labour report dominating a relatively busy data schedule, which has Japan’s wages and Household Spending, German and French Industrial Production, Thai and Philippines CPI to digest, with Canadian Unemployment and the UN FAO World Food Price ahead, while Sunday has the latest Chinese Trade data.. On the events calendar, there are the expected 50 bps hike RBI rate decision and the RBA’s Statement on Monetary Policy (SOMP) to digest, while BoE Chief Economist Pill holds his regular post MPC meeting media conference. Meanwhile Romania’s BNR seen hiking rates 100 bps to 5.75%, following in the footsteps of many CEE central banks that have been forced into rear-guard ‘behind the curve’ rate hikes. A more modest run of corporate earnings has Allianz, Rheinmetall and WPP among the highlights in Europe, while across the pond headline makers may include Goodyear, Liberty Media and Western Digital.

In terms of the post mortem on the BoE’s 50 bps rate hike, and provisional decision to start actively reducing the size of its balance sheet at a pace of £10 bln per quarter, and set up a Short-term Repo Facility to mitigate the impact, the market reaction was not really any great surprise. That is given the fact that the BoE is forecasting that the UK will enter recession in Q4 2022, and remain in recession for 5 quarters, while projecting a peak for CPI in October above 13.0%, and only a relatively modest drop to 9.5% in 2023. Markets were quick to reduce the peak on rates to 2.75%  in early 2023, and will doubtless push the trajectory considerably lower, if activity data in coming months proves to be weaker than expected, and even more so if nominal wage growth does not pick up as the BoE is projecting. This may all prove to be rather moot as Conservative leadership favourite Truss and her supporters have clearly decided that the BoE is to be held high as the scapegoat for high inflation and weak growth, threatening the BoE’s independence, in what looks to be a further ominous echo of the sort of policies espoused in the 1930s by Oswald Mosley (British Union of Fascists leader).

Next week’s schedule is headlined by US and China inflation data, UK preliminary Q2 GDP and June monthly activity data, and a holiday season dictated light calendar of central bank speakers, while the corporate earnings season winds down slowly. The EIA, iEA and OPEC also publish their monthly Oil Market Reports, as oil markets bend to recession and by extension oil demand concerns, despite supply remaining very tight.

** U.S.A. – July Non-farm Payrolls / Unemployment **

US labour data have proven to be resilient, or at least that has been the message from Payrolls, but the latter are again expected to lose momentum with Private Payrolls seen at 230K, after posting a robust increase of 381K in June; any weakness will clearly undermine a key element of the Fed’s case for moving rates into restrictive territory. That said the Fed has already said it wants to see labour market conditions loosen, therefore one month of weaker labour data is unlikely to soften its rhetoric. The Participation Rate is not expected to improve after dipping to 62.2% in June, still well below the pre-pandemic level of 63.4%, and along with the Underemployment Index at a long-term low of 6.7%, both continue to contribute to the pressures on Wages & Salaries evident in last Friday’s ECI (1.4% q/q vs. prior reading of 1.2% and 1.0%). Average Hourly Earnings have been showing signs of easing, with another 0.3% m/m increase expected, which would edge the y/y rate down to 4.9%, in other words way below headline inflation.