Macroeconomics: The Day Ahead for 7 September

  • Much busier day for data and central banks: digesting China Trade, Australia GDP, German Industrial Production, awaiting Eurozone final GDP, US and Canada Trade; UK MPC testimony, BoC and NBP rate hikes, Fed speakers and Beige Book; US EIA Short-term Energy Outlook, UK & German bond auctions
  • China Trade forecast miss both a reflection of drop in domestic and external demand, as well as Covid and power supply disruptions
  • Poland rate decision: further modest 25 bps hike seen and signal of rates close to peak, despite continued headline and core CPI rise; some risk of taking foot off the rate pedal too early
  • Canada rate decision: another aggressive hike expected to move rates into restrictive territory, heavy burden on statement on forward signal
  • Govt bond markets’ volatility highlighting increasing liquidity gap as Fed moves to maximum QT pace, and upcoming BoE corporate bond sales
  • Some thoughts on the energy crisis around the world, and its impact on the global economy, via the latest edition of “Insider’s Guide to Energy”

EVENTS PREVIEW

A much busier day awaits on most fronts, kicking off by digesting the overnight China Trade, Australian Q2 GDP and German Industrial Production data, with Eurozone detailed and final Q2 GDP and Canadian and US Trade ahead. A busy day for central banks has testimony from BoE’s Bailey and his MPC colleagues, which will likely see some testing questions on whether new PM’s Truss energy crisis and other fiscal plans will add to pressure on the BoE to hike rates even higher and at a faster pace, as well as questions about its independence. Moving on Poland’s NBP is expected to raise rates 25 bps and the Bank of Canada to hike by 75 bps, there is Fed speak from Brainard and Mester, and the Fed publishes its Beige Book. With energy prices continuing to be very volatile, buffeted backward and forward by supply and recession concerns, the EIA’s monthly Short Term Energy Outlook (STEO) will get plenty of scrutiny, particularly given that the US SPR has now fallen to its lowest level since 1984, and overall inventories of oil product (above all distillates) and gas look inadequate (i.e. well below seasonal averages) going into the fall/winter. Government bond supply comes via way of UK 10-yr and German 16-yr, which may prove challenging after yesterday witnessed a level of volatility in govt bond yields and yield curves that has not been witnessed since the GFC. To be sure rate lock hedging for new corporate issuance was doubtless a contributor, but the violent swings in curves underline that the Fed reaching peak QT, and the prospect of the BoE not only gradually unloading its Corporate Bond portfolio, but also probably launching active Gilt Sales as of October is opening an even bigger gap in market liquidity.

** China – August Trade **

While both Export and Imports missed forecasts, and again serve as a reminder of both weak domestic demand, and the long anticipated drop in demand for exports, the myriad of disruptions from Covid-19 lockdowns, lowered output due to the drought and accompanying disruption to power supplies advise against over-interpreting one month’s data. Indeed coming off the back of the stronger than expected July exports data, the slower pace in August may amount to little more than a mean reversion. In the detail on commodities, weak oil imports are to some extent a reflection of weak domestic demand, but still owe much to unplanned refinery shutdowns in recent months, with the strength of refined product exports reflecting supply bottlenecks globally, as well as an increase in quotas. Continued weakness in Soybean imports reflects both high prices, weather related disruptions to imports from Brazil, and a sharp drop in Animal Feed output due to persistently negative margins over the summer months, and as pig farmers culled herds due to cost pressures, anecdotal data for August suggest trends have improved in the meantime. The weakness in Iron Ore imports continues to reflect the dire state of the property sector, which the tinkering with rates and credit availability in recent months is unlikely to change, without rather more forceful measures aimed at balance sheet resolution in the sector.

** Poland – NBP rate decision **

The NBP is expected to ease up on its rate hike pace again with a ‘regular’ 25 bps hike to 6.75%. That expectation is premised on recent NBP MPC comments that have largely suggested that rates are close to their peak with a further 25 bps hike at this meeting, and perhaps one further 25 bps in October being mooted. That said, headline and core CPI hit new highs of 15.6% and 9.3% y/y respectively in July, and even if there has been some easing in m/m gains, with base effects likely to help to bring down y/y rates from September, inflation is unlikely to ease back to low single digits until the middle of next year at the earliest. While Q2 GDP contracted rather more sharply than expected (-2.3% q/q), this was in part a mean reversion after an outsized 2.5% q/q in Q1 the rebound in real Retail Sales suggests that Q3 GDP will see a rebound, despite the headwinds from a down at heel Manufacturing sector due to the energy crisis. Per se the risk is that the NBP may be taking its foot off the rate hike pedal a little too soon, even if signals from the local property sector are suggesting that the cumulative 640 bps of rate hikes since last September are starting to bite hard.

** Canada – BoC rate decision **

The 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 tomorrow), 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.

RECAP† observation – Yesterday’s US Services ISM: the index surprised on the upside, and while the details highlighted some points of concern, these were modest overall. However, a) do look at the table attached of what sectors are included in the ISM and not in the PMI, and consider what that implies for those sectors that are in the PMI. b) Do read the write-up of “What Respondents Are Saying” makes for less comfortable reading, which I will just leave it here with the question, does this give you a lot of confidence about the economic outlook?

“Starting to see some cost pressures relief; the overall supply environment is healthy.” [Accommodation & Food Services] “Some pullback on projects by clients, but activity is still strong for our company. This has alleviated some labor availability issues. Generally, there has been improvement in lead times and prices, but still longer and higher, respectively, than in 2021.” [Construction] “Supply chain issues continue to significantly extend lead times, with a shortage of materials to build scientific equipment and machinery contributing to the issue. Purchases need to be made three to six months in advance, in addition to the normal lead time. As for the higher education industry, it is breaking records for student applicants.” [Educational Services] “The supply chain and labor continue to be significant issues. Repair parts are non-existent. Lead times for durable goods are extended, and the less-expensive, mass-produced products are breaking at increased rates — no QC (quality control). The FDA (U.S. Food and Drug Administration) must be reeling because we have been reporting sometimes daily. I’m concerned that a certain percentage of faulty products are probably discarded, which adds to the cost of doing business. Surgery and other hospital products cannot be culled, so it’s a complete loss — if they are red-bagged, that is another cost.” [Health Care & Social Assistance] “The supply chain challenges affect a portion of our buys as they include products and components made outside of the U.S. that are subject to shipping delays and other issues.” [Management of Companies & Support Services]

“COVID-19 still affecting many businesses. Also, there is a labour shortage.” [Professional, Scientific & Technical Services] “Lingering concerns about inflation and price increases. Still having difficulties hiring staff to fill many positions.” [Public Administration] “No major changes. Concerns about the macroeconomic climate and consumer confidence.” [Retail Trade] “Very long lead times from major equipment — Original Equipment Manufacturers (OEMs). Commodity price escalation appears to be levelling.” [Utilities] “Business is pretty steady month to month, but we expect seasonal supply increase by September that will moderate prices.” [Wholesale Trade]

†Source: ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/services/august/

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