Macroeconomics: The Day Ahead for 12 July

A week that is replete with major data gets off to a subdued start, as markets continue to display a very fickle and fluid reaction function, on Friday discarding concerns about adverse delta variant infection rates and downside economic surprises in favour of cheering China’s policy easing. The latter is understandable from the perspective that China’s credit impulse index has been pointing to a sharp slowdown in activity over the next 6-12 months for some time, though it is dubious whether the reaction was anything more than a Pavlovian ‘moar stimulus, innit’. Be that as it may, there are Japan’s Orders (showing welcome underlying strength) and PPI along with a big surge in German WPI (1.5% m/m 10.7% y/y) to digest, with only India’s CPI and Industrial Production ahead. On the events side of the equation, the primary talking point will be Lagarde’s overnight comments about a change in policy guidance and adjustments to its monetary toolbox at its July meeting next week (the risk of being underwhelmed looks to be quite high), though the key issue remains the divisions on the council on tapering the PEPP, let alone how it might ‘morph’ post its current end date of March 2022. Meanwhile Poland’s NBP publishes its quarterly Inflation Report, as the pressure to join the likes of Czechia and Hungary in removing some accommodation grows, given persistently high inflation (though core CPI is seen easing somewhat this week to 3.7% y/y from 4.0%). The US also kicks off this week’s run of coupon auctions with 3 and 10-yr.

RECAP: The Week Ahead – Preview: 

The new week has a busy run of statistics from China: Q2 GDP, Trade, Production, FAI and Retail Sales; UK and US inflation; US Retail Sales, Production, NY, Philly Fed, NFIB & Michigan Sentiment surveys, UK and Australian labour data, and Japan’s Machinery Orders. On the central bank side of the equation there are the Fed’s Beige Book, a BoJ policy meeting and update on its economic forecasts, with perhaps more interest in the extent of the hawkish (or rather less accommodative) tilt from the BoC (further taper expected) and RBNZ at their policy meetings, along with the usual run of central bank speakers. Politically the Biden/Merkel summit is attracting attention, but aside from the distraction of NordStream2, the key is whether this really does signal post-Trump US/German rapprochement, or whether healing will take longer, as opinion polls in Germany would appear to suggest. In case you have not read this, do take the time to read Ulrike Franke’s excellent article on the German (and likely in many other countries) post-Cold War generation’s struggle to engage with strategic political thinking here.

The Q2 corporate earnings season kicks off with the usual run of financials getting things under way, with Taiwanese chipmaker TSMC the other major highlight. It will be a busy week for govt bond supply, with the US selling $120 Bln total of 3, 10 & 30-yr coupons after an unusual 2 week absence, and plenty of supply from the Eurozone with auctions in Germany, France, Italy, Netherlands and Spain, but nothing from the UK this week.

The commodity space has a raft of key monthly reports including Agricultural S&D reports in the US (WASDE), China (CASDE) France, Brazil (Unica & Coffee Exports), Malaysia (Palm Oil) and Cocoa grinds reports in Europe and Asia, and after last week’s FAO/OECD outlook, the UN FAO publishes its 2021 World State of Food Security & Nutrition report. With OPEC+ still in gridlock, there are also OPEC and IEA monthly Oil Market Reports, while Singapore is the venue for the Iron Ore, Steel and Shipowners Forums.

In terms of the data run, markets appear to be in the mood to focus on negative surprises both in terms of pandemic related developments, above all activity restrictions in Asia, and rising infection rates in parts of Europe and the US (though hospitilizations and fatalities are thankfully contained for the time being), as downside misses on official data. The focus for the week will primarily China’s Trade and GDP, and US CPI and Retail Sales, with UK inflation readings seen ticking marginally higher in y/y terms, and Employment posting a solid though smaller gain, while base effects flatter wage data. China’s broad based (as opposed to targeted) 50 bps Reserve Requirement Ratio cut effectively pre-empted much of this week’s activity data, and puts the focus on this week’s 1-yr MTLF rate setting (last 2.95%). Q2 GDP is seen accelerating in q/q terms to 1.0% from Q1 0.6%, as base effects rein in the y/y rate to an expected 8.0% from 18.3% in Q1. The Services component will likely accelerate thanks due to base effects. Industrial Production is likely to remain robust, above all on a 2-yr comparison, but slow in y/y terms to 8.0% vs. prior 8.8%. However Retail Sales will perhaps be key, with the consensus looking for 10.9% y/y from 12.4%, but this implies an underlying pace of 4.5% y/y, far short of the pre-pandemic pace of 8.0-9.0%; perhaps no surprise given survey weakness.Unemployment Rate is seen unchanged at 5.0%, again well above the 4.2-4.5% pre-pandemic range. Trade data are also due, with Exports seen at a slower but robust 15.1% y/y, and Imports at 20.8%. Eminently the minutiae on commodities imports will as ever be in focus, the critical element may however be any evidence that export demand may be waning (as implied by PMIs), as Europe and North America get back to their feet, and production displacement demand wanes.

For all that there is a busy run of US data, CPI and Retail Sales will be front and centre. Headline CPI is forecast to slow in m/m terms to 0.5% (best since Feb), while core is seen at 0.4% m/m  vs. May’s 0.7%, ironically base effects would edge y/y headline down to 4.9%, but push core up to 4.0% y/y from 3.8%. The question above all for core is how much (i.e. more than half?) can be attributed to genuine re-opening pressures and supply chain disruptions, as was the case in recent months. Retail Sales are unsurprisingly seen falling -0.4% m/m in headline terms, dragged lower by very weak Auto Sales, but all core measures are seen up 0.4%, which would hardly be stellar, but at least positive after two months of weakness. The Beige Book will also be important, specifically a) on outlooks, b) labour demand and skills shortages, and c) supply chain disruptions.

As noted, the US Q2 earnings season kicks off, and will mark the peak of base effect boosts as earnings recover from last year’s pandemic hit, with S&P 500 Q2 earnings seen up 64.0-66.0% y/y, the best since Q4 2009, though revenues are seen up a more modest 18.5% y/y, (ex-energy sector 15.2%). As concerns about the recovery losing momentum in H2, the focus will above all be on guidance and outlooks for the Q3. Bloomberg News identify the following as likely to be among the highlights among financials Bank of America, Bank of New York Mellon, BlackRock, Citigroup, Goldman Sachs, JPMorgan, Morgan Stanley, U.S. Bancorp, Wells Fargo, First Republic Bank, PNC Financial Services and State Street. ‘Real economy’ corporate highlights include: Taiwan Semiconductor, Alcoa, America Movil, U.S. industrial supplier Fastenal, Finnair, mapping service TomTom, PepsiCo, Japanese shopping centre operator Izumi, Swedbank, and Indian software firms Wipro and Infosys.