Macroeconomics: The Week Ahead: 14 to 18 August 2023

The Week Ahead – Preview:

The new week has plenty of major data in the US, China and UK, though the peak of the summer holiday season in the northern hemisphere will likely thin trading volumes, along with an array of public holidays on Tuesday. The US and China look to Retail Sales and Industrial Production, with the US also seeing FOMC Minutes, NAHB, NY & Philly Fed surveys and Housing Starts, China also has Fixed Asset Investment and Property sector indicators, while the UK has Unemployment & Average Earnings, CPI & PPI and Retail Sales. A light schedule in the EU has the German ZEW survey, Swedish and final Eurozone CPI, while Japan looks to advance Q2 GDP and Trade, with Canada and India awaiting CPI, and Australia Q2 Wages and monthly Unemployment and RBA minutes. The run of central bank speakers is light, mostly from The fed, while rates are seen up 25 bps to 4.0% in Norway, held again in New Zealand (5.50%) and after the weak Q2 GDP kept unchanged in the Philippines, with China’s 1-yr MTLF operation also seen at unchanged 2.65%. The corporate earnings season winds down, with retailers (Home Depot, Target & Walmart all report) and John Deere getting top billing in the US, though Asia, above all China has a busier run of companies reporting, including CNOOC, JD.com and Tencent. Unusually the US will have no Treasury coupon issuance, which should offer some relief to a rather beleaguered and volatile Treasury Market (see chart). Elsewhere the UK sells 16-yr, Germany 2 & 30-yr, France mediums and I-L, and Japan 5 & 20-yr in a seasonally typical light week for issuance. A rather thin week in the commodity space for scheduled data and events, with only the IGC’s monthly Grains report and no major conferences, leaving the focus on weekly inventory data in Energy, while weather and Ukraine / Russia war developments will be the focal points for Grains.

Statistically US Retail Sales are expected to post a slightly perkier rise of 0.4% m/m on nearly all measures, with the core ‘Control Group’ seen up 0.5%, following June’s solid 0.6%, with a combination of a boost from Amazon’s Prime Day promotion and a jump in Gasoline prices towards the end of the month the main drivers, and little impact from flat Auto Sales, which would be a solid if unspectacular outturn. After June’s drops, Industrial Production is forecast to rise 0.3% m/m, primarily due to a weather related boost to Utilities output, but Manufacturing Output seen unchanged after dipping 0.3% m/m in June, all in all fitting in with the continued weakness in the ISM and PMI sector surveys. The August NY & Philly Fed surveys are also seen little changed vs. July, whereby the huge volatility in the NY survey over the past 18 months render it a poor guide to national trends, while the hefty weighting of refiners in the Philly Fed region suggests a modest upside risk to a forecast of -10.5 (vs. July -13.5). Import Prices are likely to get a boost from higher commodity prices, and shipping costs, though a forecast headline rise of 0.2% m/m and -0.2% ex-Petroleum fits with the disinflationary narrative. Housing data are expected to show no change in the NAHB Housing Index at a 13-month high, but still historically sluggish 56, and with Mortgage Rates back above 7.0%, there may be a modest downside risk. Housing Starts are forecast to post a slight upward correction of 1.5% m/m to a very ‘average’ 1.468 Mln SAAR pace after sliding 8.0% m/m in June. It is likely that markets will be more interested in the July FOMC minutes, barring some sizeable surprises in the data run, and the extent to which the tentative signs (at the time) of a more substantial disinflationary trend, above all in core prices had persuaded a minority of the FOMC to suggest the need for further rate hikes was contestable, above all given deteriorating credit conditions. Nevertheless, the message of ‘high for longer’ and a need to lean against the markets’ rate cut trajectory should also be evident.

Over in Asia, attention to data breakdown details will be important. Thus China’s activity data are forecast to see Industrial Production and FAI little changed vs June at 4.3% and 3.8% y/y respectively, with Retail Sales picking up to 4.2% y/y from 3.1%, boosted in part by base effects, but at least m/m readings for Production and Sales should maintain the positive reading seen in June, albeit signalling disappointing momentum. Property Sales and Investment (forecast -8.0% y/y vs. prior -7.9%, despite benign base effects) will likely be very poor again, with mortgage demand slumping some 30% m/m after a jump in June. Business and Consumer Confidence remain very weak, with the lack of any real shock and awe stimulus measures, along with the renewed fears about the Property sector after Country Garden has said it expects to post a whopping CNY 55 Bln loss in H1 and suspended trading of 10 onshore bonds, and the rising tech sector tensions with the US will continue to embed concerns about China’s economic outlook. A close eye also needs to be kept on the Inward part of the China FDI report due during the week, which has slowed to barely a trickle. In Japan Q2 prov. GDP is seen posting an impressive gain of 2.9% SAAR or 0.7% q/q, with a sharp turnaround in Net Exports contribution from -0.3 ppt in Q1 to 0.9 ppt in Q2 the key contributor, but also implying domestic demand was weak at -0.2 ppt, even if an expected drag of -0.3 ppt from Inventories is taken into account. Indian CPI is expected to jump sharply to 6.4% y/y from 4.8%, boosted heavily by a rise in food prices (grains, vegetables) due to flooding, and to a small extent base effects, but this should prove to be short lived, even if it only adds to the case for the RBI retaining a hawkish bias. Meanwhile, in Australia the Q2 Wage Price Index is expected to accelerate to 1.0% q/q 3.8% y/y (vs. Q1 0.8%/3.7%), but still negative in real terms, and nominal wages will inevitably accelerate further in Q3 after a hefty increase in the minimum wage. however, the RBA has already taken account of this and has stated that it does not see much risk of a wage-price spiral. July Unemployment is expected to post a modest rise of 15K, with the Unemployment Rate seen at 3.6% from 3.5%.

In the UK, all eyes will be on the inflation and wages data. Labour data are projected to show another small 12K drop in July HMRC Payrolls (May -9K), though the Apr-June LFS Employment measure is seen at a still solid 102K, with the ILO Unemployment Rate expected to hold at 4.0%, with Vacancies likely to drop further, but still remain well above pre-pandemic levels. If correct this would a case of labour demand becoming less tight, rather materially loosening. Far more significantly, Average Weekly Earnings are forecast to jump to 7.4% y/y from 6.9% on the headline, with very adverse base effects accounting for that (June 2022 dropped to 5.1% from 6.1%), and tick up to 7.4% uy/y from 7.3% ex-Bonus, also implying a further rise in Private Sector Wages (last 7.7%). If CPI forecasts are correct, then real wage growth would finally turn positive again (but still remain below end 2007 levels – see chart). Headline CPI is seen down -0.5% m/m, paced by the cut in the energy price cap that will exercise a downward pull off -0.8 ppt, and thus see the y/y rate slide to 6.8% y/y from 7.9%, but core CPI is only expected to dip to 6.8% y/y from 6.9%; PPI is also seen falling in m/m terms, with PPI Output projected to move into disinflation at -1.3% from 0.1%, and Input price to ease 0.1 ppt to -2.8% y/y, confirming a continued lack of pipeline pressures. Friday brings GfK Consumer Confidence, which is expected to remain very weak at -29 vs. July’s -30, while Retail Sales are expected to reverse much of June’s unexpectedly strong 0.7% with a drop of -0.5%, serving as a reminder that the strength of Q2 Private Consumption is unlikely to last.

Earnings highlights for the week according to Bloomberg News are likely to include: Adyen, Agilent Technologies, Alcon, Applied Materials, Cisco Systems, CNOOC, Coloplast, CSL, Deere, Estee Lauder, Galaxy Entertainment, Hangzhou Hikvision Digital Technology, Home Depot, Hon Hai Precision Industry, Hong Kong Exchanges & Clearing, ITC, JD, Jiangsu Hengrui Pharmaceuticals, Keysight Technologies, Nu Holdings, Palo Alto Networks, Ross Stores, Sea, Straumann , Suncor Energy, Synopsys, Target, Telstra Group, Tencent, TJX, Transurban Group, Walmart.