Macroeconomics: The Day Ahead for 9 June

China’s overnight Trade data and the much anticipated ECB council meeting provide the focal point for today. Otherwise a very modest run of data and events includes the UK RICS House Price Balance, South Africa’s Q1 Current Account, US weekly jobless claims and perhaps most significantly inflation data from Brazil, Egypt and Mexico; there is some central bank speak from the Riksbank and Bank of Canada, while the US sells USD 19.0 Bln 30-yr. It is never wise to over-interpret China’s monthly trade data, and the all the more so this month given “re-opening” effects are likely to have distorted both exports and imports. But the underlying impression is that export demand is holding up better than expected, while weak domestic demand continues to mute imports, though in both cases inflation and the strength of the USD are clearly flattering the outturn, with actual trade volumes considerably weaker. Markets largely ignored the data, and are focussing instead on new lockdown measures in Shanghai. As for the UK RICS survey, the slightly larger than expected headline fall (73 vs. expected 76, and April’s 80) still leaves the index at historically very high levels, however the steeper fall in New Buyer Enquiries (-7 vs. prior +8) offers a clearer signal on the outlook for the UK housing market.

** Eurozone – ECB council meeting **

– The ECB is expected to hold rates today, affirm the already signalled July and August 25 bps rate hikes and the end of QE. But the key questions are a) how hard will Lagarde & co push back on the idea of 50 bps rate hikes, b) what if any consensus on the ECB council is there on what they see as the “neutral rate”, given that comments from various national central bank officials have suggested anything between 1.0% and 2.0%, which obviously have different implications for the ECB’s rate trajectory. As for the updated staff forecasts, these are generally less an indicator of how inflation and growth will actually turn out, and rather more a compromise to reflect whatever consensus is reached on the rate trajectory on the council. Given that markets are effectively discounting a more aggressive ECB rate path, any substantial push back on the possibility of a 50 bps rate hike would take the wind out of the EUR’s sails, and perhaps ease some of the upward pressure on Bund yields and peripheral spreads, and conversely leaving the door open for a 50 bps move would have the opposite effect. In broader terms it is worth reiterating that central banks are in a very difficult place, they underestimated the effects of supply chain shocks due to the pandemic, attributing far too much to temporary disruptions, and underestimating the long-term factors that were also in play, above all long-term upstream oil and gas underinvestment (e.g. 2011-2016 saw an average $750 Bln p.a. invested in upstream, 2017-2021 the average fell to $400 Bln p.a.). It was always going to be difficult to establish how much productive capacity was permanently lost due to the pandemic, but as but one example, the US lost 10% of its oil refining capacity in 2019-2021. So now they are trying to tame the resulting supply side driven inflation with the blunt instrument of interest rates to tame demand. What they will likely achieve is to deflate the asset price inflation that they have driven with QE, while having minimal impact on consumer and producer prices. Now there are the myriad supply dislocations due to the Russian invasion of the Ukraine, which monetary policy can do nothing about. In truth the co-ordination between monetary and fiscal policy evident during the pandemic should have been continued, particularly as fiscal and legislative measures would be more effective (to an extent) in curbing some of the supply side inflation pressures, even though a geo-politically fragmented world make this less effective. The fact that the monetary (QE) stimulus is being withdrawn at the same time as the fiscal stimulus bodes poorly, and may in fact only serve to amplify the already sharp impact of supply side inflation problems on economic growth prospects.