Macroeconomics: The Week Ahead: 8 to 12 August

The Week Ahead – Preview: 

The new week’s schedule is headlined by US and China inflation data, UK preliminary Q2 GDP and June monthly activity data, and a holiday season dictated light calendar of central bank speakers, with rate decisions in Mexico and Thailand. The corporate earnings season winds down slowly, while the US heads a relatively light govt bond auction calendar. The EIA, IEA and OPEC publish their monthly Oil Market Reports, and the USDA publishes its WASDE Agricultural supply and demand monthly report, while China has its equivalent CASDE report.

As observed last week, there is now an epic battle afoot between bond and rates markets betting on recession, and central banks, above all the Fed, doubling down on their anti-inflation policy rhetoric. As the reaction to Friday’s much stronger than expected US labour data, with markets forced to price back in a 75 bps September Fed rate hike, rates volatility remains extraordinarily high, and is likely to remain so. Equity markets in the US appear to be less focussed on rates, and indeed earnings (other than some very selective positive ‘spins’ on reports), and rather more on some front loading of corporate equity buyback programmes ahead of next year’s introduction of the 1% buyback tax as part of the US ‘anti-inflation’ bill. This only adds to a further dislocation of markets from the real economy, and appears to ignore the fiscal cliff that the US faces: a $1.850 Trln reduction in Federal deficit spending in the current FY, allied with a $1.0 Trillion reduction in the Fed’s balance sheet over 14 months, not to mention anything between 325 and 425 bps of cumulative Fed rate hikes. Per se focussing on an expected jump in buybacks, looks to be a case of both wilful blindness and wishful seeing, above all with the Fed doing everything to make it very clear to markets that the ‘Fed put’ is not ‘in the house’. The question is not whether the Fed is misjudging the economic situation, which remains a real possibility, but whether markets’ reaction function has been so badly damaged by a decade of QE and near zero rates, which only a hard catharsis can rectify.

Statistically, US CPI is expected to slow in headline terms to 0.2% m/ 8.7% y/y (vs. June 9.1%) thanks to the sharp fall in energy prices, but core CPI is seen at 0.6% m/m, which would push the y/y rate back up to 6.1%. The latter is likely to see hefty pressure from housing (OER seen around 0.8% m/m), with an energy related drag on airfares likely to provide only an offset to the breadth of core services price pressures, with core goods prices likely to ease from the very robust 0.8% m/m pace seen in July. If forecasts are correct, then the Fed (as per weekend comments from Bowman) is likely to signal a further 75 bps in September, but also the likelihood of 75 bps in November (even if there is a lot which could happen in the meantime). PPI should also benefit from the easing of energy prices, but as was evident in June, Services PPI pressures remain strong, and core PPI is seen up 0.4% m/m. The NFIB Small Business Optimism will bear a lot of scrutiny, even if headline is expected to be little changed at a weak 89.5, particularly after the plunge in June ‘Expect Higher Sales’ to -28 from -15, amid weakening, though not soft labour demand (‘Plan to Hire’ has already been published 20 vs. 19 in June 26 in May).

China’s Trade data were a mixed bag, with the stronger than expected 18.0% y/y rise in Exports probably flattered by a re-opening catch-up effect, while the tepid 2.3% y/y rise in Imports would appear to confirm the ongoing weakness in domestic demand, with no boost from re-opening. To a certain extent, China’s inflation data will be little more than a distraction, with CPI set to be boosted by food prices, and expected at 2.9% y/y vs. June’s 2.5%, while base effects and lower energy and steel prices are likely to combine to being PPI down further to 4.9% y/y from 6.1%. After a huge boost from local govt borrowing and targeted CRR cuts in June, Aggregate Social Financing is expected to drop back to just CNY 1.325 Trln from June’s CNY 5.17 Trln, with seasonal effects accounting for much of the drop, though the moves to prop up the calamitous property market suggests some modest upside risks.

UK Q2 GDP and the array of monthly activity indicators will a) be distorted by the two day Platinum Jubilee bank holiday, and b) get kicked around like a tired rather deflated football by the political fraternity, in what will be an abject display of how badly the country’s political leaders are disconnected from the economic realities faced by the general public. June monthly GDP is seen falling -1.2% m/m (prior double bank holidays have seen GDP fall as much as 2.0% m/m), resulting in a 0.2% q/q contraction in Q2 GDP, with health services the ongoing wild card, with the June Index of Services seen down 1.0% m/m, Industrial Production -1.4% m/m and Construction Output -2.0% m/m. Perhaps of more interest will be July BRC Retail Sales and RICS House Price surveys.

There is a smattering of Fed speak, while Thailand’s BoT is expected to commence a rate hike cycle with a 25 bps hike to 0.75%, and Banco de Mexico to echo many other Latin American central banks with another aggressive 75 bps hike to 8.50%.

The run of monthly Oil Market Reports will require a lot of scrutiny, with the focus likely to be on headline oil demand, but perhaps more attention will need to be paid to product demand prospects, given some evidence of demand destruction, but as with crude output, still very obvious constraints on refining capacity. Meanwhile in the Agricultural space the USDA’s WASDE report will be a case of working out how improved crop prospects in some areas are balanced out by drought and extreme heat effects in Europe, and assessment of the potential impact of a gradual resumption of grain exports from Ukraine.

The corporate earnings schedule is likely to see the following among the highlights according to Bloomberg news: Alcon, AIG, Barrick Gold, Berkshire Hathaway, Bharti Airtel, BioNTech, Bridgestone, Cathay Pacific, China Mobile, Commonwealth Bank of Australia, Coinbase Global, Coupang, Deutsche Telekom, Dominion Energy, Globalfoundries, Hapag-Lloyd, Hon Hai, Honda, Itau Unibanco, Manulife, NTT, Prudential, PT, Rivian, Siemens, SoftBank, State Bank of India, Tyson Foods, Vesta Wind & Walt Disney.