Macroeconomics: The Day Ahead for 18 August

A relatively data heavy day awaits, with Japan’s Orders and Trade (mixed and clearly subject to further downward pressure due to the lockdown extension), Australian Wages and the gamut of UK inflation indicators to digest, while ahead lie South African and Canadian CPI along with US Housing Starts. In event terms the RBNZ pushed back on its rate timeline, specifically due to the latest short-term nationwide lockdown. However the focal point for the day will be the FOMC minutes, while Nvidia, Target and TJX top the run of corporate earnings. Govt bond sales come via a small EUR 1.0 Bln 30-yr auction in Germany and $27 Bln of US 20-yr. In terms of the FOMC minutes, these are some historical, in so far as the latest labour report has clearly shifted some FOMC members views on when would be best to start tapering, but they will at least put some colour on the balance of opinions on inflation risks, and how that balances out against labour market considerations.

U.K. – July CPI, PPI

– In a classic case of what was the fuss all about, CPI proved to be much weaker than expected dropping back to the MPC’s target of 2.0% y/y from June’s 2.5% and vs. expected 2.3% , with core CPI dropping to 1.8% vs. expectations of 2.0%; unseasonal sales patterns doubtless account for much of this, but clearly the over-dramatized reaction to the June readings was misplaced, as they say “one swallow does not make a summer”. Be that as it may, pipeline pressures have picked up again with PPI Input rising to 9.9% y/y from an upwardly revised 9.7% (prior 9.1%), and Output PPI showing signs of accelerating pass through at 4.9% y/y vs. expected 4.4% and June’s upwardly revised 4.3%. Overall it allows the MPC to keep a watching brief on inflation rather than forcing its hand in terms of taking action, and renewed upward pressure will be seen in coming months, above all given the array of supply chain bottlenecks related to trade, raw materials prices & availability, as well as labour and skills shortages.

U.S.A. – July Housing Starts

– Yesterday’s relatively sharp drop in the NAHB Housing Market Index (75 vs. expected/prior 80), the focus turns to Housing Starts that are expected to drop 2.6% m/m to a still robust 1.60 Mln SAAR pace, after a sharp 6.3% m/m rebound in June. However it is the more forward looking Building Permits which will be the main point of focus, after a run of three successive declines, including a 5.3% m/m drop in June, with a modest 1.0% m/m rebound to 1.61 Mln SAAR. While the latter would still be solid and above 2019 average levels, it is also well off the cyclical high of 1.883 Mln in January, and fits with the clear loss of momentum in the sector this year.

Canada – July CPI

– After posting a larger than expected decline to 3.1% y/y in June from May’s peak of 3.6%, headline CPI is seen rebounding to 3.4%, while core measures are expected to tighten in range terms with Common Core edging up to 1.8% y/y from 1.7%, while the Trimmed Mean is slipping to 2.5% y/y, neither of which are that far from the  BoC’s 2.0% target, nor the very narrow 3-yr range that preceded the pandemic. Interestingly current BoC governor Macklem recently took to the opinion pages of the Financial Post to opine that ““We shouldn’t overreact to these temporary price increases. You can be confident that we will keep the cost of living under control as the economy reopens.” This came hot on the heels of an opinion piece by former governor David Dodge, generally reckoned to be the best ever BoC governor, having re-established BoC credibility and stabilized the CAD after a prolonged period of volatility. Dodge suggested that “By insisting it’s all temporary they tend to undermine their own credibility, which is unfortunate,” Dodge told Bloomberg News. “It’s better to be humble and say that’s what we think, but of course there is a chance things could be different.” The BoC’s current forecast assumes headline CPI will peak around 3.9% y/y at the end of Q3, beginning of Q4.