Macroeconomics: The Day Ahead for 15 July

It will be another day that is jam packed with data, events and indeed corporate earnings. China’s Q2 GDP and array of monthly activity data will get top billing, with Australian and UK labour market statistics and Indonesia Trade also to be digested, while ahead lie US weekly Jobless Claims, NY & Philly Fed Manufacturing surveys, Import & Export Prices and Industrial Production, with tonight’s New Zealand CPI getting more attention than usual following the RBNZ policy decision yesterday. On the events side of the equation, the Bank of Korea held rates as expected, but offered another strong hint that a rate hike is close at hand, the BoE publishes its Q2 Bank Liabilities & Credit Conditions surveys, and there is more testimony from Powell. Given that the OPEC Saudi UAE stand-off on increasing production appears to have been resolved yesterday, there will be particular interest in the OPEC monthly Oil Market Report, following on from the IEA warning on oil market risks earlier in the week. In passing, one particular bit of nonsense that has done the rounds on oil demand needs to be partially debunked, namely the concerns voiced about China’s oil demand after Tuesday’s trade data showed an H1 fall of 3.0%. Firstly it appears to have been forgotten that China was massively aggressive buyer when oil prices collapsed last year, therefore base effects are very unfavourable. Secondly as today’s June oil throughput data rose to a record 14.8 Mln bpd, with H1 throughput up 10.3% y/y at 15.13 Mln bpd. That said, the fact that oil product exports are also very high, does leave questions about domestic demand, and could contribute to a product glut and refiner margin pressures, above all once pandemic related disruptions to output in Asia and elsewhere ease.

Outgoing Chancellor Merkel will meet with President Biden, 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. The Chicago Auto Show gets under way, with the focus both on how the auto sector is dealing with the semiconductor shortage, as well as new EV vehicle launches. France, Spain and Canada top the run of govt bond auctions, while the corporate earnings schedule features chipmaking behemoth TSMC (missing forecasts), a further rash of financials (BoNY Mellon, Morgan Stanley, US Bancorp), with UnitedHealth and crypto leader Coinbase also on hand.

** China – Q2 GDP, Retail Sales & Industrial Production **

– Q2 GDP proved to be stronger than expected at 1.3% q/q, though the downward revision to Q1 to 0.4% q/q from 0.6% left the y/y rate at 7.9%, just below a forecast of 8.0%, with infrastructure spending proving to be sluggish as local govt bond issuance slowed (Huarong and other SOE debt concerns may well have played a role), while trade proved to be a stronger than expected contributor, as was flagged earlier in the week. Q3 GDP is likely to prove stronger than many had anticipated given the RRR cut last week, though much will depend on domestic consumption picking up some of the slack from slower exports as displacement demand from the US and Europe ebbs as their economies re-open. In terms of the monthly data, the slightly better than expected Retail Sales (23.0% y/y) was encouraging, though in m/m terms this slowed to 0.7% from 0.8%, doubtless a reflection of localized shutdowns during the month. But a marked rebound in leisure spending (above all Restaurants) and a rebound in Telecoms helped to offset sluggish Auto Sales (chip shortages eminently playing a role), and despite relatively stubborn Unemployment and a drop in Income growth (see chart), the question is whether the pick-up in private consumption is sustained, and can offset a slowing pace of industrial output in H2 (in part due to domestic curbs on output, as already seen in the steel sector)

** U.K. – May/June Labour data **

– The less timely March-May LFS labour data were weaker than expected, but will be dismissed as historical given that the more timely June HMRC Payrolls data showed a sharp 356K surge, and the Claimant count fell 114.8K following a revised May -151.4K, underlining the strength of the labour market recovery as the economy has re-opened. This should continue into Q3 given that Vacancies stood at 862K, nearly 10% above pre-pandemic levels. Wage data remains so distorted by base effects as to render any analysis meaningless for the time being. The large fly in this ointment is the fact that staff shortages as a result of the spread of the delta variant are dramatic, with many having to stay home due to school children having to go into quarantine (821K at the most recent count), while other reports suggest some 20 pct of the workforce are having to self-isolate after track and trace notifications. Given predictions that the infection rate may rise to 100K per day by August from an already high 42K, next week’s so-called ‘Freedom day’ may prove to be anything but for many of the population.

** U.S.A. – Weekly Jobless Claims, NY/Philly Fed, Import Prices, Industrial Production **

– While jobless claims are expected to continue to fall over coming months, this week’s report may deliver another surprise, both due to unseasonal patterns for auto sector retooling closures, and the additional wildcard of the Independence Day holiday. The consensus looks for a reversal to a fresh pandemic low of 350K after last week’s unexpected marginal uptick to 373K, while Continued Claims are forecast to drop modestly to 3.30 Mln from 3.339 Mln. The first two of this month’s regional Fed surveys are seen broadly steady at 18.0 (NY) and 28.0 (Philly), indicating continued strength, with factories still trying to catch up with order backlogs due to supply chain disruptions, and CapEx outlooks remaining strong across all surveys, as well as yesterday’s Beige Book. Prices will be a focal point, with the June Philly Fed prices sub-index reaching a 42 year high; outlook indices will also be in focus to see if there is any sign that supply delivery issues are expected to ease over the next 6 months. Industrial Production is seen up a solid 0.6% m/m (vs. May 0.8%), with mining / extractive industries leading the way, while the drop in manufacturing hours in the labour data and well documented headwinds from semiconductor shortages in the auto sector, are expected to restrain manufacturing to a modest 0.3% m/m increase. Following on from the much higher than expected CPI and PPI, which markets have chosen to largely dismiss, it appears unlikely that markets will do anything other than ride roughshod over anything higher than expected on today’s Import and Export prices. That said, forecasts of 1.1% m/m for headline import prices, and what looks to be a rather “under-clubbed” estimate of 0.6% m/m ex-Petroleum are indicative of continued broad based pressures, given rising food, industrial supplies and automotive prices.