Macroeconomics: The Week Ahead: 1 to 5 August

Written by Marc Ostwald, ADMISI’s Global Strategist & Chief Economist

The Week Ahead – Preview: 

As Europe and North America head into peak holiday season, the first week of August brings a very familiar array of data, via way of Manufacturing & Services PMIs, German Orders, Production & Trade, and finishes off with US and Canadian Labour data. The BoE, Australia’s RBA and India’s RBI are expected to hike rates by 50 bps, and there is a further deluge of corporate earnings, covering a very broad array of economic sectors, and 150 US S&P 500 companies reporting. OPEC+ holds its production meeting for September, at which it is seen holding output levels. There are a good many US shale producers reporting earnings, with the Japan Energy Summit and India Coal Outlook conferences also on tap, while the UN FAO Food Price Index is likely to see a further drop, but remain very high on any historical basis. The Eurozone and UK feature on a seasonally typical light run of govt bond auctions. The entrenched, brutal and barbaric war in Ukraine; the renewed escalation in China’s property sector woes; US-China tensions over Taiwan, as US House Speaker Pelosi visits Asia, and may visit Taiwan; record high temperatures and numerous droughts around the world, along with polarized politics and enfeebled politicians, and escalating numbers of ‘debt crises’ in emerging and developing economies, will continue to provide the uncomfortable overarching themes.

Markets are now locking horns with central banks in terms of their efforts to aggressively hikes rates to try and rein in inflation, with markets taking an increasingly confident view that central banks will have to abandon their inflation quest, due to looming recession risks. Markets may prove to be right about central banks having to accept that they will not be able to hike rates as much as they want in their attempt to curb inflation, but wrong to assume that central banks will then cut rates and restart QE as economies contract, and this may prove to be the torpedo that hits the current bout of ‘risk appetite’.

Statistically Manufacturing and Services PMIs get the week under way, and are expected to confirm the downbeat picture from the G7 flash PMIs, as inflation pressures and accompanying demand destruction bear down on many economies, even China’s PMIs signal an already stalling recovery from Covid lockdown measures, which remain an ongoing threat. They should also serve to remind markets that the ‘much better than expected’ Eurozone GDP readings required much more attention to a lot of uncomfortable detail: French domestic demand contracted by 0.2% q/q, and the recovery in net exports will likely prove to be a one-off; Italy’s GDP was above all boosted by govt spending, which will not be repeated as it reverts to its usual corrosive political backdrop; Germany’s GDP was abject and it is now the weakest of the major Eurozone economies, while Spain’s GDP got a much needed boost from tourism after a protracted drag from the sector during the peak pandemic period, and also a weak Q1. But the fact is that even with that Q2 bounce, Spain’s economy is still 2.5% smaller than prior to the pandemic. ‘Willful blindness’ is an all too frequent ‘hospital (if not morgue) pass’ for many investors. In that vein, German Factory Orders are seen falling 0.7% m/m, the fourth contraction in five months, while Production is seen slipping 0.2% m/m as companies cut output in the face of high energy costs.

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. But 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 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% (i.e. way below headline inflation). Auto Sales will be the other key US indicator with a pick up to a 13.5 Mln SAAR (vs. June 13.0 Mln) pace expected, which would still be way off the pre-pandemic average of 17.0 Mln, and still implying that Used Car price pressures are unlikely to ease as significantly as faltering private goods consumption would imply.

On the central bank front, Tuesday’s RBA decision looks to be far more clear cut than the BoE’s, with the consensus looking for a further 50 bps hike to 1.85%, and a few seeing 75 bps (though a ’round numbering’ 65 bps move to 2.0% would appear to be the more likely upside risk), even if the Q2 CPI data were slightly weaker than forecast, but still accelerated in q/q terms, and way above the RBA’s target. The BoE decision sees a marginal majority expecting the MPC to take a more aggressive stance with a 50 bps hike to 1.75%, but the rest look 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. The phasing of 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. The fact is 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. On balance, the risk is that in the face of the multitude of headwinds to the UK economy, the MPC sticks with a 25 bps hike, 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. Elsewhere India’s RBI is expected to hike its Repo Rate by a further 50 bps to 5.40%, thus exiting the ultra-accommodative stance in place since the start of the pandemic. There is some suggestion that with its previous policy tightening transmitting very swiftly to commercial lending rates (given long-standing banking sector non-performing loan issues), it may revert to a more measured 25 bps pace, while still signalling that rates will continue to rise into the autumn.

The corporate earnings schedule is likely to see the following among the highlights according to Bloomberg news: Activision Blizzard, Adidas, AMD, Aflac, Airbnb, Alibaba, Allianz, Allstate, AP Moller-Maersk, Apollo Global, AXA, Banco Bradesco, Bayer, BMW, BCE, Beyond Meat, Block, Booking, BP,  Caterpillar, Cigna, CK Asset, CK Hutchison, ConocoPhillips, Credit Agricole, CVS Health, DBS Group, Deutsche Post, DoorDash, Duke Energy, eBay, Electronic Arts, Eli Lilly, Emirates Telecommunications, Exelon, Gilead Sciences, Glencore, Hang Seng Bank, Heineken, HSBC, Illinois Tool Works, Infineon, ING Groep, Kellogg, KKR, London Stock Exchange, Lucid, Lyft, Marathon Petroleum, Marriott, Merck KGaA, MetLife, Mitsui, Moderna, Motorola Solutions, MUFG, Nintendo, Novo Nordisk, Nutrien, Occidental Petroleum, Overseas-Chinese Banking (OCBC), PayPal, Prudential, Realty Income, Regeneron, S&P Global, Saudi Telecom, Simon Property, SoftBank, Starbucks, Suncor, Thomson Reuters, Toyota Motor, Uber, Under Armour, Vertex Pharmaceuticals, Vornado, Williams, Yum! Brands and Zoetis.

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