Macroeconomics: The Day Ahead for 3 August

As is often the case on the second working day of the month, the data schedule is light, with Japan, South Korea (above forecast, and likely to underpin expectations of a BoK rate hike in the next few months) and Turkey CPI and Spanish Unemployment to digest ahead of US Auto Sales & Factory Orders and Canada’s Manufacturing PMI. There is the RBA’s policy meeting to digest, with Fed’s Bowman the only central bank speaker. Debt auctions take the shape of UK 30-yr and Austrian 4 & 10-yr. A busy run of corporate earnings features amongst others: Alibaba, BMW, BP Infineon, Societe Generale, Standard Chartered, Stellantis, while the US looks to Amgen, Conoco Phillips, Du Pont, Eli Lilly, Fidelity, KKR, Occidental Petroleum and Under Armour. Once again, China’s regulatory interventions are making headlines as state media described online gaming as “spiritual opium”, with Tencent this time falling in the cross hairs of the Maoist rollback. To be sure, many investors, who for the most part are underweight in allocations to Chinese assets will probably view this as another dip to buy, given China’s potential growth rate, and above all the all-pervasive financial repression in developed world markets. However it still adds a layer of risk to Chinese assets, and ultimately will be a serious impediment to China’s growth potential, leaving aside its renewed attempts to internationalize use of the CNY.

The RBA decision to stick to its QE tapering plans for September is perhaps a signal moment, with governor Lowe noting “The recent outbreaks of the virus are, however, interrupting the recovery and GDP is expected to decline in the September quarter. .. The experience to date has been that once virus outbreaks are contained, the economy bounces back quickly”. For markets that have become inured to G10 central banks erring on the side of caution in the face of either adverse pandemic developments, or market sell-offs, this was a modest surprise. The fact remains that the RBA taper will be modest, and the RBA’s holdings of govt debt remain among the highest in proportion terms.

In that respect, the Treasury quarterly financing announcement which cut the estimate for Q3 sales of market by $148 Bln to $673 Bln was broadly in line with market estimates, but also underlines that the Fed remains the elephant in the room with its $80 bln/month of Treasury purchases, continuing to destroy the free-float. Even if it does taper, and notwithstanding the infrastructure spending bill (which will add little in terms of borrowing given the spread over 5 years), the reduction in Treasury net borrowing will largely offset much of the taper.

US Auto Sales are expected to steady at subdued levels, due to inventory shortages and increasingly adverse consumer perceptions of prices, the risk looks to be firmly to the downside of the estimate of 15.30 Mln SAAR, above all due to an unfavourable seasonal adjustment.