Macroeconomics: The Day Ahead for 5 September

Another much anticipated ECB meeting on Thursday takes centre stage amid a seemingly knife-edge decision on whether to hike 50 bps or an even more aggressive 75 bps, with the RBA seen hiking 50 bps on Tuesday, and the Bank of Canada by 75 bps on Wednesday. There is a light US schedule of data (Trade, jobless claims & Consumer Credit), while China publishes CPI, PPI and Trade and possibly credit aggregates, with Germany looking to Factory Orders and Industrial Production. Elsewhere Australia has Q2 GDP and Current Account, Canada has its labour data, with Brazil, Mexico and South Africa consumer inflation readings headlining in the EM space. There are also the Fed’s Beige Book and many central bank speakers throughout the week, including BoE testimony to parliament on Wednesday, two potentially testing auctions of UK 3 and 11-yr Gilts (given the August price rout), with the new UK PM to be announced on Monday. Australia issues its quarterly Abares agricultural crops update, while China’s drought, energy and property sector crises and the latest round of ‘Zero Covid’ lockdowns will continue to cast a long shadow over local economy prospects.

Today’s OPEC+ production is expected to hold output at current levels, but with the Saudi Energy minister hinting at potential production cuts, and other countries offering their support (in principle), a reduction in the overall output target would not be a surprise. BUT this would be as much of a red herring as the most recent hike in output, and indeed the talk of a production surplus in H2 2022. The fact is OPEC+ has been missing its production targets for months, and any cut would still leave the target higher than actual output.

The economic data run is not overwhelming, but has a number of points of interest. Services PMIs are expected to confirm that across the board drops seen in the G7 flash PMIs, some into contraction territory, though in contrast to the supper dismal 44.1 on the US reading, the Services ISM is expected to drop but only to a still solid expansionary reading of 55.4 from July’s 56.7; retail, transport and logistics, housing and construction related impart some downside risk relative to forecast. US Trade data are expected to echo the Goods Trade Balance and see a further sharp narrowing in the deficit, and imply another solid contribution to Q3 GDP. German Orders are forecast to fall a 6th consecutive month (-0.7% m/m) as still extreme energy price pressures reduce output and create some demand destruction, with Production seen down 0.6% m/m.

China’s Services PMI was expected to drop back to 54.0 from 55.5, but proved better than expected at 55.0, and countered the bleak picture suggested by the official NBS reading of 49.4 (vs 49.0). China Trade data are always good for some sharp outliers, and with drought, extreme heat and energy supply woes adding to extant property sector woes, Covid-19 lockdowns and weak private consumption, the risks would seem to be amplified. Exports are expected to slow to 12.3% from 18.0% y/y, impaired by a 1-week lockdown at one port and not helped by adverse base effects, while Imports are seen barely growing at 1.0% vs. July’s 2.3%. The focus in the detail will be on raw materials and energy imports. China CPI is forecast to edge up 0.1 ppt to 2.8% y/y, with less upward pressure from food prices, and weak demand continuing to keep Non-food prices at very subdued levels. China’s credit aggregates are expected to rebound after a grinding to a near halt in July, in part due to a seasonal pick-up and in part due to the latest round of stimulus measures and rate cuts.

Australia’s Q2 GDP is seen accelerating to 1.1% q/q 3.5% y/y from Q1 0.8%/3.3%, with Net Exports swinging from deducting 1.7 pts in Q1 to adding 1.0 ppt in Q2, but Inventories adding just 1.5 ppts after 3.2% in Q1, but overall confirming weak business investment seen last week and echoing a steady pace of Consumer Spending (as per the real Retail Sales data). Canadian labour data are expected to see the Unemployment Rate edge up 0.1 ppt from a record low of 4.9% in June & July, but with Employment expected to recover some of July’s unexpected 30.6K fall, with a rise of 15.0K, while Hourly Wages are forecast to edge up 0.1 ppt to 5.0%.

But it will be this week’s central bank meetings that garner most attention, kicking off with a forecast 50 bps hike to 2.35% from Australia’s RBA, which will likely re-emphasize that the RBA has ‘no pre-set path’ for rates. Continued upward pressures on headline and core price measures (Q2 Trimmed Mean 4.9% vs. Q1 3.7%) imply a signal of further tightening, though muted wage growth (Q2 2.6% y/y), and some quite sharp downward pressure on House Prices after the previous 175 bps of rate hikes may prompt a more cautious tone on the outlook. Canada’s BoC is expected to hike 75 bps to 3.25%, and as with July’s 100 bps hike emphasize that it is front loading hikes to get rates into restrictive territory (above its ‘neutral’ zone of 2.0-3.0%). As this is not a press conference meeting, the statement will be key (with deputy governor Rogers speaking on Thursday), and will likely see some changes to the passage ” “the Governing Council continues to judge that interest rates will need to rise further, and the pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation” to reflect a likely less aggressive path going forward. While stressing that headline and core CPI remain far too high, it may also note signs of slowing activity above all in housing, and note that with rates in restrictive territory, it will be monitoring the evolving cumulative impact of its rate hikes, and adjust the pace accordingly; markets are currently discounting a peak around 3.75% by the end of the year.

As for the ECB: inflation pressures show no signs of abating as yet, even if economic activity data and surveys all point to a tip-over into recession in H2. The ECB’s hawks have been banging the drum for a 75 bps hike after the latest rise in headline and above all core inflation (4.3% y/y), which along with very high levels of PPI underline the extent of pipeline pressures and second round effects. They have stressed that fear of recession must not stop the ECB from fulfilling its mandate. Markets are discounting a high probability of a 75 bps move with rates seen at 1.75% by year end. The key argument against a more aggressive move is the fact that financial conditions are already at their highest levels since 2013, and one might well add that rate hikes will do nothing to resolve the energy crisis, with fiscal and legislative measures likely to be far more effective. There will be updated staff economic forecasts (for what they are worth), and Lagarde is likely to again face a lot of questions about the ‘neutral rate’, which she will have to dodge as best she can, as there is clearly little agreement among council members about this.

The corporate earnings schedule is very light this week, with Bloomberg News highlighting the following as likely to be among the headline makers: Kroger, NIO and Sun Hung Kai Properties.