Macroeconomics: The Day Ahead for 15 September

A busier day for statistics and central bank speakers awaits, with the run of China activity and UK inflation data and Japanese Machiniery Orders to digest ahead of Canada’s CPI, US Import Prices, NY Fed Manufacturing survey and Industrial Production and Indian Trade. The ever widening ripples from China’s Evergrande teetering on the brink of default will be a key talking point, see China data commentary below. Central bank speakers include ECB’s Lane and Schnabel, BoJ’s Kuroda and Russia central bank governor Nabiullina, while in the agricultural commodities space there are France’s AgriMer monthly grains report and Brazil’s Unica cane crush and sugar output data. A quieter day for govt bond sales with the UK auctioning 10 yr and Canada 2 yr. In passing, yesterday’s slightly better than expected US NFIB survey was notable for the very confused message it conveyed about the economy, with hiring plans, selling prices, net compensation and capital spending intentions at their, or making new highs, but earnings trends and economy expectations were at their, or made new lows.

U.K. – Aug CPI, RPI and PPI

Given last week’s comments by BoE’s Bailey about the MPC being evenly split at its August about whether minimum conditions for a rate hike having been reached, today’s higher then expected readings will raise expectations about a rate hike as early as next week. The 0.7% m/m rise in CPI was primarily paced by re-opening pressures (holidays, airfares, restaurants and recreation) and rents, with adverse base effects from last year’s ‘eat out to help out’ programme, clearly paying a big role. Upward pressure on household energy was also evident, and will only get worse going into winter, and driver shortages are clearly pressurizing prices on many goods. A rate hike will do nothing to solve any of these pressures, though the case for ending QE looks to be fairly robust.

China – Aug Industrial Production, Retail Sales, FAI and Property indicators

The risks foor today’s run of activity data was always to the downside given the numerous localized lockdowns and the devastating floods that hit China in August, and as such markets willl proabbly be inclined to look past today’s data, above all the sharp slowown in Retail Sales to 2.5% y/y vs. expected 7.0% (July 8.5%). That said, the weaker than expected Industrial Production (5.3% y/y vs. expected 5.8%, July 6.4%) clearly owes more to the various curbs that hhave been put in place, above all in the steel sector, though the drought impact on power output in parts of China was/is clearly playing a role too. However it is the fall-out from Evergrande’s debt woes and potential default that is the more immediate issue, with the heavily indebted property developer definitely falling into the ‘too big to fail’ category (Evergrande owns 2% of China’s real esttate assets), with profound risks for local govts and their array of LGFVs (local govt financing vehicles), WMPs (Wealth Manaagement Products) and international banks and funds, given that it has a vast amount of offshhore debt. Quite rightly a number of people are asking whethehr this could be China’s Lehman moment, and what action will the CCP take to stem the current ripples from Evergande turning into a tsunami.

Canada – August CPI

After July’s upside surprise (0.6% m/m 3.7% y/y), a subdued 0.1% is forecast for August, which would push the y/y rate up to 3.9%, with core CPI measures seen remaining very divergent due to statistical composition as well as housing cost effects, but all unchanged from July’s readings (1.7%, 2.6% & 3.1%). As can be seen from the attached chart of CPI components, housing and transport account for around 3/4 of the rise in CPI, with food, and recreation & education the only other two contributors of any note, per se offering some support for the BoC sticking to its view that current price pressures will prove to be transitory.

U.S.A. – Aug Industrial Production, Import Prices & Sep NY Fed Manufacturing

It’s probably fair to observe that with yesterday’s CPI missing forecasts (though a modest rebound is more than possible in coming months) on the back of a sharp about turn in used auto prices and re-opening categories (above all Air Fares, Shelter away from home, Motor Insurance), markets wiil pay rather less attention to today’s run of US statistics, though tomorrow’s Retail Sales will as ever be sensitive. Industrial Production is seen up 0.5% m/m, after unseasonal re-tooling patterns (above all in Autos) gave a hefty boost to July (+0.9% m/m, Manufacturing 1.4% m/m). But seasonal adjustment will act as a drag in August, with continued supply chain disruptions (very evident in ISM and other manufacturing surveys), and output curbs in the energy sector due to Hurricane Ida implying some downside risks, even if warmer than normal weather should see a boost to utilities output. The September NY Fed Manufacturing index is seen down marginally at 18.0, way below the record high of 43.0, but still robust by any recent historical standard, with the focus not only on Orders, Prices, Employment and Supplier deliveries, but also on 6-mth outlook metrics, which remained very strong in August, despite the sharp decline in current activity readings.  Finally, Import Prices are expected to remain well contained at just 0.2% m/m, and ease in y/y terms thanks to base effects to 9.4% from July’s 10.2%, though supply disruptions due to Hurriane Ida and supply chain disruptions do impart some upside risks, particularly as the larger pressures in July were on raw materials prices from Canada (though obviously not lumber!).