Macroeconomics: The Week Ahead: 20 June to 24 June
Written by Marc Ostwald, ADMISI’s Global Strategist & Chief Economist
The Week Ahead – Preview:
If one could sum up what markets are currently running scared from, then Fed governor Waller’s weekend comments act as a good proxy. “The Fed is ‘all in’ on re-establishing price stability”; “I don’t care what’s causing inflation, it’s too high, it’s my job to get it down”. He added that fears of a recession are “a bit overblown”, but also added “maybe we have to go below trend growth for six months to a year, that’s OK. Maybe unemployment has to go up 4%, 4.5% — I think it would be 4% to 4.25%.” “Right now we’ve not seen inflation like this in 40 years and that’s the most important thing you’ve got to worry about.” While Waller was ahead of his colleagues in dumping the ‘transitory’ narrative, the Fed is more than compounding its prior error on underestimating inflation pressures, by playing catch up with rates now. To be sure, Waller conceded that: “by requiring substantial further progress toward maximum employment to even begin the process of tightening policy, one might argue that it locked the Committee into holding the policy rate at the zero lower bound longer than was optimal. But if we again face those challenges, we now have the additional insight that only experience can bring.” (But this would again be fighting the next war with the tools deployed in the last one). That is cold comfort for markets, with the excess liquidity that central banks have pumped in over more than a decade, above all the amplified pace during the peak of the pandemic, along with the adoption of a reactive (rather than proactive) monetary policy stance, now likely to be their undoing. Their optimism on the economic outlook is likely to prove to be just as flawed as the prior ‘transitory’ narrative, above all as much of that excess liquidity, even if it is gradually being withdrawn, is still free to run riot. The lack of a genuine sharp spike in equity index volatility (particularly the VIX) underlines that equity markets were largely anticipating this, and it is not a shock (unlike the pandemic). On the other hand, this has not put a brake on the largest nominal drawdown in bonds and stocks in recent history (see chart), and the pain of the accompanying capital destruction will be a major drag on economies. As quarter end is now in view, the next fortnight looks likely to be pivotal for markets, and dictate just how much further financial conditions tighten, which will in turn dictate the scale of the push back on the broadly, though disparate, aggressive major central bank policy stance being outlined for H2 2022, as well as how long the BoJ can sustain its outlier dovish stance. All of this points to continued high levels of volatility, above all in commodities, as well as continued widening of credit spreads, particularly as higher rates and weaker earnings raise the prospect of rising default risks, above all amongst ‘zombie’ companies.
In terms of the scheduled agenda of data and events, the new week is dominated by surveys (PMIs, Ifo, CBI, regional Fed), while the official schedule has CPI and Retail Sales in both UK and Canada, German PPI, US New and Existing Home Sales, with inflation data from Brazil, Mexico and South Africa also on the radar in the EM space. On the central bank front, Powell’s semi-annual testimony to Congress and Lagarde’s regular appearance at the European Parliament’s Committee on Economic and Monetary Affairs top a very busy run of Fed, ECB, BoE, BoJ, RBA and BoC speakers. The Fed also publishes the results of its annual major Bank Stress Tests this week. Rate hikes are expected in Norway (+25 bps to 1.0%), Czechia (+100 bps to 6.75%), Iceland (100 bps to 4.75%), Mexico (+75 bps to 7.75%), Philippines (+25 bps to 2.50%), Egypt (+100 bps to 12.25%), with only Bank Indonesia seen standing pat, though very likely to hike in July. China’s zero Covid policy continues to be an overarching theme and spokes the chance of a robust recovery, despite the various targeted stimulus measures, with the monthly 1 and 5-yr Loan Prime Rate fixings expected to see rates unchanged. Politically the results of the French parliamentary elections will need to be digested, Russia tightening of gas supplies to Europe will be a key topic at the two day EU leaders summit at the end of the week, and a close eye will be kept on the meeting between US Energy Secretary Granholm with major US refiners. The IEA’s “World Energy Investment” annual report will obviously be highly relevant in the context of the latter. Record temperatures in many parts of the Northern Hemisphere are threatening grains crops, adding to supply concerns due to the Russian invasion of Ukraine, and will find focal points in Monday’s monthly EU MARS Crop Bulletin and this week’s European Food Safety Authority’s One Conference on food safety.
With the Bank of England coming under intense pressure for ‘talking tough’ but not acting tough on inflation, this week’s UK CPI data will be closely scrutinized, with a smaller but still quite large rise of 0.7% m/m expected (after the utility price induced 2.5% m/m in April), and see headline CPI edge up to 9.1% y/y from 9.0%, though core CPI is seen easing modestly to 6.0% y/y from 6.2%. PPI will underline the extent of pipeline pressure and again be heavily boosted by energy prices, with Input seen up 1.8% m/m 19.4% y/y (vs. prior 18.6%), with Output expected at 1.5% m/m 14.7% y/y (vs 14.0%). By contrast Retail Sales are forecast to reverse some of April’s Easter related 1.4% m/m rebound with a drop of 0.7%, while the ex-Auto Fuel measure is seen falling 0.9% m/m, and the GfK Consumer Confidence is expected to hold at its all-time low of -40. Rightmove and ONS House Prices, and the PSNB Budget data are also due. German PPI is expected to underline the extent of ongoing pipeline price pressures in the Eurozone, with the consensus looking for a 1.5% m/m rise for a fresh all-time high of 33.8% y/y (vs. prior 33.5%).
The week’s run of PMIs, Ifo and other surveys are forecast to post modest drops (<1.0 pt) across the board, with the exception of a marginal gain seen in the US Services PMI. However the focus will be on the sub-indices for Prices, Orders and above all Supplier Deliveries and Inventories which will be heavily scrutinized for signs of easing supply chain bottlenecks and downturn signals. In that vein, do take a look at the US Trucking and Container charts attached (via Craig Fuller, CEO of Freightwaves), which point to an accelerating decline in demand, above all due to rising fuel costs. The risks on the array of surveys would appear to be on the downside, particularly for Manufacturing, though with Services clearly also running out of steam, as re-opening effects fade, and inflation pressures bite.
While the Q1 earnings season has largely run its course, earnings from FedEx, homebuilders KB Home and Lennar, along with auto retailer CarMax will offer highly topical insights. The government bond auction schedule is quite light in the Eurozone (Germany, Italy and Belgium), while the US offers 20-yr T-Bond and 5-yr TIPS, and Japan 5 and 20-yr JGBs.
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