Macroeconomics: The Week Ahead: 12 – 16 August

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

The Week Ahead – Preview: 

The new week has a blockbuster schedule of major data from the US, China and UK. The US and UK have CPI and PPI, the US, UK and China have Retail Sales and Industrial Production, the UK and Japan have Q2 GDP. The US also has NY & Philly Fed Manufacturing, NFIB and NAHB surveys, China looks to Property Sales & Investment and House Prices, the UK awaits labour and monthly activity data, while Australia looks to Q2 Wages and the monthly labour report, and India has CPI and Industrial Production. A modest run in Europe sees revised Q2 GDP, German ZEW survey and Swedish CPI. China’s PBOC holds its 1-yr MTLF operation on Thursday, and the RBNZ is expected to hold rates at 5.50% when it meets on Wednesday. In the agricultural commodity space the USDA WASDE, China CASDE and Brazil CONAB monthly reports will be the focal point, while energy markets eye monthly Oil market reports from OPEC and the IEA. The fact that speculative positioning now holds a short position in 26 commodity futures contracts, the largest short in 10 years (see chart) as per the latest CFTC data, suggests that there is a clear vulnerability to a bout of short covering. Corporate earnings will be quite plentiful, though the US earnings season is now well past its peak, with only nine S&P 500 companies reporting, with the focus moving to retailers, via way of Home Depot and Walmart, and in China to consumer tech behemoths Alibaba, JD.com and Tencent.

CFTC Commodity speculative short positions

Source: Bloomberg

– U.S.A.: Given that labour demand and growth have an equal weighting to inflation in the Fed’s policy deliberations, Retail Sales and the run of activity data should garner as much attention as CPI. Tuesday’s PPI is seen up 0.2% m/m on headline and core, which would see y/y rates fall by 0.3 ppt to 2.3% and 2.7%. At the core level, much will depend on the extent to which the upward pressure on Portfolio Management Fees, which has been a wildcard for many months for both PPI and core PCE, are offset by airfares and trade (logistics prices). CPI is also forecast to rise 0.2% m/m headline and core, leaving headline y/y unchanged at 3.0% and core edging down to 3.2%. Energy prices via way of utilities price increases rather than gasoline, which should provide some offset, will be the primary upside pressure on headline, while continued downward pressure from autos, airfares, hotels and retailer discounting should help to offset continued, though moderating pressure from housing rents, with Medical Care perhaps the wild card (last a moderate 0.2% m/m after prior 3 months saw gains of 0.4% or 0.5%). On the activity side, the simple caveat remains that markets have over the past 18 months too frequently been hasty in taking one or two months weakness in Retail Sales to ramp up recession calls. Headline should get a boost from the rebound in Auto Sales, with 0.4% m/m rise expected, while a mean reversion to 0.1% m/m after June’s 0.8% m/m jump is seen for the core ‘Control Group’ and ex-Autos measures, much depending on the impact of Amazon Prime day and ‘back to school’ spending. By contrast Industrial Production and Manufacturing Output are forecast to drop -0.3% m/m, after solid gains of 0.6% & 0.4% in June, with the drops in regional Fed surveys and ISM Production index predicating those expectations. The first batch of August surveys are anticipated to see the NY Fed Manufacturing little changed at -5.5, Philly Fed dropping back to 5.0, NHAB improving 1 pt to 44 (some upside risk from the drop in mortgage rates), and Michigan Sentiment remaining weak at 66.9 vs. prior 66.4. Housing Starts and Building Permits are both expected to slip, and an eye needs to be kept on Business Inventories, which have been rising thanks to a sharp reversal in auto stocks from record low levels thanks to the pandemic, and which now stand well above long-run averages. On balance, the run of data, if in line with forecasts, seem likely to prompt the Fed to initiate rate cuts in September, though by 25 bps rather than 50 bps.

– U.K.: The immigration protests and riots along with the new government’s fiscal policies have been the focus of attention, but this week will allow some focus on the economy. Labour data kick off the busy run of statistics, with a sharp fall in headline Average Earnings to 4.6% y/y from 5.7%, and a more moderate 0.3 ppt drop to 5.4% y/y for the ex-Bonus measure expected, Base effects will account for much of the fall, but even accounting for these, Private Sector pay (last 5.6% y/y) should drop close to the BoE’s forecast of 5.1% y/y. Wednesday’s CPI is likely to contrast adverse base effects on headline due to household energy bill base effects, with a seasonally typical drop of -0.1% m/m still resulting in a y/y rise of 2.3% from 2.0%. Core CPI is expected to ease 0.1 ppt to 3.4% y/y, as Services dip 0.2 ppt to a still very high 5.5% y/y, much may depend on travel and hotel accommodation, the latter having spiked 0.8% m/m in June, and should see some reversal in July. PPI is again expected to underline that there is no pipeline goods price pressure, with a flat m/m reading seen for Output, and a drop of -0.3% on Input. Q2 provisional GDP is forecast to rise 0.6% q/q, slightly off the 0.7% q/q Q1 pace, but still much stronger than most had anticipated earlier in the year, but June monthly GDP is seen up just 0.1% m/m after jumping 0.4% in May. A slight acceleration in Private Consumption (0.5% q/q), strong Govt Spending (0.6%) and a moderate rise in Gross Fixed Capital Formation (0.4%) should offset a substantial drag from Net Exports, the latter paced by a fall in Exports and a rebound in Imports. Monthly activity indicators are anticipated to see marginal gains (0.1% m/m) in Production and Services, offset partially by a mean reversion in Construction Output (-0.3% m/m following May +1.9%). July Retail Sales round off the week, after a lot of m/m volatility (Q2 -1.2%, +2.9% and -1.5%), and are forecast to revert to a more normal pattern, with a rise of 0.6% m/m headline and a punchier 0.9% ex-Auto Fuel. Overall, the data should support the cautious line on further rate cuts that the BoE has adopted.

– China: This week’s activity will not serve to allay long standing concerns about China’s economic outlook, nor prompt a larger fiscal response from the authorities. Leaving aside the drag from the woe stricken property sector, the fundamental flaw in the current strategy is the focus on expanding ‘high quality productive capacity’ which will likely be deflationary for China and the rest of the world, given that protracted weak domestic demand prompts an ever stronger drive to export excess production, crushing margins and profits, and amplifying trade tensions above all with the US and EU. Be that as it may, Retail Sales are forecast to rebound to 2.6% y/y from 2.0%, but in year to date terms slow to 3.5% y/y from 3.7%. A steadier profile is seen for Industrial Production (5.2% y/y vs. 5.3%) and Fixed Asset Investments (unchanged at 3.9% y.t.d.), while Unemployment is expected to edge up 0.1 ppt to 5.1%. Property sector metrics are likely to remain dire overall, though anecdotal evidence from major cities, suggests downward pressure on Home Prices should ease somewhat, while base effects will once again account for the modest improvement in Property Investment to -9.9% y/y y.t.d. from -10.1%, and also for Property Sales (last -26.9% y/y), though still remaining in a deep contraction. Credit aggregates are also due, with the consensus looking for a paltry CNY 438 Mln increase in New Yuan Loans, while overall Aggregate Financing is seen up CNY 1.2 Trln, the former would be well below typical seasonal patterns, though the latter would be modestly above. The PBOC is expected to hold its 1-yr MTLF rate at 2.3%, after the unscheduled operation that cut the rate 20 bps in July, with some speculation that it may delay the operation until next week, as it shifts its policy focus gradually to the 7-day reverse repo rate, but that shift may be rather more gradual in timing terms.

– Japan: Given heightened market sensitivity to the gyrations of the JPY, this week’s PPI and provisional Q2 GDP data will get rather more attention. PPI is expected to accelerate marginally in m/m terms to 0.3% to push the y/y rate up to 3.1% from 2.9%, though the bulk of the pressure has come from a weak JPY and energy prices, which if the recent reversal in the JPY is sustained should start to ease. Q2 advance GDP is expected to post its first increase since Q2 2023, with a rise of 0.6% q/q or 2.3% SAAR. Solid rebounds in Private Consumption (0.6% q/q, after contracting for four consecutive quarters) and Business CapEx (0.8% q/q vs. Q2 -0.4%) are expected to offset modest -0.1 ppt contributions from Inventories and Net Exports. It would offer further backward justification for the recent BoJ rate hike, but with some of the rebound down to auto production and exports, following the emissions reporting scandal output halts in Q1, there is reason to question whether the rebound will be sustained. A stronger than expected rebound would also raise questions about whether the repricing (lower) of the BoJ’s trajectory can be sustained, given the much cited comments from BoJ’s Uchida last week about not hiking rates against a backdrop of market volatility hardly closes the door on further rate hikes, assuming a semblance of calm does materialize.

– India: There is some irony perhaps that the RBI’s still hawkish tone at its policy meeting was predicated on food price concerns, but perhaps it wanted to head off market rate cut chatter in reaction to a likely very sharp, food price (primarily vegetables) base effect driven fall in headline CPI to 3.6% y/y from 5.08%, which will likely be amplified by the cut in gold import duties, the latter also likely to see core CPI post a fresh record low, after falling to 3.4% y/y in June. Industrial Production is expected to slow to 5.5% y/y from 5.9%, whereby this would mask an overall sharper loss of momentum given that June 2023 Production dipped temporarily very sharply to 4.0% from 5.7%, and some downside risks to forecasts given a relatively sharp 5.0% m/m fall in June Exports, even if drops are seasonally typical. India’s July Trade deficit is expected to widen on the back of a jump in imports, both due to the confirmed continued Budget support, and as is typical as the rainy season restrains domestic output this time of the year. India may well continue to expand rapidly in GDP terms, but the fact is that Unemployment remains very high, and with a rapidly growing population, and such an uneven distribution, a lot more will need to be done to address crass economic inequalities, and a fairly acute supply/demand gap for skilled labour.

– Eurozone: there is precious little in the way of data this week, with Q2 GDP seen unrevised at 0.3% q/q 0.6% y/y, and Industrial Production expected to rebound 0.5% m/m, echoing national data from the largest economies. Germany’s ZEW survey will be heavily subject to potential data collection timing effects, with roller coaster ride in equities anticipated to have prompted relatively sharp setbacks in Expectations to 31.8 from 41.8, and the Current Situation to -75.0 from -68.9.

– Australia: The RBA’s continued hawkish policy stance is likely to be reinforced by both sets of labour data this week. The Q2 Wage Price Index is forecast to edge up to 0.9% from 0.8% q/q, though in y/y terms expected to dip to 4.0% from 4.1%. Forecasts for monthly Employment again centre on a long-term average of +20K, suggesting that forecasters are groping in the dark, after some a run of much higher and much lower than expected outturns this year. Both the Unemployment (4.1%) and Participation (66.9%) are seen unchanged. Westpac Consumer Confidence will also bear some scrutiny, having been in a seemingly relentless downturn since February, outside of a short-lived rebound in June, and continuing to be pressured by ‘high for longer’ rates.

– New Zealand: the consensus looks for no change at 5.50% from the RBNZ, but the door to a rate cut in coming months to be pushed somewhat wider. A minority anticipate a 25 bps cut, predicated on the lower than expected Q2 CPI (0.4% q/q 3.3% y/y, with Non-Tradeable CPI easing to 0.9% q/q from Q1 1.6%), as well as sluggish growth. But last week’s Q2 labour data suggest that the RBNZ will stay its hand for the time being, given that Q2 Employment was a lot stronger at 0.4% q/q vs. a forecast of -0.2%, and both Private Sector Wages (0.9% q/q vs. forecast 0.8%) and Average Hourly Earnings (1.1% q/q vs. Q1 0.3%) posted solid gains.

– Worldwide corporate earnings highlights: as compiled by Bloomberg News are likely to include: Adyen, Alibaba Group, Applied Materials, Barrick Gold, Cisco Systems, Commonwealth Bank of Australia, CSL, Deere, E.on, Flutter Entertainment, Foxconn Industrial Internet, Goodman Group, Hangzhou Hikvision Digital Technology, Hannover Re, Hapag-Lloyd, Henkel, Hindustan Aeronautics, Home Depot, Hon Hai Precision Industry, JBS, JD`, Orsted, Marfrig Global Foods, Ping An Bank, RWE, Sea Ltd, Sun Life Financial, Telstra, Tencent, UBS Group, Walmart and Wanhua Chemical.

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