Macroeconomics: The Week Ahead: 4 July to 8 July

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

The Week Ahead – Preview: 

A new quarter gets under way, but the thematics for markets remain the same, with the focus on the growing signs of a sharp slowdown in the global economy as the cumulative impact of an extended period of inflation, above all energy and food prices, sows the seeds of demand destruction and weighs on earnings and profits outlooks. Central banks are running to catch up with the sun that is sinking, as they reap the harvest of previously complacent reactive monetary stances, and are now compounding that error with an aggressive catch up. Geopolitics remain ugly with Russia continuing its barbarous tactics of mass destruction and genocide in the Ukraine, and increasing pressures in energy markets via cutting supplies of gas to Europe and seizing control of the Sakhalin-2 Gas and Oil project, and this along with China’s tensions with Taiwan will be at the forefront of the G-20 Foreign Ministers’ meeting in Bali. National politics look no better, with PM Johnson seemingly stumbling from one crisis to another in the UK, plenty of uncertainty around how much can be achieved by Macron’s minority govt in France, Chancellor Scholz’s coalition continuing to dither over so many key decisions, and US politics managing to find new zeniths in polarization, while China continues to stick resolutely to its economically disruptive zero-Covid policy, which could again derail the current re-opening upturn. Industrial unrest remains the other theme, with a strike on France’s railways set for Wednesday. The US Independence day holiday will ensure a slow start to the trading week, with the Eid-Al-Adha holidays starting at end of the week in many Islamic countries.

The run of economic data finds its focal points in the run of Services PMI, which are likely to see solid pick-ups in China and Japan, but are generally expected to show a further loss of momentum elsewhere, along with the week ending US labour data. The consensus looks for Payrolls growth to slow to 273K vs. a 3-mth average of 408K, so this would be a marked slowdown, but payrolls are anything but the be all and end all for the Fed. They will be focussed above all on the Participation Rate which at 62.3%, 1.0 ppt below pre-pandemic levels, they have been hoping that there would be more workers returning to the labour force to ease shortages, but a combination of ‘boomers’ retiring (i.e. demographics), some households needing a parent to stay at home given continued health concerns, and others simply taking a different view about working, this has not been the case, or at least not to the extent they had hoped. They will also be focussed on Average Hourly Earnings, which are expected to rise 0.3% m/m for a third month and signalling moderation in wage pressures, though ideally they would prefer 0.2% m/m as an average. Any downside surprises would likely see markets push back harder on the Fed’s rate trajectory. Anecdotal evidence does point to some easing in labour market pressures.  German Orders, Industrial Production and Trade, and Saturday’s China CPI and PPI.

The RBA leads the run of mostly CEE and EM central bank policy meetings. The RBA will likely hike by 50 bps to 1.35%, finding themselves in the same boat as other central banks in being complacent about inflation pressures, and now having to play catch-up so as to get back to a putative neutral (i.e. non-accommodative)  level, they will likely revert to 25 bps in August, but much depends on the end-July Q2 CPI, that is likely to see headline CPI hit 6.0% (highest for 20 years). While they have not mentioned house prices (which are slowing), they will be aware that a cumulative 150 bps of rate hikes will impact mortgage repayment rates, given that many Australian mortgages are variable rate, and this will present a considerable headwind to consumer spending. Elsewhere Israel’s BoI is expected to hike rates by 50 bps to 1.25%, Malaysia’s BNM by 25 bps to 2.25%, Poland’s NBP by 75 bps to 6.75%, and Peru’s BCRP by 50 bps to 6.0%. There are also the minutes of the Fed and ECB June policy meetings, which may offer the one or other twist on current policy debates, and a goodly number of Fed, ECB and BoE speakers throughout the week, though it is unlikely that they will offer any genuinely fresh insights into their various policy outlooks.

On the commodities front, a battle royal continues to rage between supply concerns and clear signs of a drop in product demand for oil; gas markets remain in turmoil thanks to Russia, though structural power supply issues are all too evident across the globe, and not helped by the series of record high temperatures in various parts of the world, and will also look to this week’s Asia Pacific LNG & Gas Summit in Singapore. “Dr Copper’s” sharp slide provides the echo chamber for concerns about the global economic outlook, along with many other metals and raw materials markets. Meanwhile the UN’s annual report on Food Security will likely highlight that while the June FAO World Price Index (due Friday) may see a further drop, prices nevertheless remain very high, and security of supply continues to be threatened by extreme weather events, as well as the Russian invasion of Ukraine.

Europe and Japan dominate the govt bond auction schedule, but as noted on Friday it is the sharp upward pressures on credit spreads, even as govt bond yields retreat, which requires most attention, with rising default risks and an increasing volume of cancelled issuance underlining the headwinds for the sector. A very light corporate earnings schedule is likely to see the following among the highlights according to Bloomberg news: Aeon, Levi Strauss, Qatar National Bank, Seven & I, Tata Consultancy Services.

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