Macroeconomics: The Day Ahead for 11 September

China’s lacklustre, but largely as expected inflation data kicked off the statistical week on Saturday (CPI 0.3% m/m 0.1% y/y, PPI 0.2% m/m -3.0% y/y). Ahead lie a much anticipated ECB policy meeting, along with a barrage of data from the US (CPI, PPI, Retail Sales, Industrial Production, NY Fed & NFIB surveys), China (Retail Sales, Industrial Production, Credit Aggregates and FAI) and the UK (Unemployment, Average Earnings, monthly GDP and accompanying business activity indicators). Elsewhere Japan awaits Private Machinery & Machine Tool Orders, Australia has labour data and confidence surveys, while inflation data is also due in Brazil, Mexico & Argentina, and this week’s Eurozone Q2 Labour Costs will be more closely watched than usual, above all in the context of the ECB meeting, while German has the ZEW survey.  There will be little in the way of central bank speakers, given the usual purdah periods ahead of next week’s Fed and BoE meetings, while China’s PBOC is expected to hold it’s 1-yr MTLF operation at an unchanged 2.50%, and Russia’s Bank Rossiya is seen leaving its key rate at 12.0% after the unscheduled August meeting saw rates hiked 350 bps. The EU Commission publishes its Autumn economic forecast update, which may also be accompanied by the OECD’s Economic Outlook update.

A bumper week for monthly reports and indeed conferences in commodity and energy markets, with the EIA, IEA and OPEC publishing monthly Oil Market Reports, the USDA issues its World Agricultural Supply & Demand Estimates (WASDE), and China and France’s Agriculture Ministries also issue monthly S&D reports, while Brazil’s Unica publishes Sugar production and Cane crush data. In conference terms, there are London Shipping Week with a big focus on maritime energy transition; the International Aluminium Conference in Barcelona, as well as China Silicon Industry, Ukraine Oil & Grains, and Vladivostok Economic Forum. In overarching theme terms, the UK’s failed offshore wind auction on Friday, US and German struggles to boost capacity in solar and wind capacity that will be needed to meet climate targets again underline the scale of current challenges, above all due to rapidly rising costs, leaving aside the very thorny issue of recycling, and highlight the need for much more strategic thinking, rather than ideological linear thinking and political virtue signalling.

Politically, there are India’s ‘triumph’ to in cobbling a joint G20 statement to digest, which had not expected given tensions between US and EU on the one hand, and China and Russia on the other. The US House of Representatives returns from its summer recess, and EC president von der Leyen gives the annual State of the EU address. A close eye also need to be kept on Japan PM Kishida’s cabinet reshuffle, and his promise of a substantial accompanying package of measures to boost the economy.

Markets are as divided as the ECB Council appears to be on the outcome of Thursday’s rate decision, with the consensus marginally favouring no change, but a sizable minority expecting a further 25 bps hike. Inflation clearly remains too high, and it would be a push to argue that current trends in core inflation suggest CPI will be back at target on a 2-yr time horizon, whatever the fresh set of staff forecasts ends up predicting (revisions seem likely to be small). On the other hand, there is no disputing the signs that the economy is slowing, particularly after the downward revision to Q2 GDP and array of negative surveys. But the ECB does not have a growth mandate, and ongoing strength in labour demand and high wage settlements offer a strong counter to growth related arguments. However monetary metrics, above all much credit, aka ‘financing’ in ECB speak, conditions as evidenced by its most recent quarterly survey, and monthly M3 and accompanying private sector credit aggregates certainly advocate for caution and taking time to gauge the impact of its cumulative hikes. If the minutes of the July meeting are a guide, then the pivotal comment that ‘A further rate hike in September would be necessary if there was no convincing evidence that the effect of the cumulative tightening was strong enough to bring underlying inflation down in a manner consistent with a timely return of headline inflation to the 2% target’ tends to suggest that they will hike by 25 bps. A compromise could possibly involve an adjustment to the pace of balance sheet reduction.

While there is a lot of US data on hand, all eyes will be on CPI. Peculiarly markets recent instant reactions have been very much focussed on headline moves, rather than core, despite the Fed’s crystal clear narrative that it is super core inflation trends which they are watching. Energy prices have risen sharply over the past month (and also set to weigh on Michigan Sentiment on Friday), and are expected to bump the m/m rate up to 0.6% m/m, and the y/y to 3.6% from 3.2%. But Core CPI is expected to notch another very ‘average’ 0.2% m/m rise for a third month, which would see the y/y fall to 4.3% from 4.7%, still high but clearly trending lower, potentially to the low 3.0%s by year end. Housing related pressures should continue to ease slightly, while used car prices were little changed. PPI is also expected to show some energy pressures, but core is also expected to remain well contained, continuing to underline easing pipeline pressures. Notably last week’s Beige Book suggested ‘Contacts in several Districts indicated input price growth slowed less than selling prices, as businesses struggled to pass along cost pressures’. Retail Sales will also be impacted by higher gasoline prices giving a boost to the ex-Autos measure (exp. 0.4% m/m), but headline (exp. 0.1%) and other core measures (exp. -0.1% m/m) are likely to have been weak, if forecasts that assume a substantial ‘hit’ from student loan repayments are correct. After some unexpected, though modest strength in July, both headline Industrial Production and Manufacturing Output are seen eking out a marginal rise of 0.1% m/m. The super volatile NY Fed Manufacturing is forecast to rebound, but only to -10.0 from -19.0, while NFIB Small Business Optimism is expected to ease marginally to 91.5 from 91.9, above all due to easing labour demand signals in the already published employment sub-indices.

In the UK, labour data will get top billing, with Average Weekly Earnings expected to remain unchanged at record highs of 8.2% y/y headline and 7.8% y/y ex-Bonus, which would hardly offer the BoE much comfort, even if survey evidence such as last week’s REC is pointing to a clear softening in the labour market. HMRC Payrolls are forecast to soften to 29K from a much stronger than expected +95K in July, while the less timely May-July LFS Employment measure is expected to post a sharply accelerated fall of -185K vs. prior -66K, with Vacancies also set for another drop, but still above pre-pandemic peaks. Anything higher than expected on wages would prompt markets to factor a higher risk of a further hike in next week or in November. Amid all the ‘hoo-hah’ about the revisions to 2020 & 2021 UK GDP, which are important in terms of signalling less economic ‘scarring’ from the pandemic, but rather moot in terms of where the UK economy is now, this week’s monthly GDP are projected to signal that June’s 0.5% m/m rebound was probably a flash in the pan, with a drop of -0.2% m/m expected as housing headwinds start to get traction, despite the modest drop in household utility bills (modest simply because they remain way above mid-2021 levels). The accompanying sector indicators are seen posting reactive corrections to June strength: Index of Services -0.1% vs. +0.2%, Industrial Production -0.6% m/m vs. +1.8%, Manufacturing Output -1.0% m/m vs. +2.4%, Construction Output -0.5% m/m vs. +1.6%. Housing sector gloom is likely to be reinforced by an anticipated further slip in the RICS House Price Balance to -55 from -53. Given that the BoE’s forecast for Q3 GDP is an optimistic looking 0.4%, anything notably weaker than expected could perhaps make the case for a rate pause.

When casting my eye over the projections for this week’s China activity data, the simple striking feature is that y/y rates for Retail Sales, Industrial Production and Fixed Asset Investment (FAI) are expected to have a 3.x handle, and the official GDP target is 5.0%. To a certain extent, barring genuine outliers, the actual outturns will be neither here nor there, especially with the accompanying Property Investment expected to drop to -9.0% y/y from -8.5%. The more interesting data will perhaps be the monetary and credit aggregates, with a seasonal rebound in both Aggregate Social Financing and New Yuan Loans to CNY 2.73 Trln and CNY 1.275 Trln expected, which would be in line with prior year patterns, rather than suggesting that recent piecemeal official moves to boost credit demand are getting traction.

There will be little in the way of corporate earnings, as is seasonally typical, with the sole highlights likely to be Adobe and Industria de Diseno Textil (aka Inditex), with Apple’s annual major product upgrade event more likely to be the centre of attention for equity markets. Government bond supply steps up a gear with the US selling $99.0 Bln of 3,10 & 30-yr, Germany selling 2 & 30-yr, Italy offering 3, 7, 17 & 30-yr, while the UK sells 10-yr and IL 30-yr, though the bigger question is how much corporate bond supply there will be after last week’s typical post US Labor Day surge in issuance.